SECURITIES REGULATIONS CODE

Atty. Dominic Victor C. De Alban

Meaning of Securities and of Exchange

Securities are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in character.
Includes:
• Debt Instrument – bonds, debentures, notes, evidence of indebtedness,
asset-backed securities.
o Bonds - A bond is a fixed income instrument that represents a loan
made by an investor to a borrower (typically corporate or
governmental); it includes the terms of the loan, the interest payment
(called coupon rate), and the time at which the loaned funds must be
paid back (Maturity date).
o Debentures - A debenture is a type of debt instrument unsecured by
collateral. Since debentures have no collateral backing, debentures
must rely on the creditworthiness and reputation of the issuer for
support.
• Other instruments in the future as may be determined by the SEC.
• Derivatives - A derivative is a financial security with a value that is reliant
upon, or derived from, an underlying asset or group of assets. The most
common underlying assets include stocks, bonds, commodities, currencies
, interest rates and market indexes.
o Options - are contracts that give the buyer the right, but not the
obligation, to buy or sell an underlying security at a predetermined
price called the exercise or strike price, on or before a
predetermined date, called the expiry date, which can only be
extended in accordance with Exchange rules. Three kinds:
▪ Call option – option to buy; gives the buyer the right to buy an
underlying asset at a strike price at anytime up to the
expiration date.
• Example: There are certain stocks which are rumored to
double in amount soon. However, rumors being rumors,
a person may instead have a call option, for a price, to
stocks for a certain period of time so that if the stocks
would continue to have value, then the person can
exercise his call option to acquire the stocks and sell it
in the future. If he has a call option but may not want to
deal with the stocks, he may sell his call option to
another person who can exercise it on his behalf. Finally
, if he does not want to pursue the venture or it may
prove to be unprofitable, he can just let the option expire
 .
▪ Put option – option to sell; gives the buyer the right to sell at a
strike price at anytime up to the expiration date.
• If a person thinks that the value of his stocks would
decrease in the future, then he may want to place a put
option. If for example the value of his stocks is P1,000 a
share, if, during the period, the price decreases to
900/share, then he may nevertheless get the
1000/share which is the terms of the put option. If the
price of the stock rises, you will lose the premium of the
put, but you do not have a loss on the stock. It is a form
of insurance to protect oneself from financial loss.
▪ Straddle – combination of both call and put option.
• Investment instruments - An investment contract is a contract, transaction
or scheme whereby a person invests his money in a common enterprise
and is led to expect profits primarily from the efforts of others.
• Equity instruments - Document that serves as a legally enforceable
evidence of the right of ownership in a firm, such as a share certificate (
stock certificate)
• Trust Instruments
⮚ The test is: Does it represent a share, participation, or interest in a
commercial enterprise or any profit-making venture? If yes, then, it is a
security. If it is a security, then, it cannot be sold, or offered for sale or
distribution within the Philippines without a registration statement duly
filed with and approved by the SEC.
⮚ They are required to be registered with and approved by the SEC.
Registration also includes the disclosure to SEC of all material and
relevant information about the issuer of the security. Prior to the sale,
the information on the securities, in such form and with such substance
as the SEC may prescribe, shall be made available to each prospective
purchaser.
o To protect the buying public from possible fraud.
What needs to be registered:
1. Securities
2. The securities market professional (persons who deal with securities):
a. Broker - A person engaged in the business of buying and selling
securities for the account of others (Sec.3.3, SRC).
b. Dealer - Any person who buys and sells securities for his/her own
account in the ordinary course of business (Sec. 3.4, SRC).
c. Associated person of a broker or dealer - He is 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 (Sec. 3.5, SRC).
 d. 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.
i. Example of the exception are rank and file employees of a
corporation who are selling stocks.
• Security market professionals are required to be registered. No
broker shall sell any securities unless he is registered with the SEC.
o If you deal with securities as an unregistered market
professional, you may not recover compensation for your
services as such along with criminal liability.
3. Registration of an Exchange - is an organized market place or facility that
brings together buyers and sellers and executes trade of securities and/or
commodities.
The following need not be registered:
1. Exempt securities
2. Securities exchanged in exempt transactions
a. However, as an exception to the above exceptions, SRC provides
that the resale of securities previously sold in an exempt transaction
must be registered.
⮚ Effect of non-registration: The issuer would be penalized. Issuers of
securities not registered shall be subjected to criminal, civil and
administrative charges.
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 an 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 Commission 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 (which
serves to promote the sale of securities issued by heavily regulated
banks).
 6. Other securities as determined by the SEC by rule or regulation, after
public hearing.(Sec. 9, SRC)
⮚ Note: Being an issuer of an exempt security does NOT exempt such issuer
from the requirement of submission of reports under the regime of full and
fair disclosure.
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 holder, 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 for the owner’s
account and the owner not being an underwriter
4. Distribution by the corporation of Securities to its stock holders or other
security holders as stock dividends or distribution out of surplus
5. Sale of CApital stock of a corporation to its own stockholders exclusively
wherein no commission or remuneration is paid or given directly or
indirectly in connection with the sale of such capital stock
a. NOTE: Also, this sale must not involve an underwriter or financial
advisor
6. Bonds or notes secured by a mortgage upon Real estate or tangible
personal property, where the entire mortgage together with all the bonds or
notes secured thereby are sold to a single purchaser at a single sale
7. Issue and delivery of any security in exchange for any other security of the
same Issuer pursuant to the right of conversion entitling the holder of the
security surrendered in exchange to make such conversion.
8. Broker’s transactions executed upon customer’s Orders, on any registered
Exchange or other Trading market
9. Share Subscriptions in capital stock prior to incorporation or in pursuance
of an increase in its authorized capital stock under the Corporation Code
when no expense is incurred, or no commission, compensation or
renumeration 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 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 increased.
10. EXchange of securities by the issuer with its existing security holders
exclusively, when no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange
11. Sale by issuer to fewer than 20persons in the Philippines during any
12 month period, otherwise known as private placement transactions 12.
Sale of securities to any number of the following Qualified Buyers:
 a. banks,
b. registered investment houses,
c. insurance companies,
d. pension funds or retirement plans maintained by the Government of
the Philippines or any political subdivision thereof or managed by a
bank or other persons authorized by the Bangko Sentral to engage
in trust functions, investment companies, and
e. other persons or entities ruled qualified by the SEC on the basis of
such factors such as financial sophistication, net worth, knowledge,
and experience in financial and business matters, or amount of
assets under management (Sec. 10.1, SRC).
⮚ Rationale: Although the securities themselves must still be registered, the
sale or issue need not be registered because the investors involved herein
are considered as highly sophisticated investors or specialized investors
and as such, have a greater risk tolerance or do not need strict protection
from the Commission.

Forms of Manipulations in Securities Trading:

o 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
i. Usually for tax related concerns; to use the incentive of losses
for deductions then to repurchase the security at the same or
lower price.
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 – or portfolio pumping 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.
i. Shortage + control of demand side = appearance of higher
price which is not dictated by the market forces but by certain
people.
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.
i. The most basic churning comes from excessive trading by a
broker to generate commissions. Brokers must justify
commissionable trades and how they benefit the client. When
there are excessive commissions with no noticeable portfolio
gains, churning might have occurred.
3. Disseminating false or misleading statements to raise or depress the
amount of a security or to induce sale thereof.
• Short sale - it is the selling of shares which the seller does not actually own or
possess and therefore he cannot, himself, supply the delivery. It is allowed by
the SRC.
• Insider trading - a purchase or sale made by an insider, or such insider’s
spouse or his relative by affinity or consanguinity within the second degree,
legitimate or common-law, shall be presumed to be effected while in
possession of material non-public 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.
o Thus, an insider is a person in possession of a corporate material
information not generally available to the public.
o Who maybe an insider trader:
▪ The issuer
▪ A director or officer (or person performing similar functions) of, or
a person controlling the issuer.
▪ 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 not generally available to the public
▪ 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
▪ Constructive Insider – A person who learns such information by a
communication from any of the foregoing insiders.
o Generally, what is prohibited is the insider’s use of material non-public
information to unduly benefit himself or others.
o Material non-public information – Information about the issuer or the
security has not been generally disclosed to the public and would likely
affect the market price of the security after being disseminated to the
public or would affect a person’s disposition or holding of a security.
Tender Offer Rule – It is the publicly declared intention by a person alone
or in concert with others to buy securities of a public corporation. It is an
invitation by the acquirer of shares of a company for other stockholders to
tender their shares to the acquirer so that they may sell their shares in the
same price and conditions as the previously acquired shares.
o Tender offer is in place to protect the interest of minority stockholders of
a target company against any scheme that dilutes the share value of
their investments. It affords such minority shareholders the opportunity
to withdraw or exit from the company under reasonable terms or a
chance to sell their shares at the same price as those of the majority
stockholders.
 o Mandatory Tender Offer:
o 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.
o The mandatory tender offer rule covers not only direct acquisition
but also indirect acquisition or “any type of acquisition.”
o Example of direct acquisition:
▪ The shares of stock of X company are owned by A (19%), B
(16%), C (20%), D (14%), E (31%). If F buys the shares of A
(19%), the transaction is not subject to mandatory tender
offer. However, if F buys the shares of A (19%) and the
shares of B (16%), then tender offer must be made because
the total shares bought by F is 35%.
o Example of indirect acquisition:
▪ The shares of stock of X company are owned by A (16%), B (
19%), C (15%), D (18%), and Corporation E (32%)
respectively. The shares of Corporation E are owned by X (
50%), Y (25%) and Z (25%). If W acquires the shares of B (
19%), the transaction is not subject to mandatory tender offer
because it did not reach the 35% threshold limit required by
law. However, if W acquires the shares of B (19%) and the
shares of X in Corporation E (50% of 32 is 16%), then, tender
offer must be made because the total shares bought by W
directly and indirectly is 35%.
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 the same
security as collateral for such advance.