ONLINE REVIEW PROGRAM IN COMMERCIAL LAW

Pros. Wilfredo B. Barreda

April 27, 2020

Reading Topics

I. LAW ON TRANSPORTATION

a. Provisions of the Civil Code of the Philippines on Transportation

b. Public Service Act (Commonwealth Act No. 146)
c. Carriage of Goods by Sea Act (COGSA)
d. Relevant provisions of the Code of Commerce
e. Warsaw Convention
f. Allowing Foreign Vessels to Transport and Co-Load Foreign Cargoes for
Domestic Transshipment (R.A. No. 10668)

Learning Objective: At the end of the learning period, the students are
expected to answer the following questions:

1. What is a common carrier?

Article 1732. Common carriers are persons, corporations, firms or

associations engaged in the business of carrying or transporting passengers
or goods or both, by land, water, or air, for compensation, offering their
services to the public.

2. What is the diligence required of common carriers?

Article 1733. Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in
the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.

3. Can a different degree of diligence be validly stipulated by the parties in a

contract of carriage?

Article 1744. A stipulation between the common carrier and the shipper or
owner limiting the liability of the former for the loss, destruction, or
deterioration of the goods to a degree less than extraordinary diligence
shall be valid, provided it be:

(1) In writing, signed by the shipper or owner;

(2) Supported by a valuable consideration other than the service rendered
by the common carrier; and
 (3) Reasonable, just and not contrary to public policy.

4. What is the duration of observance by a common carrier of extraordinary

diligence in the vigilance over goods and the safety of passengers?

Over the goods:

Article 1736. The extraordinary responsibility of the common carrier lasts

from the time the goods are unconditionally placed in the possession of,
and received by the carrier for transportation until the same are delivered,
actually or constructively, by the carrier to the consignee, or to the person
who has a right to receive them, without prejudice to the provisions of
article 1738.

Article 1737. The common carrier’s duty to observe extraordinary diligence

over the goods remains in full force and effect even when they are
temporarily unloaded or stored in transit, unless the shipper or owner has
made use of the right of stoppage in transitu.

Article 1738. The extraordinary liability of the common carrier continues to

be operative even during the time the goods are stored in a warehouse of
the carrier at the place of destination, until the consignee has been
advised of the arrival of the goods and has had reasonable opportunity
thereafter to remove them or otherwise dispose of them.

Over safety of passengers:

From the moment the person who purchased ticket from the carrier
presents himself at the proper place and in a proper manner to be
transported (Jesusa Vda. De Nueca vs The Manila Railroad Company) up
to the time the passenger has reached his destination, safely alighted from
the carrier’s conveyance or has had a reasonable opportunity to leave the
carrier’s premises. (Aboitiz Shipping Corp vs CA; La Mallorca vs CA)

5. Is the common carrier excused from liability if there is contributory

negligence on the part of the passenger in causing the loss, destruction or
deterioration of goods transported?

Article 1762. The contributory negligence of the passenger does not bar
recovery of damages for his death or injuries, if the proximate cause
thereof is the negligence of the common carrier, but the amount of
damages shall be equitably reduced.
6. What is the degree of diligence required of common carriers with respect
to the baggage of passengers?

Article 1754. The provisions of articles 1733 to 1753 shall apply to the
passenger’s baggage which is not in his personal custody or in that of his
employee. As to other baggage, the rules in articles 1998 and 2000 to
2003 concerning the responsibility of hotel-keepers shall be applicable.

Baggage not in personal custody or that of his employee: Extraordinary

Diligence

In the custody: Diligence of a depositary (ordinary diligence)

7. In the transportation of goods, is the carrier liable if it incurs in delay?

Yes

Article 1740. If the common carrier negligently incurs in delay in

transporting the goods, a natural disaster shall not free such carrier from
responsibility.

Article 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner contravene
the tenor thereof, are liable for damages.

8. Are common carriers liable if deaths of or injuries to passengers are

caused by the negligent or willful acts of its employees?

Article 1759. Common carriers are liable for the death of or injuries to
passengers through the negligence or willful acts of the former’s
employees, although such employees may have acted beyond the scope
of their authority or in violation of the orders of the common carriers.
This liability of the common carriers does not cease upon proof that they
exercised all the diligence of a good father of a family in the selection and
supervision of their employees.

Will the answer be the same if such acts are caused by other passengers
or of strangers?

Article 1763. A common carrier is responsible for injuries suffered by a

passenger on account of the willful acts or negligence of other passengers
or of strangers, if the common carrier’s employees through the exercise of
the diligence of a good father of a family could have prevented or stopped
the act or omission.
9. What damages are recoverable in case of injury to or death of a
passenger?

Article 1764. Damages in cases comprised in this Section shall be

awarded in accordance with Title XVIII of this Book, concerning Damages.
Article 2206 shall also apply to the death of a passenger caused by the
breach of contract by a common carrier.

Kinds of damages that may be recovered in case of death of a passenger:

1. An indemnity for the Death of the victim

2. An indemnity for loss of Earning capacity of the deceased;
3. Moral damages;
4. Exemplary damages;
5. Attorney's fees and expenses of litigation;
6. Interest in proper cases (Briñas v. People, G.R. No. L-30309, Nov. 25,
1983).
7. Hospital and funeral expenses

Carrier is not liable for exemplary damages where there is no proof that it
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.

NOTE: In case of death, the plaintiff is entitled to the amount he spent

during the wake and funeral of the deceased. However, it has been ruled
that expenses after the burial are not compensable (Victory Liner, Inc. v.
Heirs of Andres Malecdan, G.R. No. 154278).

Damages in Personal Injury Cases

Personal injury and even death entitles claimant to all medical expenses
as well as other reasonable expenses that he incurred to treat his or his
relative’s injuries. Medical expenses may even include the amount spent
for plastic surgery of the plaintiff or any procedure to restore the part of the
body that was affected (Spouses Renato Ong v. Court of Appeals, G.R.
No. 117103, January 21, 1999)

10. What is a bill of lading?

is a written acknowledgment of the receipt of goods and an agreement to

transport and to deliver them at a specified place to a person named or on
his order.

11. What are the functions of a bill of lading?

It serves three main functions: it is a conclusive receipt, i.e. an
acknowledgement that the goods have been loaded; it contains or
 evidences the terms of the contract of carriage; and it serves as a
document of title to the goods.

12. What are the types of bills of lading?

 13. When must the cargoes covered by a bill of lading be delivered?

As indicated in the Bill of lading or if there is no period fixed for the

delivery of the goods the carrier shall be bound to forward them in the first
shipment of the same or similar goods which he may make point where he
must deliver them; and should he not do so, the damages caused by the
delay should be for his account.

14. In coastwise or within the Philippines shipment of goods, when shall the
shipper file a claim with the carrier?

ARTICLE 366. Within the twenty-four hours following the receipt of the
merchandise, the claim against the carrier for damage or average be
found therein upon opening the packages, may be made, provided that
the indications of the damage or average which gives rise to the claim
cannot be ascertained from the outside part of such packages, in which
case the claim shall be admitted only at the time of receipt.

After the periods mentioned have elapsed, or the transportation charges

have been paid, no claim shall be admitted against the carrier with regard
to the condition in which the goods transported were delivered. (Code of
Commerce)

What is the prescriptive period in filing a case in court?

1) Within 6 years, if no bill of lading has been issued;

2) Within 10 years, if a bill of lading has been issued.

15. Who are the persons involved in maritime commerce?

Parties in Maritime Commerce

Pilot
A person qualified, and licensed to conduct a vessel into or out of ports or in
certain waters.

Captain/ Masters
The general agent of the ship owner. The commander and technical director of
the vessel. Government representative of the country under whose flag he
navigates. The ship owner shall be liable for contracts made by the captain
when:
a. When duly authorized
b. For ship repairs, equipping or provisioning the vessel for the latter’s benefit even
if there was no express authority

Officers and crew

Sailing Mate/First Mate

Second chief of the vessel who takes the places of the captain in case of
absence, sickness, or death and shall assume all of its duties, powers and
responsibilities.

Second Mate
Takes command of the vessel in case of the inability or disqualification of the
captain and the sailing mate, assuming in such case their powers and
responsibilities.

Engineers
Officers of the vessel but have no authority except in matters referring to the
motor apparatus. When two or more are hired, one of them shall be the chief
engineer.

Members of the crew

The aggregate of seamen who man a ship, or ship’s company.

Ship owner and ship agent

Is entrusted with the provisioning and representing the vessel in the port in which
it may be found. His liability to passengers and cargo owners for loss or injury is
the same as the ship owner. He is solidarily liable with the owner for such loss or
damage subject to his right to claim reimbursement from the ship owner.

Super cargoes
Is a person who discharges administrative duties assigned to him by ship agent
or shippers, keeping an account and record of transaction as required in the accounting
book of the captain.

16. What is a charter party? What are the kinds of charter party?

A charter party is a contract by which with the entire ship or some principal
part thereof is let by the owner to another person for a specified period of
time or use.

2 types:

1. Contract of affreightment- involves the use of shipping

space leased by the owner in part or as a whole, to carry
 goods for others: time charter-leased for a fixed period of
time; voyage- for a single voyage;
2. Demise or bareboat- by the terms of which the whole
vessel is let to the charterer which transfers to him its
entire command and possession and consequent control
over its navigation, including the master and crew.

17. Explain the Doctrine of Limited Liability in maritime law?

Also called the “no vessel, no liability doctrine,” it provides that liability of
ship owner is limited to ship owner’s interest over the vessel. Consequently, in
case of loss, the ship owner’s liability is also extinguished. Limited liability
likewise extends to ship’s appurtenances, equipment, freightage, and insurance
proceeds. The ship owner’s or agent’s liability is merely co-extensive with his
interest in the vessel, such that a total loss of the vessel results in the liability’s
extinction. The vessel’s total destruction extinguishes maritime liens because
there is no longer any res to which they can attach. (Monarch Insurance v. CA,
G.R. No. 92735, June 8, 2000)

What are the exceptions to the applicability of the doctrine?

1. Repairs and provisioning of the vessel before the loss of the vessel;
(Art. 586)

2. Insurance proceeds. If the vessel is insured, the proceeds will go to the

persons entitled to claim from the shipowner; (Vasquez v. CA, G.R. No. L-
42926, Sept. 13, 1985)

3. Workmen’s Compensation cases (now Employees’ Compensation

under the Labor Code); (Oching v. San Diego, G.R. No. 775, Dec. 17,
1946)

4. When the shipowner is guilty of fault or negligence; Note: But if the

captain is the one who is guilty, doctrine may still be invoked, hence,
abandonment is still an option.

5. Private carrier; or

6. Voyage is not maritime in character.

18. What are the extents of the liability of the ship agent and/or the ship
owner?
 By necessary implication, the ship agent’s or ship owner’s liability is confined to
that which he is entitled as of right to abandon—the vessel with all her equipment and
the freight it may have earned during the voyage and to the insurance thereof, if any
(Yango vs. Laserna, 73 Phil. 330, 1941).

Civil liabilities of ship owners and agents

1. Damages suffered by a 3rd person for tort committed by the captain;

2. Contracts entered for provisioning and repair of vessel;
3. Indemnities in favor of 3rd persons arising from the conduct of the captain from the
care of goods;
4. Damages in case of collision due to fault or negligence or want of skill of the captain;
and
5. Damages for the acts of the captain.

19. What is meant by general average?

This includes all damages and expenses which are deliberately caused in
order to save the vessel, its cargo, or both at the same time from real and
known risk.

What are the requisites for general average?

Requisites:
● There be a common danger;
● That for the common safety, part of the cargo is deliberately sacrificed; Jettison;
● That from the expenses or damages caused, flows the successful saving of
vessel and the cargo;
● Expenses and dames have been incurred after taking legal steps and authority.

20. How is collision distinguished from allusion of vessels?

Collision Allision
Impact of two vessels both of Impact of between a moving vessel and a
which are moving stationary one
 21. What is the so called doctrine of inscrutable fault?

Doctrine of Inscrutable fault- In a collision, the vessel at fault shall

indemnify the damages sustained or losses incurred and if both vessels
were at fault, each shall suffer its own damages, and both shall be
solidarily liable to others.

22. What are the three zones of time in collision of vessels?

Zones of time in Collision of vessels

I. First zone- Time up to the moment when risk of collision begins;

II. Second zone- Time between the risk of collision begins until it becomes a
practical certainty;

III. Third zone- Time when collision is certain up to the time of impact.

23. What is the doctrine of error in extremis?

Error in Extremis

If a vessel having a right of way suddenly changes its course during the third
zone, in an effort to avoid an imminent collision due to the fault of another
vessel, such act may be said to be done in extremis, and even if wrong
cannot create responsibility on the part of said vessel with the right of way.

24. What is arrival under stress of a vessel?

Arrival under Stress

It is the arrival of the vessel at the nearest and most convenient port, if during the
voyage the vessel cannot continue the trip to the port of destination due to:
1. Lack of provision;
2. Well-founded fear of seizure, privateers or pirates; and
3. By reason of any accident of the sea disabling it to navigate

25. When do you apply the Carriage of Goods by Sea Act?

It will only be applied in terms of loss or damage of goods transported to and from
Philippine ports in foreign trade.
It may also apply to domestic trade when there is a paramount clause in the contract.
Paramount Clause is a stipulation or clause either on the bill of lading or charter party
stipulating the laws that the parties agreed to be used of that particular transport. In the
event that there will be a breach, the parties shall follow the law stipulated in the
paramount clause (Martin, 1989).

The Carriage of Goods by Sea Act applies up to the final port of destination even if the
transshipment was made on an inter-island vessel (Sea Land Service Inc. vs. IAC, G.R.
No. 75118, August 31, 1987).

Applicability:
The transportation must be:
1. For the carriage of goods;
2. By the sea;
3. To and from Philippine ports in foreign trade.

26. In international shipment of goods from a foreign port to the Philippine

port, what is the procedure and prescriptive periods for filing maritime
claims?

Unless notice of loss or damage and the general nature of such loss or
damage be given in writing to the carrier or his agent at the port of
discharge before or at the time of the removal of the goods into the
custody of the person entitled to delivery thereof under the contract of
carriage, such removal shall be prima facie evidence of the delivery by the
carrier of the goods as described in the bill of lading. If the loss or damage
is not apparent, the notice must be given within three days of the delivery.
Said notice of loss or damage maybe endorsed upon the receipt for the
goods given by the person taking delivery thereof.

The notice in writing need not be given if the state of the goods has at the
time of their receipt been the subject of joint survey or inspection.

In any event the carrier and the ship shall be discharged from all liability in
respect of loss or damage unless suit is brought within one year after
delivery of the goods or the date when the goods should have been
delivered: Provided, That if a notice of loss or damage, either apparent or
concealed, is not given as provided for in this section, that fact shall not
affect or prejudice the right of the shipper to bring suit within one year after
the delivery of the goods or the date when the goods should have been
delivered

What is the limitation of the liability of the carrier?

Neither the carrier nor the ship shall in any event be or become liable foe
any loss or damage to or in connection with transportation of goods in an
amount exceeding $500 per package lawful money of the US, or in case
 of goods not shipped in packages, per customary freight unit, unless the
nature and value of such goods have been declared by the shipper before
shipment and inserted in the bill of lading.

27. What is a public utility?

A business or service engaged in regularly supplying the public with some

commodity or service of public consequence sush as electricity, gas,
water, transportation, telephone or telegraph service.

28. What is the difference between Certificate of Public Convenience and

Certificate of Public Convenience and Necessity?

The former is any authorization to operate as public service issued by the

Public Service Commission for which no franchise is required by law. In
the latter, a franchise issued by the legislative department is necessary.

29. What are the requirements that must be met before a Certificate of Public
Convenience may be issued under the law?

1. Applicant must be a citizen of the Philippines. If the applicant is a

Corporation, 60% of its capital must be owned by Filipinos

2. Applicant must prove public necessity

3. Applicant must prove the operation of proposed public service will

promote public interest in a proper and suitable manner; and

4. Applicant must have sufficient financial capability to undertake

proposed services and meeting responsibilities incidental to its operation.
(Kilusang Mayo Uno v. Garcia G.R. No. 108584, Dec. 22, 1994)

30. What is the so called prior operator rule? What is the limitation of its
application?

Definition of “Prior Operator Rule:” before permitting a new operator to

operate in the territory of another operator already established with a
certificate of public convenience, the PRIOR operator must first be given
the opportunity to EXTEND its service in order to meet the public needs.
Public operators must be shielded from ruinous competition by giving the
prior operator the opportunity to IMPROVE his equipment and services
before allowing a new operator to serve in the same territory.
31. What are the three major factors to be considered by the regulating
agency in fixing the just and reasonable rates to be charged by public
utility?

In determining the just and reasonable rates to be charged by a public

utility, three major factors are considered by the regulating agency: a) rate
of return; b) rate base and c) the return itself or the computed revenue to
be earned by the public utility based on the rate of return and rate base.

What is a rate of return?

The rate of return is a judgment percentage which, if multiplied with the

rate base, provides a fair return on the public utility for the use of its
property for service to the public. The rate of return of a public utility is not
prescribed by statute but by administrative and judicial pronouncements.
The Supreme Court has consistently adopted a 12% rate of return for
public utilities.

32. What is the concept of the so called “boundary system”?

Under this system the driver is engaged to drive the owner/operator’s unit
and pays the latter a fee commonly called boundary for the use of the unit.
Whatever he earned in excess of that amount is his income. (Paguio
Transport Corp. v. NLRC, G.R. No. 119500, Aug. 28, 1998)

Under the system and in relation to the existing transportation laws, what
is the relationship between the driver and the owner/operator?

The relationship between jeepney owners/operators on one hand and

jeepney drivers on the other under the boundary system is that of
employer-employee and not of lessor-lessee. (Martinez v. NLRC, G.R. No.
117495, May 29, 1997).

The features which characterize, the "boundary system" – namely, the fact
that the driver does not receive a fixed wage but gets only the excess of
the amount of fares collected by him over the amount he pays to the jeep-
owner, and that the gasoline consumed by the jeep is for the account of
the driver – are not sufficient to withdraw, the relationship between them
from that of the employer and employee. (National Labor Union v.
Dinglasan, G.R. No. L-14183, Nov. 4, 1993)

Who is liable for the injury to or death of the passengers resulting from the
negligent operation of the vehicle operating under the boundary system?
 In the criminal case for the injury or death, the driver is liable for the
criminal penalty and is primarily liable for the civil liability/indemnity. In case the
Driver is insolvent, the owner of the common carrier is subsidiarily liable.

In an action for damages based on quasi-delict, the owner is primarily

liable for the damages under the vicarious liability.

In an action for damages for breach of Contract of carriage, the owner of

the common Carrier is liable.

33. What is the so called “kabit system” in transportation operation?

-It is an arrangement whereby a person who has been granted a certificate of public
convenience allows other persons who own motor vehicle to operate them under the
license, sometimes for a fee or percentage of the earnings. Although the parties to such
an agreement is invariably recognized as being contrary to public policy and therefore
void and inexistent under Art. 1409 of the New Civil Code.

Who is liable for the injury to or death of the passengers resulting from
the negligent operation of the vehicle operating under the “kabit system”?

For the safety of passengers and the public who may have been wronged and deceived
through the baneful kabit system, the registered owner of the vehicle is not allowed to
prove that another person has become the owner so that he may be thereby relieved of
responsibility. Subsequent cases affirm such basic doctrine.

34. In what kind of transportation operation does the Warsaw Convention

applicable?

International Air Transportation

There are then two categories of international transportation, viz., (1) that where the
place of departure and the place of destination are situated within the territories of two
High Contracting Parties regardless of whether or not there be a break in the
transportation or a transshipment; and (2) that where the place of departure and the
place of destination are within the territory of a single High Contracting Party if there is
an agreed stopping place within a territory subject to the sovereignty, mandate, or
authority of another power, even though the power is not a party of the
Convention.(Mapa vs CA, 275 SCRA)

35. Under the Warsaw Convention, what is the carrier’s liability limit for
baggage lost and for the injury or death of a passenger?
 In the carriage of passengers the liability of the carrier for each passenger is
limited to the sum of 125,000 francs. Where, in accordance with the law of the Court
seised of the case, damages may be awarded in the form of periodical payments, the
equivalent capital value of the said payments shall not exceed 125,000 francs.
Nevertheless, by special contract, the carrier and the passenger may agree to a higher
limit of liability.

In the carriage of registered luggage and of goods, the liability of the carrier is
limited to a sum of 250 francs per kilogram, unless the consignor has made, at the time
when the package was handed over to the carrier, a special declaration of the value at
delivery and has paid a supplementary sum if the case so requires. In that case the
carrier will be liable to pay a sum not exceeding the declared sum, unless he proves
that that sum is greater than the actual value to the consignor at delivery.

As regards objects of which the passenger takes charge himself the liability of
the carrier is limited to 5,000 francs per passenger.

May the carrier avail of this liability limit if the breach of the contract of
carriage is attended by willful misconduct, bad faith, recklessness or
improper behavior on the part of any official or employee of the carrier?

The carrier shall not be entitled to avail himself of the provisions of this Convention
which exclude or limit his liability, if the damage is caused by his wilful misconduct or by
such default on his part as, in accordance with the law of the Court seised of the case,
is considered to be equivalent to wilful misconduct.

IV. BANKING LAWS

a. The New Central Bank Act (R.A. No. 7653 as amended by R.A. No.
11211)
b. General Banking Act of 2000 (R.A. No. 8791)
c. Law on Secrecy of Bank Deposit (R.A. No. 1405, as amended)
d. Truth and Lending Act (R.A. No. 3765)
e. Lending Company Regulation Act of 2007 (R.A. No. 9474 as amended by
R.A. No. 10881)
f. Philippine Deposit Corporation Act

Learning Objective: At the end of the learning period, the students are
expected to answer the following questions:

1. What are the state policies behind the passage of the New Central Bank
Act?
 The State shall maintain a central monetary authority that shall function and
operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money,banking and credit. In line with this policy,
and considering its unique functions and responsibilities, the central monetary authority
established under this Act, while being a government-owned corporation, shall enjoy
fiscal and administrative autonomy.

2. What government agency acts as the central monetary authority of the

State?
Bangko Sentral ng Pilipinas.

3. What are the objectives and basic functions of the Bangko Sentral ng
Pilipinas (BSP)?

"Sec. 3. Responsibility and Primary Objective. - The Bangko Sentral shall provide policy
directions in the areas of money, banking, and credit. It shall have supervision over the
operations of banks and exercise such regulatory and examination powers as provided
in this Act and other pertinent laws over the quasi-banking operations of non-bank
financial institutions. As may be determined by the Monetary Board, it shall likewise
exercise regulatory and examination powers over money service businesses, credit
granting businesses, and payment system operators. The Monetary Board is hereby
empowered to authorize entities or persons to engage in money service businesses.

"The primary objective of the Bangko Sentral is to maintain price stability conducive to a
balanced and sustainable growth of the economy and employment. It shall also promote
and maintain monetary stability and the convertibility of the peso.

"The Bangko Sentral shall promote financial stability and closely work with the National
Government, including, but not limited to, the Department of Finance, Securities and
Exchange Commission, the Insurance Commission, and the Philippine Deposit
Insurance Corporation.

"The Bangko Sentral shall oversee the payment and settlement systems in the
Philippines, including critical financial market infrastructures, in order to promote sound
and prudent practices consistent with the maintenance of financial stability.

"In the attainment of its objectives, the Bangko Sentral shall promote broad and
convenient access to high quality financial services and consider the interest of the
general public."

4. What are the corporate powers of the BSP?

SEC. 5. Corporate Powers.

 _ The Bangko Sentral is hereby authorized to adopt, alter, and use a
corporate seal which shall be judicially noticed; to enter into contracts; to
lease or own real and personal property, and to sell or otherwise dispose
of the same; to sue and be sued; and otherwise to do and perform any
and all things that may be necessary or proper to carry out the purposes
of this Act. The Bangko Sentral may acquire and hold such assets and
incur such liabilities in connection with its operations authorized by the
provisions of this Act, or as are essential to the proper conduct of such
operations.

The Bangko Sentral may compromise, condone or release,in whole or in

part, any claim of or settled liability to the Bangko Sentral, regardless of
the amount involved, under such terms and conditions as may be
prescribed by the Monetary Board to protect the interests of the Bangko
Sentral.

5. What are the powers of the Monetary Board?

Powers and functions of the Monetary Board

(RASBI)
1. Issue Rules and regulations it considers necessary for the effective
discharge of the responsibilities and exercise of its powers.

2. Direct the management, operations, and Administration of the BSP,

reorganize its personnel, and issue such rules and regulations as it may
deem necessary or convenient for this purpose.

3. Establish a human resource management System.

4. Adopt an annual Budget for and authorize such expenditures by the

BSP as are in the interest of the effective administration and operations of
the BSP in accordance with applicable laws and regulations.

5. Indemnify its members and other officials of the BSP, including

personnel of the departments performing supervision and examination
functions against all costs and expenses reasonably incurred by such
persons in connection with any civil or criminal action
(NCBA, Sec 15).

6. What is a bank?

Under the General banking law of 2002, section 3.1. "Banks" shall refer to
entities engaged in the lending of funds obtained in the form of deposits.
7. What are quasi-banks?

"quasi-banks" shall refer to entities engaged in the borrowing of funds

through the issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes as defined in Section 95 of Republic Act
No. 7653 (hereafter the "New Central Bank Act") for purposes of relending
or purchasing of receivables and other obligations

8. What are the classifications of banks?

Banks shall be classified into:

1. Universal banks- Primarily governed by the GBL. They can exercise the
powers of an investment house and invest in non-allied enterprises and
have the highest capitalization.

2. Commercial banks- Ordinary banks governed by the GBL which have a

lower capitalization requirement than universal banks and can neither
exercise the powers of an investment house nor invest in non-allied
enterprises.

3. Thrift banks – These are a) Savings and mortgage banks; b) Stock

savings and loan associations; and c) Private development banks, which
are primarily governed by the Thrift Banks Act (RA 7906).

4. Rural banks – These are mandated to make needed credit available

and readily accessible in the rural areas on reasonable terms and which
are primarily governed by the Rural Banks Act of 1992 (RA 7353).

5. Cooperative banks – Banks whose majority shares are owned and

controlled by cooperatives primarily to provide financial and
credit services to cooperatives. It shall include cooperative rural banks.
They are governed primarily by the Cooperative Code (RA 6938).

6. Islamic banks – Banks whose business dealings and activities are

subject to the basic principles and rulings of Islamic Shari’ a, such as the
Al Amanah Islamic Investment Bank of the Philippines which was created
by RA 6848.

7. Other classification of banks as determined by

the Monetary Board of the BSP

9. What are the basic functions of banks?

 1. Deposit Function- refers to those functions which allow a
bank to receive money from the public with the obligation of
returning an equal amount of the same kind and quality

2. Lending/loan function- refers to those funstions which allow

a bank to extend credit and loans to persons in need of funds to
fund investments, expansion of business, or cover short term
liquidity requirements.

10. Who may own banks?

Stock Corporations

Extent of ownership of foreign individuals and non-bank corporations in a

bank:
Foreign individuals may own or control up to forty
percent (40%) of the voting stock of a domestic
bank (GBL, Sec 2).

Extent of ownership of a non-banking corporations in a bank

GR: A corporation may only own 40% of the bank

XPNs:

1. A universal bank can own up to 100% of a thrift bank

2. A corporation whose shares are listed in the stock exchange can own up to
60% of the bank. This privilege can be exercised only once.
3. If the corporation is in existence for 10 years it can own up to 60% of the
bank. This privilege can be exercised only once.
4. Under Foreign Bank Liberalization Law (RA
7721), the Monetary Board may authorize foreign banks to operate in the
Philippines.

11. What is the so called Fit and Proper Rule?

Sec. 16. Fit and Proper Rule. — To maintain the quality of bank management and afford
better protection to depositors and the public in general, the Monetary Board shall
prescribe, pass upon and review the qualifications and disqualifications of individuals
elected or appointed bank directors or officers and disqualify those found unfit.
After due notice to the board of directors of the bank, the Monetary Board may
disqualify, suspend or remove any bank director or officer who commits or omits an act
which render him unfit for the position.
In determining whether an individual is fit and proper to hold the position of a director or
officer of a bank, regard shall be given to his integrity, experience, education, training,
and competence.

12. What is the Doctrine of Apparent Authority in banks?

Under the doctrine of apparent authority, acts and contracts of the agent, as are
within the apparent scope of the authority conferred on him, although no actual authority
to do such acts or to make such contracts has been conferred, bind the principal.The
principal’s liability, however, is limited only to third persons who have been led
reasonably to believe by the conduct of the principal that such actual authority exists,
although none was given. In other words, apparent authority is determined only by the
acts of the principal and not by the acts of the agent. There can be no apparent
authority of an agent without acts or conduct on the part of the principal; such acts or
conduct must have been known and relied upon in good faith as a result of the exercise
of reasonable prudence by a third party as claimant, and such acts or conduct must
have produced a change of position to the third party’s detriment.

13. What is the degree of diligence required of banks?

Extraordinary diligence. The appropriate standard of diligence must be

very high, if not the highest, degree of diligence; highest degree of care
(PCI Bank vs. CA, 350 SCRA 446, PBCom vs. CA, G.R. No. 121413, 29
Jan. 2001) This applies only to cases where banks are acting in their
fiduciary capacity, that is, as depository of the deposits of their depositors.
(Reyes v. CA, G.R. No. 118492, Aug. 15, 2001)

14. What are the different kinds of deposit? Are anonymous accounts
allowed?

1.Demand deposits
• All those liabilities of BSP and of other banks
which are denominated in Philippine currency and
are subject to payment in legal tender upon
demand by presentation of checks
• Only universal and commercial banks may accept
or create demand deposits without prior authority
from BSP
• Other types of bank require such authority. This
considered as the current account in the bank.

2. Savings Deposits
• Banks may be authorized by the BSP to solicit and
accept deposits outside their bank premises

3. Negotiable Order of Withdrawal Accounts

• NOW accounts are interest bearing deposit
Sqaccounts that combine the payable on demand
feature of checks and investment feature of
savings account
• Universal and Commercial banks may offer NOW
accounts but other banks need prior approval of
MB
4. Time Deposits
• Time deposits – one the payment of which cannot
be legally required within such specified number
of days
• Special time deposits from the Agrarian Reform
Fund Commission with lower interest shall be
exempt from legal reserve requirements
• Certificated of Time Deposits can either be
negotiable or non-negotiable. Only Universal or
commercial banks can issue negotiable CTDs
without prior approval of BSP
5. Deposit Substitute (Quasi-Banking Function)
Essential Elements of quasi-banking are:
1. Borrowing funds for the borrower’s account
2. Twenty or more lenders at any one time
3. Methods of borrowing are issuance, endorsement
or acceptance of debt instruments
4. Purpose is for relending and purchasing
receivables
• Borrowing – all forms of obtaining or raising
funds
• For the borrower’s own account – assumption of
liability in one’s own capacity
• Relending – refer to the extension of loans by an
institution with antecedent borrowing transactions
6. Foreign Currency Deposits
• Any person, natural or juridical may deposit with
such any bank in good standing designated by BSP,
foreign currencies which are acceptable as part of
international reserve, except those which are
required by BSP to be surrendered
• Such banks can accept deposits and accept foreign
currencies in trust
1. Numbered accounts for recording and
servicing of deposits are allowed
• The depository bank shall
1. Maintain at all times a 100% foreign
currency cover for their liabilities
2. 15% of such must be in the form of
 foreign currency deposit with BSP
3. The balance shall be in form of foreign
currency loans/securities which are short-
term maturities and readily marketable
4. Such loans can be extended to domestic
enterprises to cover the 100% foreign
currency cover
• Depository banks under the expanded foreign
currency deposit system shall be exempt from the
15% requirement of deposit with BSP
• There is no restriction on withdrawals by depositor
of his deposit of the same abroad except does
arising from contract of depositor and bank
7. Anonymous and Numbered accounts
• Such accounts are not allowed. Numbered
accounts is only allowed in foreign currency
deposits
• However, banks/non-banks should ensure that the
client is identified in an official document

15. What is a survivorship agreement?

There is survivorship agreement when joint owners of a deposit agree that

either of them could withdraw any part or whole of account during lifetime
of both and the balance upon death of either belongs to the survivor

• It is an aleatory contract
• Survivorship agreement is per se not contrary to law but may be violative
• Agreement can be a mere cloak to hide in inofficious donation to transfer
property in fraud

16. What is the single borrower’s limit?

Single Borrowers Limit

• Total amount of loans, credits accommodation and
guarantees extended to any person, partnership or
corporation shall not exceed 20% of net worth of
bank
• In Circular 425 of 2004 of BSP, the SBL was
increased to 25%
• Exceptions to SBL:
1. MB may otherwise prescribe for reasons
of national interest
2. Deposit of rural banks with GOC financial
institutions such as LB, DBP and PNB
 17. What is a DOSRI account?

Account owned by Directors, Officers, Stockholders, and their Related

Interests (DOSRI)

Requirements that must be complied with in

case of DOSRI accounts (2002 Bar)

1. Procedural requirement - Loan must be

approved by the majority of all the directors not
including the director concerned. CB approval
is not necessary; however, there is a need to
inform them prior to the transaction. Loan must
be entered in the books of the corporation (GBL,
Sec. 36).

2. Substantive requirement - Loan must not exceed

the paid in contribution and unencumbered
deposits. (Not to exceed 15% of the portfolio or
100% of the net worth, whichever is lower)
(GBL, Sec. 36 [4]).
In the case of Go v. Bangko Sentral ng Pilipinas,
G.R. No. 178429, October 23, 2009, it was held
that the requirements are: (1) Approval
requirement which means that the DOSRI
transaction must be approved by at least
majority of the directors excluding the director
concerned. (2) Reportorial requirement means
that the transaction must be recorder in the
books of the bank and reported to the BSP. (3)
Ceiling requirement which means that the
amount of the loan shall not exceed the book
valued of the paid-in contribution and the
amount of the unencumbered deposits. Three
different offenses are committed by those who
fail to observe the board approval, reporting
and ceiling requirements.

18. What help can the BSP extend to banks in distress or banks with liquidity
problem?

The BSP may extend loans and advances to banking institutions for a period of not
more than seven (7) days without any collateral for the purpose of providing liquidity.

The BSP, upon the approval of at least five (5) members of the Monetary Board, may
also grant emergency loans or advances in the amount not exceeding fifty percent
(50%) of its total deposits and deposit substitutes. The loans shall be released in two
tranches.

19. When is a bank in distress placed under conservatorship?

Appointment of Conservator. _ Whenever, on the

basis of a report submitted by the appropriate supervising or
examining department, the Monetary Board finds that a bank or
a quasi-bank is in a state of continuing inability or unwillingness
to maintain a condition of liquidity deemed adequate to protect
the interest of depositors and creditors, the Monetary Board may
appoint a conservator with such powers as the Monetary Board
shall deem necessary to take charge of the assets, liabilities, and
the management thereof, reorganize the management, collect all
monies and debts due said institution, and exercise all powers
necessary to restore its viability.

20. What are the powers of conservator?

Powers of a conservator (CARe BEAr)

1. Collect all monies and debts due to the said
bank
2. To take charge of the Assets, liabilities, and the
management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary Board
deems necessary
5. Exercise all powers necessary to restore its
viability, with the power to overrule or revoke
the actions of the previous management and
board of directors of the bank or quasi-bank
6. To bring court actions to Assail or Repudiate
contracts entered into by the bank. (First
Philippine International Bank v. CA, G.R. No.
115849, Jan. 24, 1996).

21. When is conservatorship terminated?

Conservatorship is terminated when the Monetary

Board is satisfied that the bank can operate on its
own.
22. What are the grounds for the placement of a bank under receivership?

SEC. 30. Proceedings in Receivership and Liquidation.

_
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the
Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable
losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or transactions
which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily
and without need for prior hearing forbid the institution from
doing business in the Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of the banking
institution.

23. What is the maximum duration of receivership of a bank?

prior to the amendatory laws to the ncba and pdic law, a receiver shall be
given 90 days from takeover to determine if rehab is still possible. But by
reason of the amendments, in particular sec. 30 of ncba and sec. 12a of
pdic law, any closure order by the monetary board which is brought about
by the existence of any of the grounds for receivership will authorize the
pdic to act as receiver for purposes of liquidation. Rehabilitation is no
longer possible, hence duration is immaterial.

24. What are the duties of a receiver?

The receiver shall:

1. Immediately gather and take charge of all the
assets and liabilities of the institution.
2. Administer the same for the benefit of the
creditors, and exercise the general powers of a
receiver under the Revised Rules of Court
3. Not, with the exception of administrative
expenditures, pay or commit any act that will
involve the transfer or disposition of any asset
of the institution: Provided that the receiver
 may deposit or place the funds of the institution
in non-speculative investments.
4. Within 90 days from the take-over, the receiver
shall determine whether the institution may be
rehabilitated or otherwise placed in such a
condition that it may be permitted to resume
business with safety to its depositors and
creditors and the general public
5. If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business, then the Monetary Board shall notify
in writing the board of directors of the
institution of its findings and direct the receiver
to proceed with liquidation of the institution
(NCBA, Sec 30).

25. What is the distinction between liquidation and rehabilitation of banks?

Acts of liquidation are those which constitute the

conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the
same to creditors and other parties for the purpose of paying debts of
such institution while in rehabilitation of banks the purpose of which is to
help the bank resume its business operations.

26. What is the purpose of the law on the Secrecy of Bank Deposits?

It is hereby declared to be the policy of the Government to give

encouragement to the people to deposit their money in banking institutions
and to discourage private hoarding so that the same may be properly
utilized by banks in authorized loans to assist in the economic
development of the country.

27. What deposits are covered by the Law on Secrecy of Bank Deposits?

All deposits of whatever nature with banks or banking institutions in the

Philippines including investments in bonds issued by the Government of
the Philippines, its political subdivisions and its instrumentalities, are
hereby considered as of an absolutely confidential nature and may not be
examined, inquired or looked into by any person, government official,
bureau or office.

28. What are exceptions to the secrecy of bank deposits or under what
instances when the protection under the law on secrecy of bank deposits
cannot be invoked?
1. Upon written consent of the depositor (RA
1405,Sec. 2)
2. In cases of impeachment (ibid)
3. Upon order of competent court in cases of
bribery or dereliction of duty of public officials
(ibid)
4. In cases where the money deposited or invested
is the subject matter of the litigation (ibid)
5. Upon order of the Commissioner of Internal
Revenue in respect of the bank deposits of a
decedent for the purpose of determining such
decedent’s gross estate (NIRC, Sec. 6[F][1])
6. Upon the order of the Commissioner of Internal
Revenue in respect of bank deposits of a
taxpayer who has filed an application for
compromise of his tax liability by reason of
financial incapacity to pay his tax liability (ibid)
7. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of a
specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party (ibid)
8. In case of dormant accounts/deposits for at
least 10 years under the Unclaimed Balances
Act (Act No. 3936, Sec. 2)
9. The prohibition against examination of bank
deposit does not preclude its garnishment to
satisfy a judgment against the depositor (Oñate
v. Abrogar, G.R. No. 107303, February 21, 1994)
10. Presidential Commission on Good Government
(PCGG) may require the production of bank
records material to its investigation (Opinion of
the Secretary of Justice, February 27, 1987)
11. The Anti-Money Laundering Council (AMLC)
may inquire into any deposit with any bank in
case of violation of the RA 9160 or the AMLA if
there is probable cause that it is related to an
unlawful activity (RA 9160, as amended, Sec. 11)
12. The PDIC and the BSP may examine deposit
accounts and all information related to them in
case of a finding of unsafe or unsound banking
practices (RA 3591, as amended, Sec. 8)
 13. With court order:
a. In cases of unexplained wealth under Sec. 8
of the Anti-Graft and Corrupt Practices Act
(PNB v. Gancayco, L-18343, September 30,
1965)
b. In cases filed by the Ombudsman and upon
the latter’s authority to examine and have
access to bank accounts and records
(Marquez v. Desierto, GR 138569, September
11, 2003)
14. Without court order: If the AMLC determines
that a particular deposit or investment with any
banking institution is related to the following
(HK-MADS):
a. Hijacking,
b. Kidnapping,
c. Murder,
d. Destructive Arson, and
e. Violation of the Dangerous Drugs Act.
f. Acts of Terrorism or in violation of Human
Security Act.
15. In case the law is repealed, superseded or
modified by any law to the contrary.

29. What is the extent of the authority of the Anti-Money Laundering Council
(AMLC) to inquire into bank deposits?

SEC. 11. Authority to Inquire into Bank Deposits. — Notwithstanding the

provisions of Republic Act No. 1405, as amended; Republic Act No. 6426,
as amended; Republic Act No. 8791, and other laws, the AMLC may
inquire into or examine any particular deposit or investment with any
banking institution or non-bank financial institution upon order of any
competent court in cases of violation of this Act when it has been
established that there is probable cause that the deposits or investments
involved are in any way related to a money laundering offense: Provided,
That this provision shall not apply to deposits and investments made prior
to the effectivity of this Act.

30. What details of the transaction are required to be disclosed by the lender
to the borrower under the Truth and Lending Act? In what form and in
what point in time should such disclosure be made?

In accordance with the Truth in Lending Act, any creditor shall furnish to each person to
whom credit is extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in accordance with rules
and regulations prescribed by the board, the following information:
1. Cash price or delivered price of the property or service to be acquired;
2. Amounts, if any, to be credited as downpayment and/or trade-in;
3. Difference between the amounts in (1) and (2);
4. Charges, individually itemized which are paid or to be paid by the debtor not incident
to the extension of credit;
5. Total amount to be financed;
6. Finance charge - amount to be paid by the debtor incident to the extension of credit
such as interest, fees, service charges, collection charges, discounts and such other
charges incident to the extension of credit; and
7. Percentage of the finance charge to amount financed

31. What is the objective of the Philippine Deposit Insurance Corporation Act?

To insure the deposits of all banks which are entitled to the benefits of
insurance under the Act.

32. What kinds of deposits are covered under Philippine Deposit Insurance
Corporation Act?

Except for the exclusions stipulated in RA 9576, deposits of all commercial banks,
savings and mortgage banks, rural banks, private development banks, cooperative
banks, savings and loan associations, as well as branches and agencies in the
Philippines of foreign banks and all other corporations authorized to perform banking
functions in the Philippines, are insured with PDIC.

As for Philippine banks with branches outside the country, RA 9576 stipulates that
subject to the approval of the Board of Directors, any insured bank with branch outside
the Philippines may elect to include for insurance its deposit obligations payable at such
branch.

Foreign currency deposits are also insured by PDIC pursuant to RA 6426 (“An act
instituting a foreign currency deposit system in the Philippines, and for other purposes”)
and Central Bank (CB) Circular No. 1389. Depositors may receive payment in the same
currency in which the insured deposit is denominated.

Exclusions from deposit insurance coverage as stipulated in R.A. No. 9576:

Investment products such as bonds, securities and trust accounts;

Deposit accounts which are unfunded, fictitious or fraudulent;

Deposit products constituting or emanating from unsafe and unsound banking practices;

Deposits that are determined to be proceeds of an unlawful activity as defined under the
Anti-Money Laundering Law.

33. Who exercises the powers and functions of the Philippine Deposit
Insurance Corporation?

The powers and functions of the Corporation shall be vested in a board of directors
consisting of three (3) members one of whom shall be the Governor of the Central Bank
of the Philippines and two of whom shall be citizens of the Republic of the Philippines to
be appointed by the President of the Philippines with the advice and consent of the
Commission on Appointments.

V. SECURITIES

a. The Securities Regulation Code (R.A. No. 8799)

Learning Objective: At the end of the learning period, the students are
expected to answer the following questions:

1. What are securities?

Under the Securities Regulation Code, securities are shares, participation or interests in
a corporation or in a commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in character. It includes:

(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-

backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing
agreement, certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.
 2. What is the rule before securities are offered for sale to the public? What
are the exceptions? What are transactions whereby the securities sold or
offered for sale arising therefrom are except from registration
requirements?

(a)

Under the Securities Regulation Code, before securities are offered for sale to the
public, there must be a registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.

The Commission may conditionally approve the registration statement under such
terms as it may deem necessary.

The Commission may specify the terms and conditions under which any written
communication, including any summary prospectus, shall be deemed not to constitute
an offer for sale under this Section.

A record of the registration of securities shall be kept in Register Securities in which

shall be recorded orders entered by the Commission with respect such securities. Such
register and all documents or information with the respect to the securities registered
therein shall be open to public inspection at reasonable hours on business days.

The Commission may audit the financial statements, assets and other information of
firm applying for registration of its securities whenever it deems the same necessary to
insure full disclosure or to protect the interest of the investors and the public in general.

(b)

The requirement of registration shall not, as a general rule apply to any of the
following classes of securities:

(a) Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with which the
Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the Commission may
require compliance with the form and content for disclosures the Commission may
prescribe.

(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the

proper adjudicatory body.

(d) Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.

(e) Any security issued by a bank except its own shares of stock.

The Commission may, by rule or regulation after public hearing, add to the foregoing
any class of securities if it finds that the enforcement of this Code with respect to such
securities is not necessary in the public interest and for the protection of investors.

(c)

The requirement of registration shall not apply to the sale of any security in any of the
following transactions:

(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or

trustee in insolvency or bankruptcy.

(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder
selling of offering for sale or delivery in the ordinary course of business and not for the
purpose of avoiding the provision of this Code, to liquidate a bonafide debt, a security
pledged in good faith as security for such debt.

(c) An isolated transaction in which any security is sold, offered for sale, subscription or
delivery by the owner therefore, or by his representative for the owner’s account, such
sale or offer for sale or offer for sale, subscription or delivery not being made in the
course of repeated and successive transaction of a like character by such owner, or on
his account by such representative and such owner or representative not being the
underwriter of such security.
(d) The distribution by a corporation actively engaged in the business authorized by its
articles of incorporation, of securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus.

(e) The sale of capital stock of a corporation to its own stockholders exclusively, where
no commission or other remuneration is paid or given directly or indirectly in connection
with the sale of such capital stock.

(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, when the entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a single sale.

(g) The issue and delivery of any security in exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under this Code or was, when sold, exempt from the
provision of this Code, and that the security issued and delivered in exchange, if sold at
the conversion price, would at the time of such conversion fall within the class of
securities entitled to registration under this Code. Upon such conversion the par value
of the security surrendered in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.

(h) Broker’s transaction, executed upon customer’s orders, on any registered Exchange
or other trading market.

(i) Subscriptions for shares of the capitals stocks of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital stocks
under the Corporation Code, when no expense is incurred, or no commission,
compensation or remuneration is paid or given in connection with the sale or disposition
of such securities, and only when the purpose for soliciting, giving or taking of such
subscription is to comply with the requirements of such law as to the percentage of the
capital stock of a corporation which should be subscribed before it can be registered
and duly incorporated, or its authorized, capital increase.

(j) The exchange of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.

(k) The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:

(i) Bank;

(ii) Registered investment house;

(iii) Insurance company;

(iv) Pension fund or retirement plan maintained by the Government of the Philippines or
any political subdivision thereof or manage by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions;

(v) Investment company or;

(vi) Such other person as the Commission may rule by determine as qualified buyers,
on the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under management.

The Commission may exempt other transactions, if it finds that the requirements of
registration under this Code is not necessary in the public interest or for the protection
of the investors such as by the reason of the small amount involved or the limited
character of the public offering.

Any person applying for an exemption under this Section, shall file with the
Commission a notice identifying the exemption relied upon on such form and at such
time as the Commission by the rule may prescribe and with such notice shall pay to the
Commission fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum
value aggregate price or issued value of the securities.

3. What are the powers and functions of the Securities and Exchange
Commission?

The commission shall act with transparency and shall have the powers and functions
provided by the Securities Regulation Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others, the following
powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnership or associations
who are the grantees of primary franchises and/or a license or a permit issued by the
Government;

(b) Formulate policies and recommendations on issues concerning the securities

market, advise Congress and other government agencies on all aspect of the securities
market and propose legislation and amendments thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration statements,

and registration and licensing applications;

(d) Regulate, investigate or supervise the activities of persons to ensure compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing
agencies and other SROs;

(f) Impose sanctions for the violation of laws and rules, regulations and orders, and
issued pursuant thereto;

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions
and provide guidance on and supervise compliance with such rules, regulation and
orders;

(h) Enlist the aid and support of and/or deputized 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 function under its Code;

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

(j) Punish for the contempt of the Commission, both direct and indirect, in accordance
with the pertinent provisions of and penalties prescribed by the Rules of Court;

(k) Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
(l) 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;

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of
registration of corporations, partnership or associations, upon any of the grounds
provided by law; and

(n) 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.

4. What is the procedure for registration of securities?

Section 12. Procedure of Registration Securities. - 12.1. All securities

required to be registered under Subsection 8. I shall be registered through
the
filing by the issuer in the main office of the Commission, of a sworn
registration statement with the respect to such securities, in such form and
containing such information and document as the Commission prescribe.
The
registration statement shall include any prospectus required or permitted
to be
delivered under Subsections 8.2, 8.3, and 8.4.
12.2. In promulgating rules governing the content of any registration
statement
(including any prospectus made a part thereof or annex thereto), the
Commission may require the registration statement to contain such
information or documents as it may, by rule, prescribe. It may dispense
with
any such requirements, or may require additional information or
documents,
including written information from an expert, depending on the necessity
thereof or their applicability to the class of securities sought to be
registered.

12.3. The information required for the registration of any kind, and all
securities, shall include, among others, the effect of the securities issue on
ownership, on the mix of ownership, especially foreign and local
ownership.
12.4. The registration statement shall be signed by the issuer’s executive
officer, its principal operating officer, its principal financial officer, its
comptroller, its principal accounting officer, its corporate secretary, or
persons
performing similar functions accompanied by a duly verified resolution of
the
board of directors of the issuer corporation. The written consent of the
expert
named as having certified any part of the registration statement or any
document used in connection therewith shall also be filed. Where the
registration statement shares to be sold by selling shareholders, a written
certification by such selling shareholders as to the accuracy of any part of
the
registration statement contributed to by such selling shareholders shall be
filed.
12.5. (a) Upon filing of the registration statement, the issuer shall pay to
the
Commission a fee of not more than one-tenth (1/10) of one per centum
(1%)
of the maximum aggregate price at which such securities are proposed to
be
offered. The Commission shall prescribe by the rule diminishing fees in
inverse proportion the value of the aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be immediately
published by the issuer, at its own expense, in two (2) newspapers of
general circulation in the Philippines, once a week for two (2)
consecutive weeks, or in such other manner as the Commission by the
rule shall prescribe, reciting that a registration statement for the sale of
such securities has been filed, and that aforesaid registration statement,
as well as the papers attached thereto are open to inspection at the
Commission during business hours, and copies thereof, photostatic or
otherwise, shall be furnished to interested parties at such reasonable
charge as the Commission may prescribe.
12.6. Within forty-five (45) days after the date of filing of the registration
statement, or by such later date to which the issuer has consented, the
Commission shall declare the registration statement effective or rejected,
unless the applicant is allowed to amend the registration statement as
provided in Section 14 hereof. The Commission shall enter an order
declaring
the registration statement to be effective if it finds that the registration
statement together with all the other papers and documents attached
thereto,
is on its face complete and that the requirements have been complied
with.

The Commission may impose such terms and conditions as may be

necessary or appropriate for the protection of the investors.
 12.7. Upon affectivity 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 true and correct as represented by the issuer or the
one making the statement. Any untrue statement of fact or omission to
state a
material fact required to be stated herein or necessary to make the
statement
therein not misleading shall constitute fraud.

5. What are the devices or practices in manipulating security prices?

The price of securities should be dictated by market

forces. It cannot be pegged or stabilized. The
following acts are considered as manipulation of
security prices and are therefore prohibited:
1. Transactions intended to create a false or
misleading appearance of active trading in any
listed security traded in an Exchange or any
other trading market:
a. Wash Sale – is a transaction in which there
is no genuine change in the beneficial (or
actual) ownership of a security;
b. Matched Sale – is a change of ownership in
the securities by entering an order for the
purchase or sale of a security with the
knowledge that a simultaneous order of
substantially the same size, time, and price,
for the sale or purchase of any such
security, has or will be entered by or for the
same or different parties;
c. Similar transactions where there is no
change of beneficial ownership.

2. Effecting a series of transactions that will raise

or depress the price of securities to induce the
purchase or sale of securities respectively, or
creating active trading to induce transactions
through manipulative devices:
a. Marking the close – buying and selling of
securities at the close of the market in an
effort to alter the closing price of these
securities.
b. Painting the tape – engaging in a series of
transactions effected by brokers in
securities that are reported publicly to give
the impression or illusion of activity or
price movement in a security, which
may trick investors into trading in
these securities because of the alleged
trading volume or indications of interest.
c. Squeezing the float – refers to 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 to create artificial
prices. This prevents the actual market
from determining the price of these
securities.
d. Hype and dump – engaging in buying
activity at increasingly higher prices and
then selling securities in the market at the
higher prices.
e. Boiler room operations – refers to activities
that involve the use of high pressure sale
tactics such as direct mail offers or
telephone follow-ups to investors to
promote purchase and sale of securities
wherein there is misrepresentation in
these securities. This is a fraudulent
transaction that tricks investors into
trading in a fake market.
f. Daisy chain – refers to a series of purchase
and sales of the same issue at successively
higher prices by the same group of people
with the purpose of manipulating prices are
drawing unsuspecting investors into the
market leaving them defrauded of their
money and securities.
g. Front-Running – is the prohibited practice
of a broker-dealer executing its proprietary
order before the customer’s order for
the same security. This violates the
fiduciary responsibility by the broker-
dealer to its customer accounts as well as
placing the customer’s order first.
h. Churning – involves the excessive trading of
securities by a broker-dealer in a
customer’s discretionary account in order
to generate commissions, without regard to
 the customer’s investment objective.

3. Circulating or disseminating information that

the price of any security listed in an Exchange
will or is likely to rise or fall because of
manipulative market operations of any one or
more persons conducted for the purpose of
raising or depressing the price of that security
for the purpose of inducing the purchase or sale
of such security.
4. To make false or misleading statement 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 of any security listed or traded
in an Exchange.
5. To effect, either alone or with others, 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.

6. What is insider trading? Who is an insider?

Under the Securities Regulation Code, insider trading is defined as the trading of a
corporation’s stock or other securities by individuals with potential access to non-public
information about the company. It is a practice in which an insider or a related party
trades based on material non-public information obtained during the performance of the
insider’s duties at the corporation or otherwise in breach of a fiduciary or other
relationship of trust and confidence or where the non-public information was
misappropriated from the company.

An insider means: (a) the issuer; (b) a director of officer of, or a person controlling the
issuer; (c) a person whose relationship or former relationship to the issuer gives or gave
him access to material information about the issuer of the security that is not generally
available to the public; (d) a government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory organization who has access to
material information about an issuer or a security that is not generally available to the
public; or (e) a person who learns such information by a communication from any of the
foregoing insiders.

7. What is a tender offer?

 Tender offer means a publicly announced intention
by a person acting alone or in concert with other
persons to acquire equity securities of a public
company. It is also an offer by the acquiring person
to stockholders of a public company for them to tender their shares therein
on the terms specified in
the offer. Tender offer is in place to protect their
minority shareholders against any scheme that
dilutes the share value of any investments. It gives
the minority shareholders the chance to exit the
company under reasonable terms, giving them
opportunity to sell their shares at the same price as
those of the majority shareholders. (CEMCO
HOLDINGS, INC. v. National Life Insurance Company,
Inc. G.R. No. 171815, August 7, 2007)

8. What instances is a tender offer required to be made?

Tender offer is required to be made in the following

instances:
1. Any person or group of persons acting in
concert who intends to acquire 35% or more of
any class of equity shares in a public company
shall disclose such intention and
contemporaneously make a tender offer for the
percent sought to all shareholders of such class.
In the event that the tender offer is
oversubscribed, the aggregate amount of
securities to be acquired at the close of such
tender offer shall be proportionately
distributed across both selling shareholder
with whom the acquirer may have been in
private negotiations and the minority
shareholders.
2. Any person or group of persons acting in
concert who intends to acquire 35% or more of
any class of equity shares of a public company
(corporation with assets of at least P
50,000,000.00 and having 200 or more
stockholders with at least 100 shares for each
stock holder) pursuant to an agreement made
between or among the person or group of
persons and one or more sellers.
3. Any person or group of persons acting in
concert intends to acquire 35% or more of
equity shares of a public company in one or
more transactions within a period of 12 months
shall be required to make a tender offer to all
holders of such class for the number of shares
so acquired within the same period.
4. If any acquisition of even less than 35% would
result in ownership of over 51% of the total
outstanding equity securities of a public
company, the acquirer shall be required to
make a tender offer under this Rule for all the
outstanding equity securities to all remaining
stockholders of the said company at a price
supported by a fairness opinion provided by an
independent financial advisor or equivalent
third party. The acquirer in such tender offer
shall be required to accept any and all securities
thus tendered.
5. In any transaction covered by this Rule, the sale
of shares pursuant to the private transaction
shall not be completed prior to the closing and
completion of the tender offer. Transactions
with any of the seller/s of significant block of
shares with whom the acquirers may have been
in private negotiation shall close at the same
time and upon the same terms as the tender
offer made to the public under this Rule. For
paragraph (2)(B), the last sale meeting the
threshold shall not be consummated until the
closing and completion of the tender offer.