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SECURITIES REGULATION

CODE
I. STATE POLICY (PURPOSE)
Nature of the Securities Regulation Code (SRC)
The SRC is enacted to protect the public from
unscrupulous promoters, who stake business or
venture claims which have really no basis, and sell
shares or interests therein to investors.
State policies with regard to the SRC
1. Establish a sociallyconscious market that
regulates itself
2. Encourage widest participation of ownership
in enterprises and enhance democratization of
wealth
3. Promote development of capital market
4. Protect investors and ensure full and fair
disclosure about securities
5. Minimize, if not totally eliminate, insider
trading and other fraudulent or manipulative
devices; and practices which distorts the free
market
II. POWERS AND FUNCTIONS OF THE
SECURITIES
AND EXCHANGE COMMISSION (SEC)
1. Regulatory
a. Have jurisdiction and supervision over all
corporations, partnerships or associations who
are the grantees of primary franchises and/or a
license or permit issued by the Government;
b. Formulate policies and recommendations on
issues concerning the securities market;
c. Advise Congress and other government
agencies on all aspects of the securities market
and propose legislation and amendments
thereto;
d. Approve, reject, suspend, revoke or require
amendments to
registration statements, and registration and
licensing applications
e. Regulate, investigate or supervise the
activities of persons to ensure compliance
f. Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and
other SROs
g. Impose sanctions for the violation of laws
and the rules, regulations and orders issued
pursuant thereto;
h. Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions and
provide guidance on and supervise compliance
with such rules, regulations and orders
i. Deputize any and all enforcement agencies of
the Government as well as any private
institutions
j. Compel the officers of any registered
corporation or association to call meetings of
stockholders or members
k. Suspend, or revoke, after proper notice and
hearing the franchise or certificate of
registration of corporations, partnerships or
associations
l. Exercise such other powers as which are
incidental to the primary powers of the
Commission
2. Adjudicative
a. Issue cease and desist order
b. Punish for contempt of the Commission,
both direct and
indirect
c. Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of the
Commission
d. 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.

Note: The SECs jurisdiction under Section 5 of


PD No. 902A (intracorporate disputes) has
been transferred to the appropriate RTC,
pursuant to Sec. 5.2 of SRC.
III. SECURITES TO BE REGISTERED
Securities are shares, participation or interests
in a corporation or in a commercial enterprise
or profitmaking venture and evidenced by a
certificate, contract, instrument, whether
written or electronic in character. It includes:
1. Equity instruments Shares of stock,
certificates of interest or participation in a
profit sharing agreement, certificates of
deposit for a future subscription, proprietary
or nonproprietary membership certificates in
corporations
2. Investments instruments Investment
contracts, , fractional undivided interests in oil,
gas, or other mineral rights
3. Debt instruments bonds, debentures,
notes, evidence of indebtedness, assetbacked
securities
4. Derivatives options and warrants
Trust instruments Certificates of assignments,
certificates of participation, trust certificates,
voting trust certificates or similar instruments;
What is registration with regard to securities?
A: It is the disclosing to the SEC of all material
and relevant information about the issuer of
the security.

Q: Why is registration of securities mandated?


A: Its purpose is to inform the public for them
to be able to make good business judgment. It
is the filing of registration statement.
Q: What is the rule with regard to registration
of securities?
No security can be sold or offered for sale or
distribution within the Philippines unless
accompanied by a registration statement filed
with and approved by the SEC.
Exceptions:
1. Exempt securities
2. Securities sold in exempt transactions.
Q: What are the effects of nonregistration?
A: The issuer would be penalized. Issuers of
securities not registered shall be subject
criminal, civil and administrative charges.
Q: What are the exempt securities?
1. 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 instrumentality of said government.
2. 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 SEC may require compliance


with the form and content of disclosures the
SEC may prescribe
3. Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.

4. Any security or its derivatives the sale or


transfer of which, by law, is under the
supervision and regulation of the Office of
Insurance Commission, Housing and Land Use
Regulatory Board, or the Bureau of Internal
Revenue.

5. Any security issued by a bank except its own


shares of stock.
6. Other securities as determined by the SEC

Note: Being an issuer of an exempt security


does not exempt such issuer from the
requirement of submission of reports full and
fair disclosure.

What are exempt


transactions?
1. Any judicial sale, or sale by an executor,
administrator, guardian, receiver or trustee in
insolvency or bankruptcy
2. Those sold by a pledge, mortgagee, or any
other similar lien holder, to liquidate a bona
fide debt (a security pledged in good faith as
security for such debt
3. Those sold or offered for sale in an isolated
transaction, the owner not being an
underwriter
4. Distribution by the corporation of securities
to its stockholders as dividends;
5. Sale of capital stock of a corporation to its
own stockholders exclusively
6. Bonds or notes secured by a mortgage are
sold to a single purchaser at a single sale
7. Delivery of security in exchange for any
other security pursuant to the right of
conversion
8. Brokers transactions executed upon the
customers orders
9. Share subscriptions prior to incorporation or
in pursuance of an increase in its authorized
capital stock
10. Exchange of securities by the issuer with its
existing security holders exclusively
11. Sale by issuer to fewer than 20 persons in
the Philippines during any 12 month period
12. Sale to banks, investment houses,
insurance companies and any entities ruled
qualified by the SEC
IV. PROCEDURE FOR REGISTRATION OF
SECURITIES
1. Application All securities required to be
registered shall be registered through the filing
by issuer with SEC, of a sworn registration
statement.
2. Prospectus The registration statement
shall include any prospectus required or
permitted to be delivered;
3. Other information 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;
4. Signatories to registration statement The
registration statement shall be signed by the
issuers:
a. Executive officer
b. Principal operating officer
c. Comptroller
d. Principal accounting officer
e. Corporate secretary or persons performing
similar functions
Note: it shall be accompanied by a duly verified
resolution of the BoD of the issuer
5. Written consent of expert 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
6. Certification by selling stockholders Where
the registration statement includes:
a. Shares to be sold by the selling shareholders
b. A written certification by such selling
shareholders as to the
accuracy of any part of the registration
statement contributed by such selling
shareholders shall also be filed
7. Fees The issuer shall pay to the SEC; the
SEC shall prescribe by rule, diminishing the fees
in inverse proportion, the value of the
aggregate price of the offering
8. Notice and publication Notice of the filing
of the registration statement shall be
immediately published by the issuer in two
newspapers of general circulation in the
Philippines; once a week for two consecutive
weeks, reciting that:
a. A registration statement has been filed, and
b. The aforesaid registration statement and
papers attached thereto are open to inspection at
the SEC during business hours.
Note: copies shall be furnished to interested parties at
a reasonable charge.

9. SEC Power for production of books The


SEC may:
a. Compel the production of all the books and
papers of such
Issuer
b. Administer oaths
c. Examine the officers of such issuer, or any
other person connected therewith as to its
business and affairs
10. Ruling Within 45 days after the date of
the filing of the registration statement, or by
such later date to which the issuer has
consented, the SEC shall declare the
registration statement
effective or rejected, unless the applicant is
allowed to amend the registration statement.
Q: What are the grounds for rejection and
revocation of registration?
1. The issuer:
a. Has been judicially declared insolvent
b. Has violated any of the provisions of the
Code, the rules promulgated pursuant thereto,
or any order of the SEC of which the issuer has
notice in connection with the offering for
which a registration statement has been filed
c. Has been or is engaged or is about to
engage in fraudulent
Transactions. Has made any false or misleading
representations of material facts in any
prospectus concerning the issuer or its
securities; or
d. Has failed to comply with any requirement
that the SEC may impose as a condition for
registration of the security for which
registration statement has been filed.
2. The registration statement is on its face
incomplete or inaccurate or includes any
untrue statement of a material fact or omits to
state a material fact required to be stated
therein.

3. The issuer or any underwriter has been


convicted by a competent judicial or
administrative body of an offense involving
moral turpitude and/or fraud or is enjoined by
the SEC or other competent judicial or
administrative body for violations of securities,
commodities and other related laws

4. Any issuer who refuses to permit the


examination to be made by the Commissioner.
Cancellation of Certificate of Registration
Grounds:
1. Fraud in procuring registration
2. Serious misrepresentation as to objectives of
corporation
3. Refusal to comply with lawful order of SEC
4. Continuous inoperation for at least 5 years
5. Failure to file bylaws within required period
6. Failure to file reports
7. Other similar grounds. (Sec. 6 [L])
1. If any time, the information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or
incomplete in any material respect; or
2. The sale or offering for sale of the
security registration there under may work
or tend to work a fraud;
3. Pending investigation of the security
registered to ascertain whether the
registration of such security should be
revoked on any ground specified the SRC;
and
4. Refusal to furnish information required
by the Commission. (Sec. 15)
Q: Who are the securities market professionals
as classified by the SRC?
A: They are the broker, dealer, associated
person of a broker or dealer, and a salesman.
Dealer: Any person who buys and sells
securities for his/her own account in the
ordinary course of business.

Broker: A person engaged in the business of


buying and selling securities for the account of
others.
*The primary obligation of the broker is to ensure his
accounts compliance with the law.
(Abacus Securities Corp. v. Ampil, G.R. No. 160922, Feb.
27, 2006)
Note: Since a brokerage relationship is essentially a
contract for the employments of an agent, the law on
contracts govern the brokerprincipal relationship

Associated person of a broker or dealer: an


employee of a broker or dealer who directly
exercises control of supervisory authority but
does not include a salesman, or an agent, or a
person, whose functions are solely clerical or
ministerial.

Salesman: He is a natural person, employed as


such, or as an agent, by a dealer, issuer or
broker to buy and sell securities; but for the
purpose of registration, shall not include any
employee of an issuer whose compensation is
not determined directly or indirectly on sales
of securities of the issuer.
Margin trading: A kind of trading that allows a
broker to advance for the customer/investor
part of the purchase price of the security and
to keep it as collateral for such advance.

Margin allowance standard: The credit


extended must be for an amount not greater
than, whichever is higher of:
1. 65% of the current market price of the
security; or
2. 100% of the lowest market price during the
preceding 36 months, but not more than 75%
of the current market price.

V. PROHIBITIONS ON FRAUD, MANIPULATIONS


AND INSIDER TRADING
A. MANIPULATION OF SECURITY PRICES
What acts are considered manipulation of
security prices?

1. Transactions intended to create active


trading:
a. Wash Sale engaging in transaction in
which there is no genuine change in the actual
ownership of a security
b. Matched Sale There is a change of
ownership in the securities by entering an
order for the purchase/sale of 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. Engaging in transactions which induce price
to increase or decrease:
a. Marking the close buying and selling
securities at the close of the market to alter
the closing price of the security.
b. Painting the tape engaging in a series of
transactions in securities that are reported
publicly to give the impression of activity or
price movement in a security.
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.
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 the use of high
pressure sale tactics to promote purchase and
sale of securities
f. Daisy chain it 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.
B. SHORT SALES - It is the selling of shares
which the seller does
not actually own or possess and therefore he
cannot, himself, supply the delivery.

C. FRAUDULENT TRANSACTIONS
1. Obtaining money or property by means of
any untrue statement of a material fact
2. Engaging in any act, transaction, practice or
course of business, which operates as a fraud
or deceit upon any person.

D. INSIDER TRADING - A purchase or sale made


by an insider or his relative within the second
degree shall be presumed to be effected while
in possession of material nonpublic
information if transacted after such
information came into existence but prior to
the public dissemination of such information,
and lapse of reasonable time for the market to
absorb such information.
Insider may be:
1. The issuer
2. A director or officers of or a person
controlling the issuer
3. A person whose relationship or former
relationship to the issuer gives him access to
material information about the issuer or the
security that is not generally available to the
public
4. A government employee, or director , or
officer of an exchange, clearing agency and/or
selfregulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or
5. Constructive Insider A person who learns
such information by a communication from
any of the foregoing insiders. (Sec. 3.8)

Q: When is information material nonpublic?


A: If:
1. Information about the issuer or the security
which has not been generally disclosed to the
public and would likely affect the market price
of the security after being disseminated to the
public and the lapse of a reasonable time for
the market to absorb the information;
or
2. Would be considered by a reasonable
person important under the circumstances in
determining his course of action whether to
buy, sell or hold a security (Sec. 27.2). (1995
Bar Question)
VI. PROTECTION OF INVESTORS
Q: What are the provisions in the SRC intended
to protect the investors?
A:
1. Tender Offer Rule
2. Rules on proxy solicitation
3. Disclosure rule
A. TENDER OFFER RULE
A: Publicly declared intention to buy securities
of public companies given to all stockholders
by:
1. Filing with the SEC a declaration to that
effect, and paying the filing fee.
2. Furnishing the issuer a statement containing
the information required of the issuers as SEC
may prescribe, including subsequent or
additional materials.
3. Publishing all requests or invitations for
tender, or materials making a tender offer or
requesting or inviting letters of such security.
Note: It is also defined as an offer by the acquiring
person to stockholders of a public company for them
to tender their shares on the terms specified in the
offer.
RULES ON PROXY SOLICITATION
Q: What are the requisite for valid proxy
solicitation?
A:
1. It must be in writing
2. It must be signed by the stockholder or his
duly authorized representative
3. It must be filed before the scheduled
meeting with the corporate secretary
(Sec. 20)
Note: The proxy shall be valid only for the meeting
for which it is intended. No proxy shall be valid and
effective for a period longer than 5 years at one
time.
C. DISCLOSURE RULE
Q: When does disclosure begin?
A: It begins at registration and continues
periodically thru periodic report.
Q: May it be suspended?
A: Yes. It may be suspended when on the first
day of the fiscal year if it has less than 100
shareholders (Rule 17.1, SRC IRR).