Capital Market Regulations

Capital market regulation includes the issuance of rules and conducts on the
establishment of the financial market. Regulations are an absolute necessity in the face of the
growing importance of capital markets throughout the world. The development of a market
economy is dependent on the development of the capital market. For a market to foster
business development it must be attractive to prospective investors looking for investment
opportunities. In order for a market to be attractive and to encourage additional investors to
partake, it must have earned investor confidence, which in turn is achieved through the
imposition and effective enforcement of rules which enable and ensure the capital market to
function and operates efficiently and fairly.

Capital Market Regulation has been developed with a view to establishing standards of
competence and conduct for those persons who are in positions of fiduciary responsibility.
These are primarily persons who have custody or control over investors’ money, and those who
provide advice or service to investors in complex matters. Rules have been established which
attempt to exclude dishonest and incompetent people, and to ensure investors receive advice
from those qualified to give it. People fulfilling such functions within the securities industry are
required to be registered with a securities commission, and in most cases, also with a Self
Regulating Organization. They are subject to rules regarding educational standards, record
keeping, reporting to clients and conflicts of interest. Other rules relating to the directors and
officers of issuers have been developed in an effort to establish duties to their investors and to
ensure they fulfill those duties.

The regulation of capital market has also been designed to ensure that trading is
conducted fairly, and that issuers and those that deal in securities on their behalf, provide fair
treatment to investors. While disclosure rules are essential to investor protection, they are not
sufficient to protect against such activities as insider trading and market manipulation.
Accordingly, regulation has developed in an effort to curtail these types of trading activities.

Ultimately, regulation of the capital markets has been designed primarily to make the
market more credible and efficient by establishing and enforcing principles which ensure
fairness, and which prevent activities which damage investor confidence. “Confidence” is
critical to an effective market. Without it the economic benefits which it provides both to
participants as well as to the general public will be lost.

In summary, the purposes of regulation and supervision are:

1. To make the capital market more credible and efficient

2. To protect the interest of the investors
3. To ensure the smooth functioning of the financial markets
4. To ensure that trading is conducted fairly
5. To ensure the full compliance with laws, rules and regulations
6. To ensure the stability, solvency and safety of the financial market

Prohibited Acts in the Capitals Market

1. Insider Trading
2. Market Manipulation
Insider Trading
Trading on insider information (that is information which is not disclosed to the public) violates
the principle of full, true and plain disclosure, as well as the principle that all investors must
share equally in the risk and opportunity. “

Insider trading” generally refers to the purchase or sale of securities while in possession of
material non-public information concerning such securities, or “tipping” such information
(providing the information to a third party to their trading benefit, or so they can trade on
behalf of the insider,) where the trader or tipper breaches a fiduciary duty or a duty arising out
of trust or confidence.

Those who trade on insider information have a clear opportunity to obtain an economic
advantage over other investors who do not have access to the same information. Legitimate
investors will likely be unwilling to trade in a market where they perceive that other investors
may have an advantage over them.

Market Manipulation
Market manipulation, which also violates the principles of full, true and plain disclosure, as well
as the principle that all investors must share equally in the risk and the opportunity, occurs
when traders intentionally cause the trading price of shares to take place at a price which is not
reflective of fair market value.

In a market manipulation, investors are deceived or defrauded by those who artificially affect
the price of a security. It is usually brought about by a combination of false information and
deceptive trading activity.

Market manipulation generally refers to such practices as wash trading, matched orders or
rigged prices. These practices are all ultimately intended to produce a market for the securities
which has little or no bearing on the true value of the securities based on the real business of
the issuer and its true prospects.

Because price and volume should be set by the justified judgment of buyers and sellers, market
manipulation violates the integrity of the market because it alters the independent trading and
pricing mechanisms of the market. Because manipulation can be a victimless offence in some
circumstances, or at the very least can have victims who are invisible to the offender, in some
quarters market manipulation has been viewed as an acceptable means of trading.

Because of the harm it does to the integrity of the market, as well as in most cases to investors,
there is no requirement that investors lose money for a manipulation to have occurred. In most
cases, however, the collapse of the market at the cessation of the manipulative conduct is not
only the best indicia of manipulative behavior, but also results in substantial losses to investors
who are left holding what has become worthless stock.
SUPERVISORY BODY (CAPITAL MARKET REGULATOR IN THE PHILIPPINES)

Securities & Exchange Commission (SEC)

Under the Securities Regulation Code (SRC), the SEC is responsible for regulating the securities
market.  It is a government agency under the administrative supervision of the Department of
Finance of the Republic of the Philippines.

Organization.    The SEC is headed by a Chairperson and four Commissioners who are all
appointed by the President of the Philippines for a term of 7 years each. (SRC, Section 4.1)

The Chairperson is chief executive officer of the SEC. The chairperson executes and
administers the policies, decisions, orders, and resolutions approved by SEC and have
general executive direction and supervision of the work and operation of the SEC, its
members, bodies, boards, offices, personnel, and all its administrative business. (SRC,
Section 4.3)

The SEC has five principal departments; each headed by a Director.  Its core function of
capital market regulation is performed by the Market Regulation Department, Corporation
Finance Department, and Investor Protection and Surveillance Department.  Its company
registration and enforcement functions are performed by the Company Registration and
Monitoring Department, and the Enforcement and Prosecution Department, respectively.

Power and Functions. Under Section 5 of the Securities Regulation Code (Republic Act
8799), the Commission shall have, among others, the following powers and functions: 

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,
advise Congress and other government agencies on all aspects 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 the rules, regulations and orders 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, regulations and orders;

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.
 CODE OF CONDUCT FOR SECURITIES BROKERS
To discharge the duties on the best interest of investors and other securities brokers, a code of
conduct has been prescribed for brokers in accordance with the statutory requirements. They
have been briefly summarized below:

1. A securities broker must honestly and promptly execute all orders for buying and selling
of securities of the best possible market price. He must make prompt payment to his
clients in the case of sales and prompt delivery in the case of purchases.

2. He should not discriminate small investors against big investors.

3. He must issue a contract note for all transactions as specified by the stock exchange
without any delay.

4. He must maintain complete secrecy of his client s personal investments and other
information of a confidential nature.

5. He should not induce or initiate purchases or sales just for the sake of his brokerage or
commission.

6. He should not give any false or misleading information with a view to encouraging
purchases or sales and thereby getting his commission.

7. He should not entertain those clients who have failed to carry out their commitments in
respect of securities with other stock brokers.

8. The capacity in which he is acting must be duly informed to his client. In other words, he
must disclose whether he is acting as a principal or as an agent. In all cases, he must give
top priority to his client’s interest.

9. He is not expected to render any investment advice except under those circumstances
which warrant it.

10. He must possess adequate infrastructure facilities and maintain proper staff to render
prompt, efficient and fair services to his clients.

11. He should not advertise his business publicly except when it is permitted by the stock
exchange.

12. He should not adopt any unfair practices with a view to attracting clients from other
brokers.

13. He should not knowingly and willfully deliver documents which constitute bad delivery.

14. He should not fail to submit the necessary returns to the stock exchange as and when
they have to be submitted as per the statutory regulations. These returns should not
contain any false or misleading information.

15. He must exercise reasonable care, diligence and skill in the discharge of his functions as
a broker.

16. He must maintain high standards of integrity and honesty, promptness and fairness in
the conduct of all his business.
17. Above all, he should not indulge in fraudulent or deceptive transactions or spread
rumours with a view to creating a false market and making personal gains.

18. He must maintain proper books of account, records and documents as required by the
various regulating authorities.

19. He must produce the above books and records for inspection whenever an inspection is
undertaken as per the provisions of exchange.