y - securities regulation code

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SECURITIES REGULATIONS CODERepublic Act No. 8799 (approved July 19, 2000).

OVERVIEW OF THE FINANCIAL MARKETS

The Securities Regulation Code may be better understood if the environment inwhich it exists could be described, albeit briefly. The SRC deals with securities and thesesecurities are, in general, issued in financial markets. These markets are described below(see A Guide to the Financial Markets by Charles R. Geist, The Macmillan Press Ltd.,1982):

Capital markets are the places to go to if you want to raise new money.

(a) Equity capital (for the investor, the stock market provides a variable return)

(i) Stock market (Security = shares of stock)

(b) Debt capital (for the lender, the money or bond market provides a fixed return)(i) Money market (for short-term debts, i.e., those normally maturing within

one year from date of issuance; security = commercial papers)

(ii) Bond market (for long-term debts, i.e., those normally maturing after ayear from date of issuance; security = junk bonds)


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Non-capital markets are the places to go to if you want to hedge or mitigatethe risks attached to holding capital assets.

(a) Commodity market The instruments traded in this market are not presentassets like shares of stock, commercial papers or bonds but future contracts calling fordelivery of an asset such as agricultural products, metals and financial instruments. Forthis reason, a commodity market is usually referred to as a futures market. (Security =futures contracts)

(b) Foreign exchange market This market is an over-the-counter market conductedby international banks and doest not have a central location. (Security = forwardexchange contracts)

(c) Options market It enables an investor to purchase an option giving him theright to buy or sell a specific number of shares at a future date, at a specific price. For

this right, the investor either pays or receives money but (just like in a commoditymarket) the money involved is only a fraction of the market value of the sharesconcerned. (Security = call or put options)


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LANGUAGE AND STATE POLICY

How do you start the study of the SRC? (Sec. 3)

Unlike most laws, one cannot immediately jump into the body of the SecuritiesRegulation Code without familiarizing oneself early on with the terms used in the law.Her e are some of them:

(a) Securities (Sec. 3.1) These are shares, participation or interests in acorporation or in a commercial enterprise or profit-making venture and evidenced by a

certificate, contract, instrument, whether written or electronic in character. It includes:(i) shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-

backed securities;

(ii) investment contracts, certificates of interest or participation in a profitsharing agreement, certificates of deposit for a future subscription;

(iii) fractional undivided interests in oil, gas or other mineral rights;

(iv) derivatives like options and warrants;(v) certificates of assignments, certificates of participation, trust certificates,voting trust certificates or similar instruments;

(vi) proprietary or nonproprietary membership certificates in corporations; and

(vii) other instruments as may in the future be determined by the Commission.


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The Revised Securities Act (Batas Pambansa Blg. 178, as amended) did not attempt todefine the term securitiesbut contented itself with an enumeration of the various securitiesincluded in the term.

(b) Issuer (Sec. 3.2) It is the originator, maker, obligor, or creator of the security.

Securities statutes have been enacted principally to protect the investing public fromunscrupulous issuers.(c) Broker(Sec. 3.3) Any person engaged in the business of buying and selling securities

for the account of others. Compare with a dealer.(d) Dealer (Sec. 3.4) - Any person who buys and sells securities for his or her own

account in the ordinary course of business. Compare with a broker.(e) Clearing agency (Sec. 3.6) Any person who acts as intermediary in making

deliveries upon payment to effect settlement in securities transactions. Just like an exchange, it

is the desire of the SEC that a clearing agency could develop into a self-regulatoryorganization.(f) Exchange(Sec. 3.7) An organized marketplace or facility that brings together buyers

and sellers and executes trades of securities and/or commodities. Unlike the usual over-the-counter market, an exchange has a physical facility.

(g) Insider(Sec. 3.8) A very important term, an insider may be:(i) the issuer;(ii) a director or officer (or person performing similar functions) of, or a person

controlling the issuer;(iii) a person whose relationship or former relationship to the issuer gives or gave

him access to material information about the issuer or the security that is notgenerally available to the public;


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(iv) a government employee, or director, or officer of an exchange, clearing agencyand/ or self-regulatory organization who has access to material informationabout an issuer or a security that is not generally available to the public; or

(v) a person who learns such information by a communication from any of theforegoing insiders.

One is not prohibited from being an insider. It is not a crime to be one. It is a status.An insider starts to get into trouble when he acts upon the material nonpublicinformation he has and buys or sells shares or, under Section 27.3, communicates suchinformation to another knowing or having reason to believe that such person will likelybuy or sell a security.

(h) Pre-need plans (Sec. 3.9) These are contracts which provide for the

performance of future services or the payment of future monetary considerations at thetime of actual need, for which plan holders pay in cash or installment at stated prices,with or without interest or insurance coverage and includes life, pension, education,interments and other plans which the Commission may from time to time approve.

(i) Promoter (Sec. 3.10) A person who, acting alone or with others, takesinitiative in founding and organizing the business or enterprise of the issuer and receivesconsideration therefor.

(j) Prospectus (Sec.3.11) It is 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 registrationstatement filed with the SEC. It is a selling document that contains most of theinformation set out in the registration statement. If a potential investor wantsinformation about new issue, his broker will hand him a prospectus of the issue, not theregistration statement of the particular security.


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(k) Registration statement(Sec. 3.12) It is the application for the registration ofsecurities required to be filed with the SEC. The protection of the investing public startswith an examination and review by the SEC of an issuers registration statement.

(l) Uncertificated security(Sec. 3.14) It is a security evidenced by electronic orsimilar records. The increased difficulty in the issuance and cancellation of shares afterevery transaction in the exchange, brought about by increases in the volume oftransactions, has led to the development and adoption of the concept of uncertifiedsecurities.

(m) Underwriter(Sec. 3.15) A person who guarantees on a firm commitmentand/or declared best effort basis the distribution and sale of securities of any kind byanother company. The firm underwriter undertakes to buy the unsold portion of the

issue it handles and gets paid a higher fee for its effort than the best efforts underwriterwho does not make the same commitment.

What is the policy of the State in enacting the SRC? (Sec. 2)

The policy of the State is to establish a socially conscious, free market that (i)

regulates itself, (ii) encourages the widest participation of ownership in enterprises, (iii)enhances the democratization of wealth, (iv) promotes the development of the capitalmarket, (v) protects investors, (vi) ensures full and fair disclosure about securities, and(vi) minimizes if not totally eliminates insider trading and other fraudulent ormanipulative devices and practices which create distortions in the free market.


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REGISTRATION OF SECURITIES

What securities are required to be registered? (Sec. 8.1)

Except securities of a class exempt under Section 9 (see Paragraph 16.7) or securitiessold in an exempt transaction under Section 10 (see Paragraph 16.8), all securities thatare to be sold or offered for sale or distribution within the Philippines are required to beregistered with the SEC.

What is the Register of Securities? Sec. 8.4)

The Register of Securities is where the record of the registration of securities,including the orders entered by the Commission with respect to such securities, shall bekept.

What securities are exempt from registration and why are they exempt? (Sec.9.1)

The list of exempt securities under Section 9.1 is not exhaustive. Note the catchallclause in Section 9.2 that the SEC may, by rule or regulation after public hearing add tothe list any class of securities if it finds that the enforcement of the SRC with respect tosuch securities is not necessary in the public interest and for the protection of investors.


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The securities listed below are exempt either because the issuer of the security is anentity that could be trusted not to deceive the investor (e.g., the Philippine government orthe government of a country with which the Philippines maintains diplomatic relations)or the issuer is regulated, supervised or monitored by another government entity whocould be expected to protect the interest of investors in the same manner as the SEC (e.g.,

the insolvency court, Office of the Insurance Commissioner, Housing, and Land UseRegulatory Board, Bureau of Internal Revenue and the Bangko Sentral ng Pilipinas):

(a) Any security issued or guaranteed by the Government of the Philippines, or byany 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 whichthe Philippines maintains diplomatic relations, or by any state, province or politicalsubdivision thereof on the basis of reciprocity; provided, that the Commission mayrequire compliance with the form and content of disclosures the Commission mayprescribe;

(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved bythe proper adjudicatory body;

(d) Any security or its derivatives the sale or transfer of which, by law, is under thesupervision and regulation of the Office of the Insurance Commission, Housing and LandUse Regulatory Board, or the Bureau of Internal Revenue;

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


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What are the exempt transactions and why are the securities sold in any ofthem not required to be registered? (Sec. 10.1)

This list is also not exhaustive. Pursuant to Section 10.2, the SEC may exempt othertransactions, if it finds that the requirements of registration under the SRC is notnecessary in the public interest or for the protection of the investors such as by reason ofthe small amount involved or the limited character of the public offering.

The security involved in an exempt transaction is not in itself exempt but thecircumstances under which the security is sold make the requirement of registrationunder the SRC unnecessary in the public interest or for the protection of the investors.

The sale of any security in any of the following transactions makes inapplicable therequirement of registration under Section 8.1 of the SRC:

(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver ortrustee in insolvency or bankruptcy;

(b) By or for the account of a pledge holder, or mortgagee or any other similar line

holder selling or offering for sale or delivery in the ordinary course of business and notfor the purpose of avoiding the provisions of the SRC, to liquidate a bona fide debt, asecurity pledged in good faith as security for such debt (e.g., the foreclosure of a chattelmortgage constituted on shares of stock);


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(c) An isolated transaction in which any security is sold, offered for sale,subscription or delivery by the owner thereof, or by his representative for the ownersaccount, such sale or offer for sale, subscription or delivery not being made in the courseof repeated and successive transactions of a like character by such owner, or on hisaccount by such representative and such owner or representative not being theunderwriter of such security;

(d) The distribution by a corporation, actively engaged in the business authorized byits articles of incorporation, of securities to its stockholders or other security holders as astock 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 inconnection with the sale of such capital stock (e.g., the additional issuance of shares by acorporation out of its authorized but unissued capital stock);

(f) The issuance of bonds or notes secured by mortgage upon real estate or tangiblepersonal property, where the entire mortgage together with all the bonds or notes securedthereby 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 securitysurrendered in exchange to make such conversion (e.g., a convertible preferred stockwhich the holder could convert at a certain ratio for common shares); provided, that thesecurity so surrendered has been registered under the SRC or was, when sold, exemptfrom the provisions of the SRC, and that the security issued and delivered in exchange,


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if sold at the conversion price, would at the time of such conversion fall within the classof securities entitled to registration under SRC. Upon such conversion, the par value ofthe security surrendered in such exchange shall be deemed the price at which thesecurities issued and delivered in such exchange are sold;

(h) Brokers transactions, executed upon customers orders, on any registeredexchange or other trading market;

(i) Subscriptions for shares of the capital stock of a corporation prior to theincorporation thereof or in pursuance of an increase in its authorized capital stock underthe Corporation Code, when no expense is incurred, or no commission, compensation orremuneration 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 subscriptions is tocomply with the requirements of such law as to the percentage of the capital stock of acorporation which should be subscribed before it can be registered and dulyincorporated, or its authorized capital increased;

(j) The exchange of securities by the issuer with its existing security holdersexclusively, where no commission or other remuneration is paid or given directly orindirectly for soliciting such exchange (e.g., a two-for-one stock split, whereby the 1,000outstanding shares of a corporation with a par value of P100.00 are divided into 2,000shares with a par value of P50.00, would require the holders of the outstanding shares ofstock to exchange their holdings for the new shares);

(k) The sale of securities by an issuer to fewer than 20 persons in the Philippinesduring any twelve-month period;


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(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 thePhilippines or any political subdivision thereof or managed by a bank orother persons authorized by the Bangko Sentral to engage in trustfunctions;

(v) Investment company; or(vi) Such other person as the Commission may by rule determine as qualified

buyers, on the basis of such factors as financial sophistication, net worth,knowledge, and experience in financial and business matters, or amountof assets under management.

The sale of securities to qualified buyers does not require the protective eye of theSEC as these buyers are sophisticated and experienced entities who are deemed capableof taking care of themselves.


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What is the initial procedure for the registration of securities? (Sec. 12)

All securities required to be registered under Section 8.1 of the SRC (see Paragraph16.5 above) shall be registered through the filing by the issuer in the main office of the

SEC of a sworn registration statement with respect to such securities. Unlike the RevisedSecurities Act, the SRC does not specify in great detail the information which must beprovided and the documents which must be submitted by the applicant issuer, leavingsuch matter, including the form of the application, for the SEC to prescribe.

Who are required to sign the registration statement? (Sec. 12.4)

The registration statement shall be signed by the issuersprincipal executive officer,principal operating officer, principal financial officer, comptroller, principal accountingofficer, corporate secretary or persons performing similar functions accompanied by aduly verified resolution of the board of directors of the issuer corporation.

What action may the SEC take in respect of a registration statement? (Sec.

12.6)

Within 45 days after the date of filing of the registration statement, or by such laterdate to which the issuer has consented, the SEC shall declare the registration statementeffective or rejected, unless the applicant is allowed to amend the registration


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(iii) Has been or is engaged or is about to engage in fraudulent transactions;(iv) Has made any false or misleading representation of material facts is any

prospectus concerning the issuer or its securities;

(v) Has failed to comply with any requirement that the Commission mayimpose as a condition for registration of the security for which theregistration statement has been filed; or

(b) The registration statement is on its face incomplete or inaccurate in any materialrespect or includes any untrue statement of a material fact or omits to state a materialfact required to be stated therein or necessary to make the statements therein notmisleading; or

(c) The issuer, any officer, director or controlling person of the issuer, or personperforming similar functions, or any underwriter has been convicted, by a competentjudicial or administrative body, upon plea of guilty, or otherwise, of an offense involvingmoral turpitude and/or fraud or is enjoined or restrained by the Commission or othercompetent judicial or administrative body for violations of securities, commodities, andother related laws.

What is a tender offer?

A tender offer is a publicly announced intention by a person, acting alone or inconcert with other persons, to acquire equity securities of a public company (Sec. 19). Ithas also been described as an imprecise term widely used in securities law, generallyreferring to a quick, enticing proposal to the shareholders of a corporation that they


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tender their shares for purchase by the offeror at a specified price. Tender offer is anupside-down term: I make the offer, you make the tender. It is usually, not always, partof an attempt by the offeror to buy enough stock to control the corporation, i.e., atakeover (also spelled take-over and take over). Accordingly, tender offer is sometimescalled a takeover offer or a takeover bid. (Mellinkoffs Dictionary of American Legal

Usage,supra, p. 641)Tender offers are regulated to prevent the stockholders of the target company from

being misled by the offeror or the targetsmanagement. Thus, a principal requirement ofthe SEC rules on tender offers is the disclosure by the offeror of certain information aboutthe offer, with a copy of such information being given or sent to the stockholders (seeSRC Rule 19.1, para. 7).

Under what circumstances is a tender offer mandatory? (Sec. 19.1(a); SRC Rule19.1, para. 2)

Except when relief from the mandatory tender offer requirements is granted underSRC Rule 19.1, paragraph 3, a person is required under the following circumstances tomake a tender offer for equity shares of a public company in an amount equal to thenumber of shares that the person intends to acquire:

(a) Where the person intends to acquire 15% or more of the equity shares of a publiccompany pursuant to an agreement made between or among the person and one or moresellers;

(b) Where the person intends to acquire 30% or more of the equity shares of a publiccompany within a period of 12 months; and


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(c) Where the person intends to acquire shares that would result in the ownership ofmore than 50% of the equity shares of a public company.

When would a person be presumed to be making a voluntary tender offer?(SRC Rule 19.1, para. 4)

A person may make a voluntary tender offer. He will be presumed to be doing sowhen some or all of the following factors are present.

(a) There is active and widespread solicitation of public shareholders for the sharesof a public company;

(b) The solicitation is made for a substantial percentage of the issuers stock;

(c) The offer to purchase is made at a premium over the prevailing market price, atfirm rather than negotiable terms;

(d) The offer is contingent on the tender of a fixed number of shares; or

(e) The offer is only open for a limited period of time.

The foregoing list of factors reflects the so-called eight-factor Wellman vs.

Dickinson test enunciated in an American case of the same name (475 F. Supp. 783,823-824 [S.D.N.Y., 1979) involving the coordinated private solicitations of 30institutions and 9 individuals, with a premium price offered and no individualizednegotiations (see Fundamentals of Securities Regulation by Louis Loss and JoelSeligman, Little Brown and Company, 3rdedition, 1995).


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What is a proxy and why is its solicitation regulated? (Sec. 20; SRC Rule 20)

A proxyis a formal authorization from a stockholder that empowers someone t votein his or her behalf; the term also refers to the person who is so authorized to vote on

behalf of a stockholder (How the Stock Market Works, John M. Dalton, ed., New YorkInstitute of Finance, 2ndedition, 1993, p. 281).

The SRC regulates the issuance and solicitation of proxies. Indeed, it expresslyrequires that proxies must be issued and proxy solicitation must be made in accordancewith SEC rules (Sec. 20.1). Thus, proxies must be in writing, signed by the stockholder orhis duly authorized representative and filed with the corporate secretary before the

scheduled meeting (Sec. 20.2); unless otherwise provided in the proxy, it shall be validonly for the meeting for which it is intended; no proxy shall be valid and effective for aperiod longer than 5 years at one time (Sec. 20.3); and a broker or dealer cannot give aproxy in respect of any security it carries for the account of a customer without theexpress written authorization of such customer (Sec.20.4).

The issuance and solicitation of proxies are regulated to minimize, if not avoid, theabuse and misuse of the proxy device that may lead to the self-perpetuation andirresponsibility of management. Management has innate advantages in the solicitationof proxies: it has the stockholderslist, if benefits from the usual inertia of stockholders;and it has access to corporate funds for the normally substantial costs of solicitation(Fundamentals of Securities Regulation, supra, p. 432).


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The terms solicit and solicitation means

(a) any request for a proxy whether or not accompanied by or included in a form ofproxy;

(b) any request to execute or not to execute, or to revoke, a proxy; or

(c) the furnishing of a form of proxy or other communication to security holdersunder circumstance reasonably calculated to result in the procurement, withholding orrevocation of a proxy.

The approach of the SEC Rules on proxy solicitation follows the traditional three-wayapproach (seeFundamentals of Securities Regulation, supra, p. 437) which (i) calls for abrief description of the matters to be considered, together with the action proposed to be

taken by the holder of the proxy (SRC Rule 20, paras. 3 and 4); (ii) requires the registrant(i.e., the issuer of the securities in respect of which proxies are to be solicited), as acondition of its own solicitation, to mail to record owners the proxy material of anystockholder upon his or her request at his or her expense (SRC Rule 20, para. 6); and (iii)adopts a general fraud rule prohibiting the making of any materially false or misleadingstatements (SRC Rule 20, para. 7).

No solicitation of proxy shall be made unless each person solicited is furnished,concurrently or earlier, with a written proxy statement containing the informationrequired by the SEC (SRC Rule 20, para. 3). The form of proxy, together with the proxystatement, shall be sent or given to stockholders at least 15 business days prior to themeeting date (SRC Rule 20, para. 4.f).


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When could the profits made by a stockholder, director or officer in apurchase and sale, or a sale and purchase, of any equity security berecovered? (Sec. 23.2)

For the purpose of preventing the unfair use of information which may have been

obtained by a beneficial owner of equity securities, director, or officer of the issuer byreason of his relationship to the issuer, any profit realized by him from any purchase andsale, or any sale and purchase, of any equity security of such issuer within any period ofless than 6 months, unless such security was acquired in good faith in connection with adebt previously contracted, shall inure to and be recoverable by the issuer, irrespective ofany intention of holding the security purchased or of not repurchasing the security soldfor a period exceeding 6 months. A suit to recover such profit may be instituted before

the Regional Trial Court by the issuer, or by the owner of any security of the issuer in thename and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within60 days after request or shall fail diligently to prosecute the same thereafter, but no suchsuit shall be brought more than 2 years after the date such profit was realized.

What are the various ways by which security prices may be manipulated?(Sec. 24; SRC Rule 24.1(b)-1, para. 5)

The following are some examples of the ways by which security prices may bemanipulated:


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(a) Painting the tapeEngaging in a series of transactions in securities that arereported publicly to give the impression of activity or price movement in a security (SRCRule 24.1 (b)-1, para. 5);

(b) Marketing the closeBuying and selling securities at the close of the market

in an effort to alter the closing price of the security (id.);(c) Improper matched ordersEngaging in transactions where both the buy and

sell orders are entered at the same time with the same price and quantity by differentbut colluding parties (id.);

(d) Hype and dumpEngaging in buying activity at increasingly higher prices andthen selling securities in the market at the higher prices (id.);

(e) Wash salesEngaging in transactions in which there is no genuine change inactual ownership of a security (id.);

(f) Squeezing the float Taking advantage of a shortage of securities in themarket by controlling the demand side and exploiting market congestion during suchshortages in a way as to create artificial prices (id.);

(g) Boiler room sales The use of high-pressure sales tactics to promote

purchases and sales of securities (How the Stock Market Works, supra, p. 239);(h) Daisy chainA series of purchases and sales of the same issue at successively

higher (or lower) prices, by the same group of people with the purpose of manipulatingprices and drawing unsuspecting investors into the market, leaving them defrauded oftheir money or securities (ibid., p. 249).


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What is an insider prohibited from doing and what is his duty when tradin?(Secs. 3.8 and 27)

While to be an insider is not prohibited, it shall, however, be unlawful for an insiderto sell or buy a security of the issuer while in possession of material nonpublicinformation with respect to the issuer or the security unless

(a) the insider is able to prove that the information was not gained from suchrelationship, or

(b) if the other party selling to or buying from the insider (or his agent) is identified,the insider is able to prove (i) that he disclosed the nonpublic information to the otherparty, or (ii) that he had reason to believe that the other party otherwise is also in

possession of the nonpublic information.The duty of an insider when trading is to disclose the material nonpublic informationto the other party.

Could an insider be liable even if he does not trade? (Sec. 27.3)

Yes. It shall be unlawful for any insider to communicate material nonpublicinformation about the issuer or the security to any person who, by virtue of thecommunication, becomes an insider as defined in Section 3.8 of the SRC, where theinsider communicating the information knows or has reason to believe that such personwill likely buy or sell a security of the issuer while in possession of such information.


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Is there a presumption of insider trading? (Sec. 27.1)

Yes. A purchase or sale of a security of the issuer made by an insider or suchinsiders spouse or relatives by affinity or consanguinity within the second degree,

legitimate or common-law, shall be presumed to have been effected while in possessionof material nonpublic information if transacted after such information came intoexistence but prior to dissemination of such information to the public and the lapse of areasonable time for the market to absorb such information; provided, however, that thispresumption shall be rebutted upon a showing by the purchaser or seller that he was notaware of the material nonpublic information at the time of the purchase or sale.

What is material nonpublic information? (Sec. 27.2)

Material nonpublic information is information that (i) has not been generallydisclosed to the public and would likely affect the market price of the security after beingdisseminated to the public and the lapse of a reasonable time for the market to absorb the

information, or (ii) would be considered by a reasonable person important under thecircumstances in determining his course of action whether to buy, sell or hold a security.


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REGISTRATION OF MARKET PROFESSIONALS AND ENTITIES

Who are the market professionals and entities required to register withthe SEC?

(a) Brokers, dealers, salesmen and associated persons (Sec. 28.1) No personshall engage in the business of buying or selling securities in the Philippines as a

broker or dealer, or act as a salesman, or an associated person of any broker ordealer unless registered as such with the SEC.

(b) Exchanges (Secs. 3.7 and 33.2) The applicant for registration must beorganized as a stock corporation and engaged solely in the business of operating anexchange. No person may beneficially own or control, directly or indirectly, morethan 5% of the voting rights of the exchange. An industry or business group issimilarly limited to not more than 20% of the voting rights of the exchange. Brokersshall constitute no more than 49% of the Board of Directors of the exchange, while

the remaining 51% shall be composed of 3 independent directors and persons whorepresent the interests of issuers, investors and other market participants who arenot associated with any broker or dealer or member of the exchange for a period of 2

years prior to his appointment.


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(c) Other securities trading markets The SEC is authorized to determine thenumber, size and location of stock exchanges, other trading markets and commodityexchanges, and other similar organizations in the light of national or regionalrequirements for such activities with the view to promote, enhance, protect, conserve orrationalize investment (Sec. 36.3). The SEC is also authorized to register and licenseinnovative and other trading markets or exchanges covering the issuance of innovativesecurities, securities of small, medium, growth and venture enterprises, and technology-based ventures (Sec. 37).

(d) Self-regulatory organizations (Sec. 39) A self-regulatory organization isany securities exchange, clearing or depository agency or other securities-related

organization or association which is so organized and has the capacity to be able to carryout the purposes of the SRC and to comply with, and to enforce compliance by itsmembers and persons associated with its members, with the provisions of the SRC, therules and regulations thereunder, and the rules of the association (Sec. 39.3[a]). Thoseentities which the SEC may register as self-regulatory organizations include associationsof brokers and dealers, transfer agents, custodians, fiscal and paying agents, computerservices, news disseminating services, proxy solicitors, statistical agencies, security ratingagencies, and securities information processors.

(e) Clearing agencies (Secs. 3.6 and 42).


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Who is an independent director?

An independent director is a person other than an officer or employee of thecorporation, its parent or subsidiaries, or any other individual having a relationship withthe corporation, which would interfere with the exercise of independent judgment incarrying out the responsibilities of a director (Sec. 38).

More expansively, SRC Rule 38.1 defines an independent director as a person who,apart from his fees and shareholdings, is independent of management and free from anybusiness or other relationship which could, or could reasonably be perceived to,materially interfere with his exercise of independent judgment in carrying out hisresponsibilities as a director in the corporation. For example, a person may not qualify asan independent director under SRC Rule 38.1 if

(a) he is a substantial shareholder (i.e., a beneficial owner, directly or indirectly, ofmore than 10% of any class of equity security) of the corporation or of its relatedcompanies (i.e., its holding company, its subsidiary, or subsidiary of its holdingcompany) or any of its substantial shareholders; or

(b) he is a relative (i.e., the spouse, parent, child, brother and sister of such person,and the spouse of such child, brother or sister) of any director, officer or substantialshareholder of the corporation, any of its related companies or any of its substantialshareholders; or

(c) he has been employed in any executive capacity by that public company, any of itsrelated companies or by any of its substantial shareholders within the last 5 years; or


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(d) he is retained as professional adviser by that public company, any of its relatedcompanies or by any of its substantial shareholders; either personally or through his firm.

Who are required to have independent directors? (Sec. 38)

A part from an exchange, any corporation with a class of equity securities listed fortrading on an exchange, or with assets in excess of P50 million and having 200 or moreholders, at least 200 of which are holding at least 100 shares of a class of its equitysecurities or which has sold a class of equity securities to the public pursuant to aneffective registration statement in compliance with Section 12 of the SRC, shall have atleast 2 independent directors or such independent directors shall constitute at least 20%

of the members of such board, whichever is the lesser.

What transactions of brokers and dealers are prohibited? (Sec. 30.1)

No broker or dealer shall deal in or otherwise buy or sell, for its own account or forthe account of customers, securities listed on an exchange issued by any corporationwhere any stockholder, director, associated person or salesman, or authorized clerk ofsaid broker or dealer and all the relatives of the foregoing within the fourth civil degreeof consanguinity or affinity, is at the time holding office in said issuer corporation as adirector, president, vice-president, manager, treasurer, comptroller, secretary or anyoffice of trust and responsibility, or is a controlling person of the issuer.


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What is the suitability rule? (SRC Rule 30.2-4)

The suitabilityrulestates that in recommending to a customer the purchase, saleor exchange of any security, a broker, dealer or an associated person or salesman of a

broker or dealer shall have reasonable grounds for believing that the recommendation issuitable for such customer upon the basis of the facts disclosed by such customer as to hisother security holdings and as to his financial situation and needs.

Can the SEC suspend trading in a security or all trading on any securitiesexchange? (Sec. 36.1)

Yes. The SEC is authorized, if in its opinion such action is necessary or appropriatefor the protection of investors and the public interest so requires, summarily to suspendtrading in any listed security on any exchange or other trading market for a period notexceeding 30 days or with the approval of the President of the Philippines, summarily tosuspend all trading on any securities exchange or other trading market for a period ofmore than30 but not exceeding 90 days; provided, however, that the SEC, promptly

following the issuance of the order of suspension, shall notify the affected issuer of thereasons for such suspension and provide such issuer with an opportunity for hearing todetermine whether the suspension should be lifted.


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What is margin trading and why is it regulated? (Sec. 54)

Margin tradingrefers to the purchase of securities by an investor using the credit ofthe broker to pay for part of the said securities. It is regulated for the purpose of

preventing the excessive use of credit or carrying of securities. The margin is theamount of money or securities that an investor must deposit with a broker to secure aloan from the broker. When a broker makes a demand on the investor to deposit moneyor securities with the broker when a purchase is made or when the investorsequity in amargin account declines below a minimum standard set by the exchange or the broker,the broker is said to have made a margin call.

PENALTIES AND SANCTIONS

What administrative sanctions may the SEC impose?(Sec. 54)

If there is a violation of the SRC, the SRC Rules or the orders of the SEC, the SEC

shall, in its discretion and after due notice and hearing, impose any or all of the followingsanctions as may be appropriate in light of the facts and circumstances:

(a) Suspension, or revocation of any registration for the offering of securities;

(b) A fine of no less than P10,000 nor more than P1,000,000 plus not more thanP2,000 for each day of continuing violation;


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(c) In the case of a violation of Sections 19.2 (the making of an untrue statement, etc.in connection with a tender offer), 20 (proxy solicitations),24 (manipulation of securityprices, etc.), 26 (fraudulent transactions) and 27 (insider trading), disqualification frombeing an officer, member of the Board of Directors, or person performing similarfunctions, of an issuer required to file reports under Section 17 of the SRC or any other

act, rule or regulation administered by the SEC;(d) In the case of a violation of Section 34 (re segregation and limitation of functions

of members, brokers and dealers), a fine of no more than 3 times the profit gained or lossavoided as a result of the purchase, sale or communication proscribed by such Section;and

(e) Other penalties within the power of the SEC to impose.

What is a settlement offer? (Sec. 55)

A settlement offer is a written proposal made to the SEC by a party beinginvestigated or charted, during an investigation or proceeding under the SRC, in orderthat such investigation or proceeding against the said party could be terminated ordismissed. Upon receipt of such offer of settlement, the SEC may consider the offer

based on timing, the nature of the investigation or proceeding, and the public interest.The SEC may only agree to a settlement offer based on its findings that such settlement isin the public interest. Any agreement to settle shall have no legal effect until publiclydisclosed. Such decision may be made without a determination of guilt on the part of theperson making the offer.


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Who may sue on account of a false registration statement? (Sec. 56.1)

Any person (i) acquiring a security, the registration statement of which or anypart thereof contains on its effectivity an untrue statement of a material fact or omits to

state a material fact required to be stated therein or necessary to make such statementnot misleading,(ii) who suffers damage, and (iii) who did not know of such untruestatement or omission at the time of such acquisition, may sue and recover damages.

Who may be sued on account of a false registration statement? (Sec. 56.1)

(a) The issuer and every person who signed the registration statement;

(b) Every person who was a director of, or any other person performing similarfunctions, or a partner in, the issuer at the time of the filing of the registration statementor any part, supplement or amendment thereof with respect to which his liability isasserted;

(c) Every person who is named in the registration statement as being or about tobecome a director of, or a person performing similar functions, or a partner in, the issuerand whose written consent thereto is filed with the registration statement;

(d) Every auditor or auditing firm named as having certified any financialstatements used in connection with the registration statement or prospectus;

(e) Every person who, with his written consent, which shall be filed with theregistration statement, has been named as having prepared or certified any part of theregistration statement, or as having prepared or certified any report or valuation which is


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used in connection with the registration statement, with respect to the statement, report,or evaluation, which purports to have been prepared or certified, by him;

(f) Every selling shareholder who contributed to and certified as to the accuracy of aportion of the registration statement, with respect to that portion of the registrationstatement which purports to have been contributed by him;

(g) Every underwriter with respect to such security.

What is the prescriptive period for the enforcement of actions underSections 56 (re civil liabilities on account of false registration statement) and57 (re civil liabilities arising in connection with prospectus, communicationsand reports? (Sec. 62)

No action shall be maintained to enforce any liability created under Sections 56 or 57of the SRC unless brought within 2 years after the discovery of the untrue statement orthe omission, or, if the action is to enforce a liability created under Sections 57.1(a) (reoffering to sell or selling an unregistered security), unless brought within 2 years after theviolation upon which it is based. In no event shall any such action be brought to enforce

a liability created under Section 56 or Section 57.1 (a) more than 5 years after thesecurity was bonafide offered to the public, or under Section 57.1(b) (re offering to sell orselling a security by means of a prospectus, etc. containing an untrue statement, etc.)more than 5 years after the sale.


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What are the damages that may be awarded in suits to recover damagesunder Sections 56-60 ? (Sec. 63)

(a) Actual damages;

(b) Treble damages, i.e., damages in an amount not exceeding triple the amount ofthe transaction;

(c) Exemplary damages in cases of bad faith, fraud, malevolence or wantonness inthe violation of the SRC or the SRC Rules;

(d) Attorneys fees not exceeding 30% of the award.

y - securities regulation code

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