Securities Regulation

Code

Atty. Josh Carol T. Ventura

Presentation Outline
Family Tree of the SRC

State Policy (Purpose)

Powers and Functions of

SEC

Securities Required to be
Registered
Presentation Outline
Procedure for Registration of
Securities

Prohibitions on Fraud,
Manipulation and Insider Trading

Protection of Investors

Civil Liability
 Family Tree of the SRC
Blue Sky Law
US Securities (Act No. 2581) US Securities
(1916) Exchange Act of
Act of 1933 1934/Uniform Sale of
Securities Act
Securities Act
(Com. Act No. 83)
1936

Revised Securities Act

(Batas Pambansa Blg., 178
(1982)

Securities Regulation Code

(Republic Act No. 8799)
2000
 Blue Sky Law
 Patterned after similar laws of the State of
Kansas (1913 and amended in 1915)
 Purpose is to protect the public against the
speculative schemes which have no basis
than so many feet of blue sky
 To thwart the sale of stocks in fly-by-night-
concerns, visionary oil wells, distant gold
mines, and other fraudulent exploitations.
 Blue Sky Law Challenge
 The challenge was on the ground that
there was undue delegation of legislative
power to the Insular Treasurer; it was
alleged that no standard could guide him
in determining which permit to issue or
cancel.
 In People vs. Rosenthal, 68 Phil 328, the
SC ruled that the Insular Treasurer is
guided by an appropriate standard.
 Commonwealth Act No. 83
 Non speculative securities were registered while
speculative ones registered and licensed prior to
sale to the public
 Creation of the SEC
 Patterned after the US Securities Act of 1933
which regulates the issuance of securities.
 Main thrust is to compel full disclosure to the
public of all information material to an investor’s
determination of the real value of the securities
issued.
 Commonwealth Act No. 83
 US Securities Act of 1933 often referred to as “truth
in securities” law
 US Securities Exchange Act of 1934 ensures
maintenance of fair and honest securities trading
markets, and subjects to continuing reporting
obligations a company that has registered its
securities.
 CA 83 provides for registration of brokers, dealers
and salesmen – taken from the Uniform Sale of
Securities Act.
 (Revised Securities Act)
Batas Pambansa Blg. 178
 In 1982 , Com Act 83 was repealed after 46
years of enactment
 Removed distinction between speculative
and non-speculative securities, and
required all securities (absent any
exemption) to be registered.
 RSA was the governing law for 18 years
until it was repealed by the SRC on August
8, 2000.
 Salient Features of the RSA
taken from CA 83
1) requirement of registration and licensing
of securities and full disclosure of
information
2) registration of brokers, dealers and
salesmen
3) Registration of exchanges
4) trading regulation
RSA plugged certain loopholes and
increased the penalties
 New Features of RSA
 defines the term securities
 aside from registration of securities it
permits revocation of registration of
securities, including suspension of the
right to sell securities
 defines what are considered as
manipulative or fraudulent acts
 3 Objectives of Securities
Regulation
 as articulated by the International
Organization of Securities Commission
(IOSCO)
1) Protection of Investors
2) Ensuring that markets are fair, efficient and
transparent
3) reduction of systemic riscks
 Purposes of the Code
1) To establish a socially-conscious free
market that regulates itself
2) Encouragement of widest participation of
ownership in enterprises
3) Enhancement of democratization of
wealth
4) Promote development of the capital
market
 Purposes of the Code
5) Protection of investors
6) Ensuring full and fair disclosure about
securities
7) Minimize if not eliminate insider trading
and other fraudulent or manipulative
devices and practices which create
distortions in the free market. (Sec. 2)
 How these Policies are
implemented
 Guide : to establish a socially conscious,
free market that regulates itself. (Chap. X
– registration, responsibilities and
oversight of the SROs)
 Widest participation of ownership in
enterprises – 35% in tender offer; 10 % of
the IPO is allocated to “local small
investors”, 60% to the general public
 How these Policies are
implemented
( including institutional investors and high
net worth individuals), while only 30% is
made available to “qualified institutional
buyers. ( See Omnibus Rules and
Regulations for Investment Houses and
Universal Banks registered as
Underwriters of Securities – July 23, 2002)
 full and fair disclosure is done by
registering securities
 How these Policies are
implemented ?
 The policy of minimizing if not totally
eliminating insider trading and other
fraudulent or manipulative devices –
addressed by Chapter VII ( Prohibition on
Fraud , Manipulation and Insider Trading)
 if investors are protected there is
confidence in the capital market, hence
there is “capital market development”
 Salient Features of the Code
 Present Code followed and improved on
the objectives sought to be achieved
under the Revised Securities Act
 Protects the public from unsound,
fraudulent and worthless securities in 3
ways :
 1) requires the registration of ,and
permit to sell securities before the same
may be sold or offered for sale:
 Salient Features of the Code

Purpose : issuers of securities to furnish

the public with full and accurate disclosure
of all material facts concerning the issuer
and its securities, so that the public may
make a reasonable business judgment
whether or not to invest
 Salient Features of the Code

2) limiting margin and borrowing requirements

to prevent undue speculations
3) punishing those who manipulate the
market from misrepresentations,
manipulations and fraudulent practices
covering securities.
 Salient Features of the Code

 SEC may refuse to permit a registration

statement to become effective if it appears
on its fact to be incomplete or inaccurate
in any material respect.
 SEC may issue a stop-order suspending
the effectiveness of any registration
statement which is found to include any
untrue statement of a material fact or to
omit to state any material fact required to
be stated therein
 Salient Features of the Code

 Code is self executory, and failure of SEC

to issue rules and regulation shall not in
any manner affect its self-executory
nature. (Subsec. 72.1)
 Regulatory Controls Covered

 Requires registration of any security in the

Philippines for sale or being offered for
sale or distribution unless they are exempt
securities or sold in exempt transactions

 Requires registration of those who

participate in the offer and sale of
securities ( brokers, dealers, salesmen
and securities exchanges)
 Securities & Exchange Commission

Nature and Composition

 SEC is a collegial body (by PD 902 A)
1) Chairman and 4 Commissioners
2) Term of 7 years
3) Presence of 3 Commissioners shall
constitute a quorum.
 Qualifications of SEC
Commissioners
1) Natural born citizens of the Phiippines
2) At least 40 years old (Chairperson) and 35
years old for the commissioners
3) of good moral character
4) of unquestionable integrity
5) of known probity and patriotism and
6) with recognized competence in social and
economic discipline
7) Majority of commissioners including the
chairperson must be members of the bar
 Securities Exchange Commission
Laws Administered by SEC :
 Securities Regulation Code (RA 8799)
 PD 902-A, as amended by PD 1653,1758, 1799, and the
Code
 Corp. Code (BP 68)
 Financing Company Act of 1998 (RA 8556)
 Investment Company Act (RA 2692)
 Investment Houses Law (PD 129, as amended by RA 8366)
 Foreign Investment Act of 1991 (RA 7042)
 EO No. 708
 Lending Company Regulation Act of 2007 (RA 9476)
 Regulatory Controls Covered
 Provides requirements to ensure that transactions
involving securities would be pursued on sound, fair and
equitable principles and to prevent market manipulation

 Expanded SEC powers and functions, including the power

to promulgate rules and regulations and to exercise
investigatory powers and removed its quasi-judicial
powers under PD 902_A so that SEC can concentrate on
its regulatory and capital market formation functions
under the Code (Subsec. 5.2)
 Jurisdiction of SEC
1) Have jurisdiction and supervision over all corporations,
partnerships or associations who are the grantees of
primary franchises and/or license issued by the
Government;

2) Formulate policies and recommendations on issues

concerning the securities market, advise Congress and
other government agencies on all aspects of securities
markets and proposed legislations and amendments
thereto.

3) Approve, reject, suspend, revoke or require amendments

to registration statements, and registration and licensing
applications;
 Jurisdiction of SEC
4) Regulate, investigate or supervise the
activities of persons to ensure compliance;
5) Supervise, monitor, suspend or take over
the activities of exchanges, clearing
agencies and other SROs;
6) Impose sanctions for the violation of laws
and the rules, regulations and orders
issued pursuant thereto;
 Jurisdiction of SEC
7) Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinions and provide guidance on and
supervise compliance with such rules, regulations and
orders;
8) Enlist the aid and support of and/or deputize any and all
enforcement agencies of the Government, civil or military
as well as any private institution, corporation, firm,
association or person in the implementation of its powers
and functions under this Code;
 Jurisdiction of SEC
9) Issue cease and desist orders to prevent fraud or injury
to the investing public;
10) Punish for contempt of the Commission, both direct and
indirect, in accordance with the pertinent provisions of
and penalties prescribed by the Rules of Court;
11) Compel the officers of any registered corporation or
association to call meetings of stockholders or members
thereof under its supervision;
 Jurisdiction of SEC
12) Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of
the Commission and in appropriate cases,
order the examination, search and seizure of
all documents, papers, files and records, tax
returns, and books of accounts of any entity
or person under investigation as may be
necessary for the proper disposition of the
cases before it, subject to the provisions of
existing laws;
 Jurisdiction of SEC
13) Suspend, or revoke, after proper notice and
hearing the franchise or certificate of registration
of corporations, partnerships or associations,
upon any of the grounds provided by law; and
14) Exercise such other powers as may be provided
by law as well as those which may be implied
from, or which are necessary or incidental to the
carrying out of, the express powers granted the
Commission to achieve the objectives and
purposes of these laws. (Sec. 5.1, SRC)
 Powers and Functions
 SEC has both regulatory and adjudicative functions
under the SRC but has deleted its quasi-functions for all
cases enumerated under Section 5 of Presidential
Decree No 902-A was transferred to the Courts of
general jurisdiction or the appropriate Regional Trial
Court. (Sec. 5.2 SRC)
 Since only Sections 2, 4, and 8 of PD 902-A, as
amended, have been expressly repealed by the
Securities Regulation Code, the Commission retains the
powers enumerated in Section 6 of said Decree, unless
these are inconsistent with any provision of the Code.
 Sec. 3 of PD 902 A
 Not repealed by Sec. 76 of the SRC
“ The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships
or associations, who are the grantees of primary franchises
and/or license or permit issued by the government to
operate in the Phils., and in the exercise of its authority, it
shall have the power to enlist the aid and support of and to
deputize any and all enforcement, agencies of the
government, civil or military as well as any private institution,
corporation, firm, association or person.”
 SEC Memo Circular N. 11(s.
2003)
1) Business operations of corps which are
grantees of secondary licenses or
franchises by this Commission, such as
but not limited to financing companies,
investment companies, investments
houses, pre-need companies,
broker/dealers and exchanges shall be
under the direct supervision of this
Commission, i. e.
 SEC Memo Circular N. 11(s.
2003)
a) Submission or reports (monthly, quarterly,
operational, annual) required in the
different laws for the type of activity
b) Compliance with provisions of the CC –
including submission of documents to
effect compliance; including registration
requirements under SRC
 SEC Memo Circular No. 11(s.2003)
2) For registered corporations with secondary business
licenses with other agencies, they shall be required to
 Submit financial statements
 Submit GIS
 Compliance with provisions on their by-laws on :
a) number of directors
b) qualifications, compensation of directors
c) holding of meetings
 Declaration of dividends
 inspection of books
 other provisions of the Code requiring submission of
documents to effect compliance
 SEC Memo Circular No. 11(s.2003)
3) The extent of SEC’s Supervisory powers shall be limited
to those mentioned in Item No. 2 . All complaints
regarding their operations shall be directed to their
primary regulator.
4) SEC aside from those mentioned in Sec. 5 of the SRC is
empowered to enforce its mandate, i.e constitute a
management committee; appoint receivers, issue Cease
and Desist Orders to prevent fraud or injury to the public
and such other measures needed to carry out the role as
regulator
 Civil Cases Falling within the
Jurisdiction of the Courts
a) Devices or schemes employed by, or any
act of, the board of directors, business
associates, officers or partners,
amounting to fraud or misrepresentation
which may be detrimental to the interest
of the public and/or of the stockholders,
partners, or members of any corporation,
partnership, or association;
 Civil Cases Falling within the
Jurisdiction of the Courts
b) Controversies arising out of intra-corporate,
partnership, or association relations between and
among stockholders, members, or associates;
and between, any or all of them and the
corporation, partnership, or association of which
they are stockholders, members, or associates,
respectively;
c) Controversies in the election or appointment of
directors, trustees, officers, or managers of
corporations, partnerships, or associations;
 Civil Cases Falling within the
Jurisdiction of the Courts
d) Derivative suits; and
e) Inspection of corporate books. (Sec. 1,
Rule 1, Interim Rules of Procedure
Governing Intra corporate Controversies
under R.A. No. 8799)
f) Petitions of corporations, partnerships or
associations to be declared in the state
of suspension of payments in cases
Civil Cases Falling within the
Jurisdiction of the Courts
where the corporation, partnership or
association possesses sufficient property to
cover all debts but foresees the impossibility
of meeting them when they respectively fall
due or in cases where the corporation,
partnership or association has no sufficient
assets to cover its liabilities, but is under the
management of a Rehabilitation receiver or
management committee created pursuant to
PD 902 A
Tests to determine whether a
controversy is intra corporate
 Sec. 5 (b) of P.D. No. 902-A does not
define what an intra-corporate controversy
is, but case law has fashioned two tests:
 The FIRST test uses the enumeration in
Sec. 5 (b) of the relationships to determine
jurisdiction, to wit:
 1) Those between and among
stockholders and members;
Tests to determine whether a
controversy is intra corporate
 2) Those between and among stockholders
and members, on one hand, and the
corporation, on the other hand; and
 3) Those between the corporation and the
State but only insofar as its franchise or
right to exist as an entity is concerned.
Tests to determine whether a
controversy is intracorporate
 The SECOND test, focuses on the nature
of the controversy itself. Recent decisions
of the Supreme Court consider not only
the subject of their controversy but also
the status of the parties. (Pascual, et al.,
v. Court of Appeals, et al., G.R. No.
138542, prom. August 25, 2000)
Tests to determine whether a
controversy is intra corporate
 No corporate relation where a corporate
officer holds in trust for another person his
corporate interests. Thus, where a
stockholder’s properties are being
litigated, there would be no corporate
relation where it is alleged that upon the
death of the stockholder, his heir became
a co-owner of the estate left by him
including his corporate interests.
(Pascual, ibid)
 Grounds for suspension or
revocation of registration
1) Fraud in procuring its certificate of
registration
2) Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general
public
 Grounds for suspension or
revocation of registration
3) refusal to comply or defiance of any lawful order
of the commission restraining commission of
acts which would amount to a grave violation of
its franchise
4) continuous inoperation for a period of at least 5
years
5) failure to file by laws within the required period
6) failure to file required reports in the prescribed
form within the prescribed period (Sec. 6 L – of
PD 902 A)
 Securities in General

Debt Equity Investment

instruments Instruments Instruments

Trust
Derivatives Catch –all
Instruments
 What are Securities?
Definition: They are shares, participation or interest in a
corporation or in a commercial enterprise or profit making
venture and evidenced by a certificate, contract, whether
written or electronic in character.

(Subsec. 3.1)Included are:

1) Debt instruments (bonds,debentures,notes,and other
evidences of indebtedness)
2) Equity instruments (shares of stock,certificate of interest or
participation in a profit sharing agreement, certificates of
deposit for a future subscription; proprietary or non
proprietary membership certificates in corporation)
 Securities

 includescommercial papers evidencing

indebtedness of any person, financial or
non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred or in
any manner conveyed to another.
 Securities
3) Investment instruments (investment contracts,
fractional undivided interests in oil, gas or other
mineral rights)
4) Derivatives like options and warrants
5) Trust instruments (certificates of assignments,
certificates of participation, trust certificates,
voting trust certificates or similar certificates)
6) Catch all – Other instruments as may in the future
be determined by the commission

SEC can inquire into any security issuance

 1. Bonds vs. Debentures
Bonds
• issued by government,
municipal and other public
corporations and by all sort of
private corporations
• evidences of indebtedness in
the nature of PN, promising to
pay a sum of money on a day
certain in the future
• Accompanied by a mortgage
of the property of the issuer
Debentures
• Similar to bonds, it may be
issued also by government,
public and private corps.
• they are also evidences of
indebtedness in the nature of
PN
• May or may not be secured
by corporate property but
issued on the basis of general
credit of the corporation
 Bonds vs. Debentures
Bonds Debentures

• Sold to the public • sold to interested

in general investors
• Used to finance • used also to
corporate projects finance small
and public works scale corporate
• Maturity periods of projects
10, 20 and 30 • Shorter maturity
years periods
 Bonds vs. Debentures
 Although not to mature for a long time,
bonds, assure some regular income in the
form of interest income usually payable
annually.
 interest obligations evidenced by coupons
which are detachable
 Both bonds and coupons are separately
negotiable
 Commercial Paper
 Long term commercial paper – means an
evidence of indebtedness of any person
with a maturity of more than 365 days.
Term includes, but not limited to bonds
and notes
 Short term commercial paper – means an
evidence of indebtedness of any person
with a maturity of 365 days or less
 2. Investment Contract (SEC
vs. Howey, 328 US, 293) 1946
 Itmeans a contract, transaction or scheme
(collectively contract) whereby a person
invests his money in a common enterprise
and is led to expect profits primarily from
the efforts of others . Hence, using the
Howey Test, the following need to be
proven to say that there is an investment
contract :
 Elements of the Howey Test
(ICEP)
1. there must be an investment of money,
2. in a common enterprise,
3. with the expectation of profits,
4. primarily from the efforts of others
(Power Homes Unlimited Corp vs. SEC) 546
SCRA 567 [2008]
 Elements of the Howey Test
(ICEP)
A common enterprise is deemed created when 2
or more investors pool their resources, even if the
promoter receives nothing but the broker’s
commission
 MOA entered between DTI and SEC on Aug. 28,
2002 to stop the proliferation of pyramiding
schemes and unregistered investment contracts.
 time shares fall within the definition of securities
“future enjoyment of certain privileges”
 3. Fractional Undivided Interests in Oil,
Gas or other Mineral Rights
 developer would lease a certain portion
of land for the purpose of mining and
operating oil and gas during a certain
portion of time
 owner in turn receives a certain
percentage of the oil and gas produced
and sold or its value at the prevailing
market price.
 3. Fractional Undivided Interests in Oil,
Gas or other Mineral Rights
 the percentage is called the “royalty interest”
which the land-owner transfers to banks as
collateral for loans or sell to an oil royalty
dealer and finds its way to securities
market in lots of fractional undivided
interest
 Under the regalian doctrine, natural
resources are owned by the state –may
enter into MPSA with Phil nationals and
FTAA with foreign nationals
 4. What is a Derivative?
 a financial instrument whose value
changes in response to the change in a
specified interest rate, security price,
commodity price, foreign exchange rate, index
of prices or rates, a credit rating or credit
index or similar variable or underlying factor
 requires no initial or little net investment
relative to other types of contract that have
similar responses to changes in market
conditions
 4. Derivative
 With respect to equity securities, a
derivative is a financial instrument,
including options and warrants, whose
value depends on the interest in or
performance of an underlying security,
but does not require any investment of
principal in the underlying security. (SRC
Rule 3.1.1.2)
 What are Options ?
 These are contracts that give the buyer the
right, but not the obligation, to buy or sell an
underlying security at a predetermined price,
called the exercise or strike price, on or before a
predetermined date, called the expiry date,
which can only be extended in accordance with
Exchange rules. (SRC Rule 3.1.1.2.a)
 There are 2 kinds of options :
 Call option are rights to buy; put options are
rights to sell
 What are warrants?
 they are rights to subscribe or purchase
new shares or existing shares in a
company on or before a pre-determined
date called the expiry date which can
only be extended in accordance with the
Commission rules or Exchange Rules
 generally have longer exercise period
than options
 Terms to remember
 Strike price : The predetermined buying
or selling price of an underlying security
under an option.
 Expiry date : The predetermined date for
buying or selling an underlying security
under an option. (SRC Rule 3.1.1.2a)
 Terms to remember
 Straddle - involves the purchase of an
equal number of put options and call
options on the same underlying security at
the same strike price and maturity date.
Each option may be exercised separately,
although the combination of options is
usually bought and sold as a unit. ( SRC
Rule 25.1.2)
 Terms to remember
 Block sale: A block sale shall mean a
matched trade that does not go through
the automated order matching system of
an Exchange trading system but instead
has been pre-arranged by and among the
Broker Dealer’s clients and is then entered
as a done deal directly into the trading
system. ( SRC Rule 30.2-8.2)
 Options vs. Warrants
Options
 the shares are usually
received or given by one
investor to another and not
the company itself
 the company that owns the
stock does not receive any
money from the transactions
 Higher price
 Longest term is 2 -3 years
Warrants
 this is issued by the
company itself
 this is a way for the
company to raise money
 usually offered at a price
lower than a stock option
 can last up to 15 years
Revisiting Stock subscription
 Subscriptionwarrant – a type of security
which enables the holder the right to
subscribe to a pre-determined number of
unissued capital stock
 Covered warrant – the right to purchase
a pre-determined number of issued or
existing shares in the future
Revisiting Stock subscription
 It is detachable if the warrant may be sold ,
transferred or assigned to any person by
the warrant holder separate from and
independent of the corresponding
beneficiary securities
 The latter are shares of stock or other
securities of the issuer which form the basis
of the entitlement of the warrant
 A warrant is non detachable if it may not be
sold, etc
 5. Certificates of Assignments, Certificates of
Participation, Trust Certificates, Voting Trust
Certificates or Similar instruments
 Certificate of Assignment - evidences a
transfer of rights and interests in a certain
credit under Art. 1624 of the Civil Code. It
involves the transfer of both the legal and
beneficial title to the credit assigned
 If only a portion of the credit is
transferred, this is evidenced by a
certificate of participation or if only the
beneficial interest is transferred.
 5. Certificates of Assignments, Certificates of
Participation, Trust Certificates, Voting Trust
Certificates or Similar instruments
 Voting trust certificate- legal title passes to
the trustee, but the beneficial title is
retained by the trustor
 Trust certificates – when a trustor entrusts
his money to a trustee, and the latter
receives the money, the trustee somehow
is supposed to give evidence of the receipt.
To be emobodied in that receipt are the
instructions of the trustor to the trustee.
 Proprietary or Non-proprietary
membership certificates in a corporation
 Proprietary share or certificate - an evidence
of interest or participation or privilege in a corp
which entitles the holder to the use of a specific
property and also to dividends or earnings of said
company
 Non proprietary share or certificate – entitles
the holder to the use of property but he has no
rights over dividends or of the assets of the
company upon liquidation thereof
 6. Other instruments as may in the
future be determined by the SEC
 Thisresidual or standby power “ensures
that SEC has authority to regulate the
public distribution and or trading of the
new instrument.
 Definition
 Registration statement- the
application for the registration of
securities required to be filed with the
SEC. Prior to any sale, information on
the securities shall be made available
to each prospective purchaser.
 A Registration Statement may be
withdrawn by the issuer only with the
consent of SEC.
 Definition
 Prospectus – the document made by
or on behalf of an issuer, underwriter
or dealer to sell or offer securities for
sale to the public through a
registration statement filed with the
Commission. (Sec. 3.11 SRC )
 Definitions
 Issuer – is an originator, maker, obligor, or
creator of the security
 Broker – person engaged in the business
of buying and selling securities for the
account of others
 Dealer is any person who buys and sells
securities for his/her own account in the
ordinary course of business
 Definitions
 Associated person of a broker or dealer
is an employee thereof who , directly
exercises control or supervisory
authority, but does not include a
salesman, an agent or a person whose
functions are solely clerical or ministerial.
Actually, he is more of a Compliance
Officer . His responsibilities include
internal control supervision of other
employees, agents, salesmen,
officers, directors, clerks and
stockholders of the broker dealer
 Definitions
 Chinese Walls -The proper segregation of
functions within a firm by any Broker Dealer
which assumes more than one function whether
as a dealer, adviser, or underwriter, or which
engages in market making transactions to
prevent:
a) the flow of information between the different
parts of its organization which perform each
function; and
b) any conflict of interest which may result.
 Definitions
A Broker Dealer shall at all times ensure
that its trading functions and back-office
settlement functions are properly
segregated and shall establish written
procedures to ensure compliance with this
Rule. ( SRC Rule 34.1-3, arrangement
supplied)
 Definitions
 Clearing agency – any person who
acts as intermediary in making
deliveries upon payment to effect
settlement in securities transactions
 Definitions
 Any person that provides a facility to a broker,
dealers, salesman, an associated person who
or another clearing agency, including a clearing
agency’s systems, processes or services and
all the tangible properties necessary to operate
such sytems for the purpose of the following
activities :
1. making deliveries in connection with
transactions in securities
 Definitions
2. reducing the number of settlement of
securities transactions or allocating
securities settlement responsibilities
3. providing the central handling of
securities so that transfers, loans and
pledges and similar transactions can be
made bookeeping entry or facilitating
settlement of securities transactions
without physical delivery of securities
(SRC Rule 3.6)
 Definitions
 Securities Clearing Corporation of the
Philippines -operates as the clearing
and settlement agency for depositary-
eligible trades in the PSE
 Philippine Central Depositary - a
registered clearing agency acting as
depositary
 Definition
 “Exchange” - is an organized market-place
or facility that brings together buyers and
sellers and executes trades of securities
and/or commodities. ( Sec. 3.7 SRC)
 Underwriter – is a person who guarantees on
a firm commitment and/or declared best effort
basis the distribution and sale of securities of
any kind by another company.
 Definition
 Money market- wholesale market for low-
risk, highly liquid short term debts
instruments;
 Floor trading - the purchase and sale of
securities on the stock exchange by a
professional speculator for his own
account only, usually in large quantities
but for small unit profits.
 Definitions
 Public Company – Any corporation :
a) with a class of with a class of equity
securities listed on an Exchange or
b) with assets of at least P 50 million
pesos and having 200 or more
holders, each of them holding at least
100 shares of a class of equity
securities. (SRC Rule 3.1.i)
 Definition
 Self Regulatory Organization - An organized
Exchange, registered clearing agency and any
organization or association registered as an
SRO under the provisions of the Securities
Regulation Code to enforce compliance with
relevant provisions of the Code and rules and
regulations adopted thereunder, and
mandated to make and enforce its own rules,
which have been approved by the Securities
and Exchange Commission, by their members
and/or participants. (SRC Rule 3.1.j)
 Definitions
 Floor trader- is a professional trader in
securities who acts for himself and not for
the account of others; hence, receives no
commission at all;
 Over the counter market- are placements or
transactions involving securities, made not
in a stock exchange, but elsewhere between
the broker and the customer directly
 Money market- wholesale market for low-
risk, highly liquid short term debts
instruments;
 Definition
“Promoter” is a person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor.
( Sec 3.10 SRC)

 Definitions
 Tender offer – a publicly announced
intention to acquire securities of a public
company. It is mandatory if a person
intends to acquire 35% or more of equity
shares in a public company, or even
less than 35% but would result in an
ownership of over 51% of the total
outstanding equity securities of a
public company
What is meant by the registration
requirement for Securities ?
 The requirement that securities shall not
be sold or offered for sale or distribution
within the Philippines, without a registration
statement duly filed with and approved by
the SEC. Prior to such sale, information on
the securities, in such form and with such
substance as the SEC may prescribe, shall
be made available to each prospective
purchaser. (Sec. 8.1, SRC)
 Registration of Securities
 The SRC is a “truth in securities law” similar
to that of the US Securities Act of 1933
since it is aimed to ensure full and fair
disclosure of information about securities
 This is to enable the public to make an
informed decision in respect of the securities
offered for sale
 The device used is the registration of
securities under Sec. 8 of the SRC
 Sale of Securities
 Must first be registered and have the
proper permit before being sold or offered
for sale to the public within the Philippines
EXCEPTIONS:
 Exempt securities
 Securities emanating from exempt
transactions
 Full Disclosure vs.
Merit System
 Full Disclosure rule states that all
companies listed or applying for listing ,
are required to divulge truthfully and
accurately all material information about
themselves and the securities they sell
under pain of administrative, civil and
criminal sanctions.
 Full Disclosure vs.
Merit System
 Merit system or merit based approach
means SEC will determine the merits of
the securities or determine the quality of
the issuer
 The SRC veered from the merit based
approach. A declaration of effectiveness of
the registration statement is not a SEC
finding as to the truth of the statements
made therein
 Public Offering
(Par. 1.N, SRC Rule 3)
 A random or indiscriminate offering of
securities in general to anyone who will buy,
whether solicited or unsolicited. Any
solicitation or presentation of securities for
sale through any of the following modes shall
be presumed to be a public offering :
i. Publication in any newspaper, magazine or
printed reading material which is distributed
within the Philippines or any part thereof
 Public Offering
(Par. 1.N, SRC Rule 3)
ii. Presentation in any public or commercial
place
iii. Advertisement or announcement in any
radio or television or in any online or email-
system; or
iv. Distribution and/or making available flyers,
brochures or any offering material in a
public or commercial place , or mailing the
same to prospective purchases
 SEC Power on Securities
Transactions(Sec. 8)
 Grant “conditional approval” of registration
statements
 Define terms and conditions under which
any written communication, including any
summary prospectus, shall not be deemed
to constitute an offer for sale
 Keep open the Register of Securities
 Audit financial statements of applicants
 Require or dispense with information
 Sec. 9. Exempt Securities
 9.1 The requirement of registration under
subsection 8.1 shall not as a general rule
apply to any of the following classes of
securities.
 Sec. 9. Exempt Securities
 The exemption is only with respect to the
registration requirements under SRC
Subsection 8.1
 Their purchase and sale are not exempt
from the anti-fraud, civil liability and other
provisions of the SRC, including reportorial
requirements
 Exempt Securities (Sec. 9)
1) Issued by the government/ subdivisions/
instrumentalities
2) Issued by foreign government t with which
the Philippines has diplomatic relations
3) Issued by receiver/trustee of an insolvent
approved by the court
4) Issued by building and loan associations
Exempt Securities (Sec. 9)

5) Policy of insurance issued by

insurance corporations supervised by
the insurance commission
6) Security/right/interest in real property
including subdivision lot/condominium
supervised by the HLURB
7) Pension plans regulated by BIR/
Insurance Commission
 Exempt Transactions
(Sec. 10)
1) Judicial sale by execution, etc. in insolvency
2) Sale of pledged property/foreclosed property
to liquidate an obligation
3) Isolated transactions on securities done by
owner/agent
4) Stock transfers emanating from mergers and
consolidations
5) Securities issued by public service operator
to broaden equity base
 Exempt Transactions
(Sec. 10)
6) Distribution by corp of securities to its
stockholders or other security holders as
a stock dividend or other distribution out
of surplus (Stock dividend declaration)
7) Sale of capital stock of a corp to its own
stockholders exclusively where no
commission or other remuneration is paid
directly or indirectly(sale of shares to
stockholders not underwritten)
 Exempt Transactions
(Sec. 10)
8) Exchange of securities by issuer with its
existing security holders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly for soliciting such
exchange
9) Sale by issuer to fewer than 20 persons or not
more than 19 persons in the Phils during any
12 month period (Private placements)
10) Sale to any number of the following qualified
buyers:
 Exempt Transactions
a) banks
(Sec. 10)
b) investment house
c) insurance company
d) pension fund or retirement plan maintained
by the Government or any political
subdivision thereof of or managed by a
banking institution
e) investment company
f) such other person as SEC may by rule
determine as qualified buyers
 Exempt Transactions
(Sec. 10)
11) Issuance of secured bonds or notes,
where entire mortgage and related
transactions on securities done by
owner/agent (Issuance of bonds to a
single purchaser)
12) Pre-incorporation subscription
13) Securities issued by public service
operator to broaden equity base
 Exempt Transactions
(Sec. 10)
14) Issue and delivery of security in
exchange for any other security of
same issuer pursuant to right of
conversion provided that the security
so surrendered has been registered or
was, when sold exempt from
registration(Transactions pursuant to a
right of conversion)
 Exempt Transactions
(Sec. 10)
15) Broker’s
transactions, executed upon
customer’s orders, on any registered
Exchange or other trading market.
Procedure for Registration of Securities

 First, Issuer files with SEC a sworn

registration using the prescribed forms and
containing all the required information
relative to the kinds of securities, the
effects of securities issue on ownership, on
mixed ownership, whether foreign or local
ownership (Sees. 12.1; 12.2; 12-3, RA No.
8799);
Procedure for Registration of Securities

 Second, the registration statement shall be

signed by issuer's executive officers,
principal operating officer, chief financial
officer, its comptroller, its accounting
officer, its corporate secretary or persons
performing similar functions accompanied
by a duly verified resolution of the board of
directors (See. 12.4, RA No. 8799).
.
Procedure for Registration of Securities

 Third,Upon filing of the registration

statement, the issuer shall pay to the
Commission a fee of not less than 1/10th
of one percentum (1 %) of the maximum
aggregate price at which such securities
are proposed to be offered [See. 12.5(a),
RA 8799
Procedure for Registration of Securities

 Fourth,
Notice of filing of registration
statement must be published for two
consecutive weeks [See. 12.5(b), RA No.
8799].
 Procedure for Registration of Securities

 Fifth, Within 45 days the Commission may

either approve it or reject it (Sec. 12.6, RA
No. 8799);
 Sixth, Upon effectivity of the registration
statement, the issuer shall state under oath
in every prospectus that all registration
requirements have been met and that all
information are all true (See. 12.7, RA No.
8799).
 Prohibitions on Fraud, Manipulation and
Insider Trading
 Sec.24. Manipulation of Prices – refers to
manipulation of security prices whether in
the stock exchange or other trading
markets referring to over the counter
markets
 Manipulation of Security Prices

UNLAWFUL ACTS DIRECTLY OR

INDIRECTLY :
a) To create a false or misleading appearance of
active trading in any listed security traded in an
exchange or any other trading market.
 (i) By effecting any transaction in such
security which involves no change in the
beneficial ownership thereof;
This is actually called a “a wash sale” – a
transaction in a security involving no genuine
change in the beneficial ownership of such
security. Also called ‘pretended sales”
 What is beneficial ownership?
(SRC Rule 3 – 1 A)
 Beneficial owner or beneficial ownership
means any person, who directly or
indirectly, through any contract,
relationship or otherwise, has or shares
voting power, which includes the power to
vote, or direct the voting of such security;
and or investment returns or power which
includes the power to dispose of such
security
 Manipulation of Security Prices

 (ii) By entering an order or orders for the

purchase or sale of such security with the
knowledge that a simultaneous order or
orders of substantially the same size, time or
prize, for the sale or purchase of any such
security, has or will be entered by or for the
same or different parties; or
 Manipulation of Security Prices
 This is called as “matched orders”. Ex. Investor
A instructs the broker to buy certain securities at
a given price, knowing that Investor B has also
instructed her broker to sell the same kind of
securities at the same price.
 SRC Rule 24.1(b) calls it the “improper matched
orders” – engaging in transactions where both
the buy and sell orders are entered at the same
time with the same price and quantity by different
but colluding parties
 Manipulation of Security Prices

 (iii) By performing similar acts where there is

no change in beneficial ownership.
 A catch all provision to include other
manipulative devices
 any scheme which will cause an artificial
reduction or shortage of available shares in the
market while falsely showing activity therein.
 Manipulation of Security Prices

UNLAWFUL ACTS DIRECTLY OR INDIRECTLY :

b) To effect, alone or with others, a series of
transactions in securities, that :
i. Raises their price to induce the purchase of
a security
ii. Depresses their price to induce the sale of a
security
iii. Creates active trading to induce such a
purchase or sale through manipulative devices
 Manipulation of Security Prices

 This subsection concerns ‘market rigging”

 This is unlawful since a false appearance of
active trading is intended by the parties
 SRC Rule 24.1 (b) identified in SRC Subsection
24.1(b) (iii), as follows :
1) Marking the close –buying and selling
securities at the close of the market in an effort
to alter the closing of the price of the security
 Manipulation of Security Prices

2) Painting the tape – engaging in a series of

transactions in securities that are reported
publicly to give the impression of activity or
price movement in a security.
3) Squeezing the Float- taking advantage of a
shortage of securities in the market by
controlling the demand side and exploiting
market congestion during such shortages in a
way as to create artificial prices
 Manipulation of Security Prices

4) Hype and Dump- engaging in buying at increasingly

higher prices and then selling securities in the
market at higher prices
Other prohibited acts:
i. boiler room operations – refers to activities out of
low rent offices and which use high-pressure
activities (ex. Direct mail offers and telephone follow
ups) typically involving misrepresentatations.
Usually they are unlicensed or nonexistent
 Other Manipulative Devices on Prices of
Securities
 Churning – involves the excessive trading by a broker
dealer in a customer’s account with a view to generating
commissions
 Scalping – where a person like an investment advisor,
purchases securities for his own account before
recommending that security, and then sells that share
for a profit upon the rise in the market price following the
recommendation.
 Daisy chain – a pattern of fictitious trading activity by a
group of persons who lures innocent people to the
scheme
 Manipulation of Security Prices

c) To circulate or disseminate information that the

price of any listed security in the exchange will
or is likely to rise or fall because of
manipulative market operations
d) To make false or misleading statements with
respect to any material fact, which he knew or
had reasonable ground to believe was so false
or misleading, for the purpose of inducing the
purchase or sale or nay security listed or
traded in an Exchange
 Manipulation of Security Prices
e) To effect any series of transactions for the
purchase and/or sale of any security
traded in an Exchange for the purpose of
pegging, fixing or stabilizing the price of
such security, unless otherwise allowed by
the Code or by rules of the Commission.
Manipulative and Deceptive Devices
 Sec. 24.2 “No person shall use or employ, in
connection with the purchase or sale of any
security any manipulative or deceptive device
or contrivance. Neither shall any short sale
be effected nor any stop-loss order be
executed in connection with the purchase or
sale of any security except in accordance
with such rules and regulations as the
commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors .”
 What is Short Sale?
 Any sale of security which the seller does
not own or any sale which is consummated
by the delivery of a security borrowed by or
for the account of the seller.
 Short selling is a departure from the norm
expressed in the maxim “nemo dat quod
non habet.”
Regulation of Option Trading
(Sec. 25)
 Sec. 25 - It shall be unlawful for an
Exchange member to directly or indirectly,
endorse or guarantee the performance of
any put, call, straddle, option or privilege in
relation to any security registered on an
Exchange
 Fraudulent Transactions
(Sec. 26)
 Itshall be unlawful for any person, directly
or indirectly, in connection with the
purchase or sale of any security to :
 Fraudulent Transactions
(Sec. 26)
a) Employ any device, scheme or artifice to
fraud
b) Obtain money or property by means of
any untrue statement of a material fact or
any omission to state a material fact
necessary in order to make the
statements made, in the light of the
circumstances under which they were
made, not misleading; or
 Fraudulent Transactions
(Sec. 26)
c) Engage in any act, transaction, practice or
course of business which operates or would
operate as a fraud or deceit upon any
person.
 The purchase of sale of any securities to
engage in any act, transaction, practice, or
course of business which operates or would
operate as a fraud or deceit upon any person.
 Fraudulent Transactions
(Sec. 26)
 Fraud here is akin to bad faith which implies
a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral
obliquity; it is unlike that of the negative idea
of negligence in that fraud or bad faith
contemplates a state of mind affirmative
operating with furtive objectives. (Securities
and Exchange Commission vs. Court of
Appeals, et al., G.R. Nos. 106425 & 106431-
32, July 21, 1995, Third Division)

 Insider Trading
(Sec. 27)
 Insider’s duty to disclose when trading
 It shall be unlawful for an “insider” to sell or
buy a security of the issuer if he knows a
fact of special significance with respect to
the issuer or the security that is not
generally available to the public. UNLESS:
1. The information was not gained from such
relationship
 Insider Trading
(Sec. 27)
2) The insider proves that the fact is
generally available
 if the party to the transaction or his agent
has information disclosed to him by an
insider
 has reason to believe that he also has
possession of such information
 Who is an insider ?
a) The issuer;
b) A director or officer of, or a
person controlling, controlled by,
or under common control with,
the issuer,
 Who is an insider ?
c) A person whose relationship or former
relationship o the issuer gives or gave
him access to a fact of special
significance about the issuer or the
security that is not generally available, or
d) A person who learns such a fact from any
of the foregoing insiders with knowledge
that the person from whom he learns the
fact is such an insider. (Sec. 3.8, SRC)
 Fact of Special Significance
 a. One which in addition to being
material, would be likely to affect the
market price of a security to a significant
extent on being made generally available
 Fact of Special Significance
 b. One which a reasonable person
would consider especially important under
the circumstances in determining his
course of action in the light of such factors
as the degree of its specificity, the extent
of its difference from information generally
available previously and is nature and
reliability.
 Information is “Material Non-Public”
(Sec. 27.2)
 If it has not been generally disclosed to the
public and would likely affect the market price of
the security after being disseminated to the
public and the lapse of a reasonable time for
the market to absorb the information or
 It would be considered by a reasonable person
important under the circumstances in
determining his course of action, whether to buy
or sell
 Protection of investors
1. Tender Offer - is a “publicly announced
intention by a person acting alone or in
concert with other persons to acquire
security of a public company.
 A public company is a corporation
a. which is listed on a stock exchange OR
b. with assets exceeding P 50 M AND with 200
or more stockholders at least 200 of them
holding not less than 100 shares of such
company
 Protection of investors
 A tender offer is an offer by the
acquiring person to the stockholders
of a company for them to tender their
shares therein on the terms specified
in the offer
 Tender Offer Rule
 Tender offer rule provides that if a party
wants to acquire 35% or more of the shares
of a public company , it is obliged to disclose
such intention and at the same time, offer to
buy the percentage of shares from ALL
STOCKHOLDERS WITHOUT
DISCRIMINATION OR
 when acquisition is to be made within a 12
month period or what is known as “creeping
acquisition.”
 Tender Offer Rule
 And if the purchase is less than 35% but
would result in the buyer getting 51% of the
company’s stocks, the obligation to make a
tender offer is remains and expands to cover
all remaining stocks
 Mandatory offer is aimed at preventing the
major stockholders from dealing directly with
interested buyers for the sale of their stocks
(often for a price higher than their book
value) without knowledge of other
stockholders
 Rules on Proxy Solicitation
 Proxy solicitation rules applies to a
“reporting company” and to any other
person soliciting votes from the
stockholder of such company
 Proxy rule is done not only in connection
with election of director but also with
respect to sec. 6 of the Corporation Code
 Requirements as to Form of Proxy and
Delivery of Information to Security Holders
 Form of Proxy shall :
i. indicate in bold face type on whose
behalf the solicitation is made
ii. provide a specifically designated blank
space for dating the
iii.Identify clearly and impartially each
separate matter intended to be acted
upon
 Requirements as to Form of Proxy and
Delivery of Information to Security Holders
iv.be in writing signed by the stockholder or
his duly authorized representative; and
v. be filed with the corporate secretary before
the scheduled meeting
 Means shall be provided in the proxy form
whereby the person solicited is afforded an
opportunity to specify by boxes a choice
between approval or disapproval of; or
abstention with respect to each separate
 Requirements as to Form of Proxy and
Delivery of Information to Security Holders
matter referred to therein as intended to be
acted upon, other than election to office. A
proxy may confer discretionary authority
with respect to matters as which choice is
not specified by the security holder
provided that the form of proxy states in
bold-face type how it is intended to vote
the shares represented by the proxy in
each such case.