SECURITIES REGULATION CODE RA 8799

RA 8799 or the Securities Regulation Code (SRC) was enacted in July 19, 2000 to strengthen the
regulatory framework of the Philippine capital market and, in the process, help the country regain
market credibility and promote portfolio investments. The SRC replaced the Revised Securities Act of
1981 (RSA), and empowered the Securities and Exchange Commission (SEC) to curtail market abuses,
similar to the stock manipulation scandal involving the Best World Resources Corp. (BW) in 1999

Executive Summary RA 8799 or the Securities Regulation Code (SRC) was enacted in July 19, 2000 to
strengthen the regulatory framework of the Philippine capital market and, in the process, help the
country regain market credibility and promote portfolio investments. The SRC replaced the Revised
Securities Act of 1981 (RSA), and empowered the Securities and Exchange Commission (SEC) to curtail
market abuses, similar to the stock manipulation scandal involving the Best World Resources Corp. (BW)
in 1999. While the law's impact on portfolio inflows has yet to be seen, the SRC has already begun the
process of reducing the level of market risk perceived by investors and of recovering market credibility.
By strengthening the country's regulatory environment, investors are starting to become more
confident, and have started to maintain a guarded optimism in the market's prospects. The
improvement in the country's regulatory framework brought the SEC closer to greater compliance with
the "Objectives and Principles of Securities Regulation" (OPSR) developed by the International
Organization of Securities Commissions (lOSCO). Using the OPSR as benchmark, a joint World
Bank/International Monetary Fund mission assessed, in December, 2001, the quality of the country's
legal and regulatory framework for capital markets, and found it to be satisfactory. This assessment is
supported by the Asian Development Bank's (ADB) own assessment in October of the same year. The
SRC has strengthened the SEC, thus improving market and corporate governance. It allows the
Commission to make, amend, rescind or modify accounting rules to make it consistent with
Internationally Accepted Standards (lAS) of accounting.

Appendix 1: Comments on the Proposed Amendments to RA 8800 Almost two years after its enactment,
certain provisions of RA 8799 are already being recommended for amendment under, among others,
House Bill (HB) 2252, as proposed by the PSE. Although it may be too early to entertain amendments at
this point, it is nevertheless crucial that the points raised by HB 2253 be studied in order to ensure the
smooth and sustainable rebound of the Philippine capital market. After all, the bill notes that these
amendments are necessary to rectify the apparent weaknesses of RA 8799, which have allegedly stifled
the growth and development of the capital market. 1. 2. Mandatory tender-offer rules. Sec. 19.1 of RA
8799 mandates a person or a group of persons who intends to acquire at least 15% of any listed equity
security, to make a tender offer to the rest of the shareholders of the corporation, subject to certain
conditions. HB 2252 proposes to increase the threshold to 35%, in accordance with the Hong Kong
Tender Offer Code. The acceptance of this amendment would undermine the spirit of the tender offer
rule. ConSidering that, the average free float in the Philippine stock market ranges between 30% to 40%,
the amendment would make the provision almost inoperable. This is more glaring if we consider that
smaller companies, which are generally almost family-owned, have a free float of between 10% to 15%.
Hence, by raising the tender offer limit to 35%, minority shareholders rights would be further weakened,
to the prejudice of corporate governance . Free float refers to the amount of shares in the market,
which are not committed to any entity, and which are freely traded everyday. Although this should
theoreticaily equal the number of shares listed in the exchange, in most cases, certain entities would
buy a significant number of shares either for accounting or contRll purposes. In these cases, the shares
would then be taken out of the free float computation, as they would indefinitely not be available for
sale . Broker-director/dealer prohibition. HB 2252 hopes to liberalize the application of the broker-
director prohibition, by allowing the SRO, rather than the regulator, to implement the rule based on its
reading of the needs of the market during the time. The proposed amendments hope to repeal Sec. 34.1
of RA 8799, which imposes a broker-dealer prohibition. While the Philippine capital market is still in its
infancy, these proposed amendments seem more logical. The original provisions of the law seem to
overlook the inevitability of overlapping functions in the Philippine capital market and is thus. seen as
too limiting for a small emerging market. 3. Minimum capital requirement Sec.28.4 of the SRC has given
the SEC authority to promulgate rules pertaining to the minimum net capital requirement of brokers and
dealers. The proposed amendment to RA 8799 hopes to transfer the authority to mandate these
capitalization requirements to the respective SRO. and to allow the SRO to implement other fitting
capital adequacy requirements. This proposed amendment is consistent with the logic behind
converting capital market organizations into SROs. Approving this amendment at this time, could
however be counter productive, because until the PSE is fully deregulated, the old boys dub network
could effectively lobby for the easing of the capital adequacy requirements, which would greatly
undermine the stability of the PSE. Such stability is essential in the government's effort in regaining
market credibility. 4. Limitation on ownership and representation of brokers in an exchange. Sec. 33.2
(c) of the SRC prohibits a single person, entity, or aligned individuals or entities from Page 12 ... ...
controlling the exchange. However, the prohibITion of the law encompasses even those individuals who
belong to the same industry or business group (e.g. members of the same Chamber of Commerce and
Industry groups or other similar business clubs). HB 2252 hopes to amend the law by taking the latter
prohibition out. The amendatory bill hopes to repeal Sec-. 33.2 (I) of the SRC, which provides for the
representation of brokers in the board of the exchange based on volumelvalue of trade and paid up
capITal. The PSE believes that this rule is contrary to the provisions of the corporation code, which bases
the power of the shareholders on their number of shares. This amendment is seen as dangerous if
approved, as it would nearly codify the existence of the old boys club network. In as much as the
demutualization of the exchange equally divided the available shares of the PSE to the old brokers, the
latter would naturally control the corporation .

Understanding Asset-Backed Securities

Asset-backed securities are essentially pools of smaller assets held by various financial institutions, such
as banks, credit unions, and other lenders. Most of the assets are loans provided to individuals in the
form of mortgages, credit card debt, or auto loans. Since the loans provide the lender with interest and
principal payments, they are assets on the lender’s balance sheet.

However, the assets are often small and illiquid and cannot be sold to investors individually. Therefore,
financial institutions will pool multiple assets together through a process known as securitization. The
process results in new securities with a diversified risk profile, as each security only contains a fraction of
the total pool of underlying assets. The interest and principal payments on the assets are also passed on
to the investor, as well as the risk.

Summary

Asset-backed securities (ABS) finance pools of familiar asset types, such as auto loans, aircraft leases,
credit card receivables, mortgages, and business loans. In one way or another, these asset types
represent contractual obligations to pay.

These contractual obligations to pay often rank senior to a borrower’s traditional debt obligations,
reducing ABS investors’ exposure to the borrower’s financial health. ABS also have many other investor-
friendly features that may help protect against loss and improve liquidity, such as tranching of risk,
overcollateralization, and diversity of payers in each underlying pool. Despite these and other strengths
discussed in this report, some ABS and other forms of structured credit continue to offer higher yields
than similarly rated corporate or municipal bonds. ABS investors’ principal job is to analyze the cash
flows from these obligations to assess value and the possibility of loss, rather than relying solely on the
current market prices of hard assets, the reputation of a sponsor, or the presence of an investment-
grade rating.

During the 2008 global financial crisis (GFC), many investors experienced losses related to certain private
label residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS),
and MBS-backed collateralized debt obligations (CDOs). In the aftermath of the crisis, the structured
credit market underwent a painful yet necessary transformation as market participants returned to
sustainable underwriting practices. However, the asset class remains complicated. At Guggenheim, we
believe that identifying value and risk in ABS requires dedicated credit, trading, technology, and legal
resources supporting a disciplined investment process.

Report Highlights

 Securitization begins with the creation of a special purpose vehicle (SPV) that acquires a pool of
assets and simultaneously raises debt financing to fund the purchase of those assets through the
issuance of ABS.

 Assets backing a securitization must include contractual obligations to pay. Each asset features a
payer (borrower, lessee, insurer, etc.) and a contract (mortgage, lease, loan, account receivable,
etc.). A securitization typically pools contractual assets of the same type (auto loans, aircraft
leases, credit card receivables, corporate loans, etc.).

 ABS carry investor-friendly features intended to help protect against loss and improve liquidity,
including bankruptcy remoteness, prioritization of payments, overcollateralization, excess
spread, amortization, professional servicing, and diversity of payers within each underlying pool.

 Lenders, lessors, and specialty finance companies commonly turn to the structured credit
market for funding. Additionally, traditional corporate borrowers that receive payments under
contract may securitize those contracts as an alternative to issuing corporate debt, particularly
when the contracts are of higher credit quality. We illustrate such a situation with a case study.
  Successful investment in structured credit requires dedicated credit, trading, technology, and
legal resources, institutional knowledge, and a disciplined investment process.

Introduction to ABS

Too often, we find that reports on structured credit as an asset class rely on jargon, anecdotes,
inaccurate definitions, and generalizations. Our goal is to provide a coherent description that answers
the following fundamental questions: Why does securitization, the process that creates structured credit
investments, exist? How does structured credit differ from traditional corporate credit, mortgage
lending, or leasing? What distinguishes a “securitizable” asset from other assets such as real estate,
guarantees, or equity interests? How are common features of structured credit intended to help protect
debt investors? What roles do originators and servicers play? What are the benefits to the borrower?
Asset-backed securities are complex investments and not suitable for all investors because these
instruments are subject to many risks, including credit, liquidity, interest rate, and valuation risk 1. We
present this primer on securitized credit with the hope that investors can approach the sector with
greater familiarity and perspective.

The Elephant in the Room

During the GFC, many investors experienced losses related to private label RMBS, CMBS, and MBS-
backed CDOs. This dislocation exposed investors who based their investment decisions primarily on
ratings, guarantees from monoline insurers, and a blind reliance on historical experience of the 2003–
2006 credit boom to anchor future performance expectations, especially in housing and commercial real
estate.

The illiquidity and credit losses investors experienced during this period led many to steer clear of the
sector. In the aftermath of the GFC, however, the structured credit market underwent a painful yet
necessary transformation: Market participants, including investors, issuers, arrangers, and rating
agencies, returned to sustainable credit underwriting. Diverse, appropriately capitalized, cautious buyers
stepped into the vacuum created by the disorderly departure of overly levered, correlated investors,
thereby improving market liquidity and stability.

Despite these developments, losses and volatility always have the potential to return to certain corners
of structured credit. Structured credit was not immune from downward ratings drift during the early
stages of the COVID-19 pandemic, similar to what was experienced across other asset classes. However,
structured credit in aggregate realized lower default rates in 2020 than corporate credit peers and their
own historical averages. For example, CLOs did not experience a single default during all of 2020, and
only five in 2021, according to S&P. This compares favorably to the high-yield bond market, which
recorded default rates as high as 9 percent in August 2020, and the leveraged loan market, which
recorded a default rate of 4.2 percent in September 2020.

Identifying which specific ABS types, structures, and securities may experience a dislocation requires
dedicated credit, trading, technology, legal resources, and a disciplined investment process.
Securitization Act of 2004

Article I

General Provisions

Section 1

Short Title. —

This Act shall be known as "The Securitization Act of 2004."

Section 2

Declaration of Policy. —

It is the policy of the State to promote the development of the capital market by supporting
securitization, by providing a legal and regulatory framework for securitization and by creating a
favorable market environment for a range of asset-backed securities. For this purpose, the State shall
rationalize the rules, regulations, and laws that impact upon the securitization process, particularly on
matters of taxation and sale of real estate on installment. Furthermore, the State shall pursue the
development of a secondary market, particularly for residential mortgage-backed securities and other
housing-related financial instruments, as essential to its goal of generating investment and accelerating
the growth of the housing finance sector, especially for socialized and low-income housing. The State
shall likewise pursue the development of a secondary market for other types of asset-backed securities
(ABS).

Section 3

Definition of Terms. —

For purposes of this Act, the term:

a. "Securitization" means the process by which assets are sold on a without recourse basis by the
Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS) by the
SPE which depend, for their payment, on the cash flow from the assets so sold and in
accordance with the Plan.

b. "Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the repayment of
which shall be derived from the cash flow of the assets in accordance with the Plan.

c. "Assets", whether used alone or in the term "Asset-backed securities," refer to loans or
receivables or other similar financial assets with an expected cash payment stream. The term
"Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt
instruments: Provided, That receivables that are to arise in the future and other receivables of
similar nature shall be subject to approval by the Securities and Exchange Commission (SEC) or
the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the term
"Assets" shall exclude receivables from future expectation of revenues by government, national
or local, arising from royalties, fees or imposts.

d. "Asset Pool" means the group of identified, homogeneous assets underlying the ABS.
 e. "Commission" refers to the Securities and Exchange Commission (SEC).

f. "Credit Enhancement" means any legally enforceable scheme intended to improve the
marketability of the ABS and increase the probability that the holders of the ABS receive
payment of amounts due them under the ABS in accordance with the Plan.

g. "Originator" means the person or entity which was the original obligee of the Assets, such as a
financial institution that grants a loan or a corporation in the books of which the Assets were
created in accordance with the Plan.

h. "Plan" means the plan for securitization as approved by the Commission.

i. "Secondary Mortgage Institution (SMI)" means an entity created for the purpose of enhancing a
secondary market for residential mortgages and housing-related ABS.

j. "Seller" means the person or entity which conveys to the SPE the Assets forming the Asset Pool
in accordance with the Plan. In most instances, the Seller may itself be the Originator.

k. "Servicer" refers to the entity designated by the SPE to collect and record payments received on
the assets, to remit such collections to the SPE, and perform such other services as may be
specifically required by the SPE, excluding asset management or administration.

l. "Special Purpose Entity (SPE)" means either a Special Purpose Corporation (SPC) or a Special
Purpose Trust (SPT).

m. "Special Purpose Corporation (SPC)" refers to a juridical person created in accordance with the
Corporation Code of the Philippines solely for the purpose of securitization and to which the
Seller makes a true and absolute sale of assets.

n. "Special Purpose Trust (SPT)" means a trust administered by an entity duly licensed to perform
trust functions under the General Banking Law, and created solely for the purpose of
securitization and to which the Seller makes a true and absolute sale of assets.

Section 4

Declaration of Principles. —

The Commission shall exercise the powers provided for in this Act in consonance with the principles of
full disclosure, transparency and accountability. The Commission shall include in its annual report the list
of SPEs with the corresponding types and amounts of assets securitized.

Article II

Special Purpose Entity

Section 5

Special Purpose Entity (SPE). —

The SPE in the form of an SPC shall be a stock corporation established in accordance with the
Corporation Code of the Philippines and the rules promulgated by the Commission solely for the
purpose of securitization and registered as such with the Commission. An SPE constituted as an SPT shall
be a trust administered by an entity duly licensed to perform trust functions under the General Banking
Law and need not be registered as such with the Commission. In any event, the SPE, whether in the form
of an SPT or SPC, shall be solely organized and operated for purposes of securitization in accordance
with this Act. The Commission and the BSP shall, from time to time, determine the required
capitalization for the SPCs and SPTs, respectively.

Section 6

Approval of the Plan. —

After the establishment of an SPE pursuant to Section 5 hereof, the proposed Plan shall be submitted to
the Commission for approval, which shall include the following:

a. The nature and mechanics of the sale of assets from the Seller to the SPE, including the terms,
conditions and circumstances specified in the Plan, wherein the assets may be reverted to the
Seller;

b. The credit enhancements or liquidity supports for the ABS which may be provided in the
following manner:

i. standby letter of credit issued by a commercial bank or universal bank other than the
trustee bank or the Originator or Seller or its subsidiary/affiliate, its parent company or
the parent company's subsidiary/affiliate;

ii. surety bond issued by any insurance company other than the Originator or Seller or its
subsidiary or affiliate, its parent company or the parent company's subsidiary or affiliate,
or the parent or subsidiary of the trustee bank;

iii. guarantee issued by any entity other than the Originator or Seller or its
subsidiary/affiliate, its parent company or the parent company's subsidiary/affiliate, or
the trustee bank or its parent or subsidiary;

iv. over-collateralization provided by the Seller wherein the assets conveyed to the SPC or
SPT exceed the amount of ABS to be issued;

v. subordinated securities issued by an SPE to any entity including those issued to the
Seller that are lower ranking, or junior to other obligations, and are paid after claims to
holders of senior securities are satisfied; and

vi. other credit enhancements as may be approved by the Commission.

c. The identities and qualifications of the Originator, Seller, Servicer, underwriter and dealer of the
ABS, and description of any compensation the issuer, seller or any underwriter has received or
will receive in the future in connection with the ABS;

d. The identity, qualifications and compensation of the trustee that will administer the assets
conveyed to the SPE for the benefit of the ABS holders which trustee shall not be related directly
or indirectly to the Originator or Seller;
 e. The aggregate principal amount of the value of ABS to be issued, the principal amount of each
class within the ABS, and the denominations which shall not be lower than Five thousand pesos
(P5,000.00) in which the ABS will be issued;

f. The structure of the ABS to be registered, including the structure and payment priorities of each
class of certificate within the ABS, anticipated payments and yields for each class, and the
circumstances under which the ABS may be redeemed or retired;

g. A full description of the assets contained, or to be contained, in the asset pool supporting the
ABS;

h. The rating agency/agencies for the ABS, the criteria used or to be used to rate the ABS, and any
limitation, qualifications or material risks not addressed by the rating agency/agencies;

i. A full description of how the issuer will collect and maintain remittances from the assets
pending distribution to holders of the ABS, including the issuer's investment policies and the
identity of the issuer's investment advisor, if any;

j. The plan for the management and administration of the assets, asset pool and the ABS,
including the disposition of the foreclosed properties, if any; and

k. The manner of disposal of any residual value or asset with the SPE after all obligations to holders
of ABS shall have been settled.

Section 7

Registration of Asset-Backed Securities (ABS). —

All ABS shall be registered with the Commission in accordance with Sections 8 and 12 of the Securities
Regulation Code and its implementing rules and regulations: Provided, however, That issuers of ABS
falling under Sections 9 and 10 thereof shall be required to file with the Commission, a notice, with a
disclosure statement.

Section 8

Approval. —

The Commission shall issue to an SPC or SPT the corresponding order and permit to sell ABS only after
compliance with all the registration requirements and the approval of the Plan by the Commission.

Section 9

Originator is a Bank; Special Purpose Trust. —

In case the originator of the assets is a bank or any other financial intermediary which under special laws
is subject to the supervision of the BSP, or an entity directly related to said bank or other financial
intermediary, or in the event the SPE is constituted in the form of an SPT, and endorsement by the BSP
of the Plan shall be required before its approval by the Commission.

Section 10

Powers of the SPE. —

Each SPE shall have the power to:

a. Accept the sale or transfer of assets;

b. Issue and offer the ABS for sale to investors;

c. Undertake on its own or through contracts with any person, such activities as contained in the
approved Plan;

d. Create any indebtedness or encumbrances to defray administrative or other necessary expenses

as specified in the Plan; and

e. Pay out or invest its funds in accordance with the Plan or as approved by the Commission.

Section 11

Restriction. —

The SPE shall not undertake any activity other than that contained in the approved Plan except upon a
written approval of the Commission and the written consent of the holders of the ABS representing at
least two-thirds (2/3) of the outstanding among of the ABS: Provided, That in case the originator of the
assets is a bank or any other financial intermediary which under special laws is subject to the supervision
of the BSP, or an entity directly or indirectly related to said bank or other financial intermediary, or in
the event the SPE is constituted in the form of an SPT, prior endorsement by the BSP is necessary.

Section 12

Transfer of Assets and Security. —

The transfer of the assets from the Originator or Seller to the SPE shall be deemed to be a "true sale"
when it results in the following:

a. The transferred Assets are legally isolated and put beyond the reach of the Originator or Seller
and its creditors;

b. The transferee SPE has the right to pledge, mortgage or exchange those transferred Assets;

c. The transferor relinquishes effective control over the transferred assets;

d. The transfer shall be effected by either a sale, assignment or exchange, in any event on a
without recourse basis to the Originator or Seller;

e. The transferee shall have the right to profits and disposition with respect to the assets;

f. The transferor shall not have the right to recover the assets and the transferee shall not have
the right to reimbursement of the price or other consideration paid for the assets; and

g. The transferee shall undertake the risks associated with the assets. This shall not, however,
prevent the transferor from giving moral representations or warranties in respect of the assets
sold.

Section 13
Withdrawal of Registration. —

If the Commission finds that the Originator or Seller has undertaken the securitization so as to seek the
benefits of this Act without a true intention to carry it out, the Commission shall withdraw or cancel the
registration of the ABS and the registration of the SPE as issuer, and cause the dissolution of the SPC or
termination of the SPT. The Originator or Seller and as the case may be, the trustee, shall pay as fine an
amount equal to the taxes from which the SPE has been exempted plus a surcharge of twenty-five
percent (25%) of the face value of the ABS issued, without prejudice to the penalties under this law and
the National Internal Revenue Code of 1997.

Section 14

Inheritance and Donor's Tax Evasion. —

It shall be unlawful for any person, whether or not in contemplation of death, to cause directly or
indirectly, the issuance, for the benefit of another or others, of ABS and avail of the tax incentives
granted by this Act for the purpose of evading the payment of donor's or estate taxes.

Section 15

Dissolution of the Special Purpose Entity (SPE). —

The SPE shall be dissolved in the following cases:

a. It fails to accept the transfer of assets or issue ABS to investors within six (6) months from the
date of approval of the Plan unless extended by the Commission;

b. Holders of at least two thirds (2/3) of the total amount of its ABS still outstanding have resolved
to dissolve the SPE and the approval of the Commission has been obtained; in case the
Originator of the assets is a bank or any other financial intermediary which under special laws, is
subject to the supervision of the BSP, or an entity directly or indirectly related to said bank or
other financial intermediary, or in the event the SPE is constituted in the form of an SPT, an
endorsement by the BSP shall be required prior to approval of the Commission;

c. Conditions for dissolution that are specified in the Plan occur; or

d. The Commission orders dissolution in accordance with Sections 13 and 19.

Section 16

Effects of Dissolution of SPE. —

The SPE and the registration of the ABS shall be terminated, cancelled or withdrawn in any of the cases
provided for under the last preceding section.

Section 17

Appointment of an Interim Representative. —

If the Commission finds that an SPE has no authorized representative to act on its behalf or such persons
cannot act for any reason resulting in the interruption of its activities pursuant to the approved Plan, the
Commission shall have the power to appoint any person or persons to act as interim representative for
the SPE. The interim representative shall have full and exclusive authority to implement the approved
Plan.

In the event of an appointment of replacement of an interim representative, the Commission shall post
the notice at the Commission's office and order its publication in at least two (2) newspapers of national
circulation.

Section 18

Delivery of Property and Records to Interim Representative. —

Where an interim representative has been appointed in accordance with Section 17:

a. The directors, officers, or any employees of the SPE shall take all appropriate steps to safeguard
the property and the benefits of the holders of the ABS of the SPE and shall deliver the property,
accounts, documents, and seals of the SPE to the interim representative; and

b. Any person who possess property or documents of the SPE shall notify the representative of
such possession.

Section 19

Failure to Continue Business. —

The Commission shall order the dissolution of an SPE upon a finding that the SPE cannot continue to
undertake its business, and shall proceed to liquidate the SPE in accordance with the Corporation Code.

Section 20

Power of Inspection. —

The Commission shall have the power to inspect or order the production of the records of the SPE.

Article III

The Servicer

Section 21

Duties. —

The Servicer shall perform its duties pursuant to the terms and conditions of the servicing agreement
and such other written instructions as the SPE, the trustee or its interim representative may issue on a
case-to-case basis. Collections made by the Servicer shall be remitted promptly to the SPE or as may be
agreed upon by the parties in the servicing agreement, but in no case shall the remittance period be
longer than one (1) month.

Section 22

Reports. —

The Servicer shall prepare periodic reports as may be required by the SPE, the trustee or its interim
representative within thirty (30) days, including reports of any borrower or obligor which fails to pay its
debt or obligation at maturity date or any adverse development that may affect the collectibility of any
loan account or receivable comprising the asset pool.

Section 23

Extent of Authority. —

The Servicer shall have such authority as is expressly stated in the servicing agreement and unless
otherwise specifically provided therein, such authority shall encompass the general powers of
administration. The Servicer shall have no authority to waive penalties and charges except with a written
authority from the Board of the SPE, the trustee or the interim representative, should one be appointed.

Section 24

Qualifications. —

The Servicer shall be a corporation duly incorporated under Philippine law, with a minimum authorized
capitalization of Ten million pesos (P10,000,000.00) or such higher amount as the Commission may
prescribe. It shall be independent of the SPC or the trustee and shall not share common ownership,
officer, or directors with the SPC or the trustee. The Originator or Seller may act as the Servicer as may
be approved by the Commission or the BSP, as the case may be.

Section 25

Standard of Conduct. —

The Servicer shall act with utmost good faith and shall perform its obligations under the servicing
agreement with the due diligence of a good father of a family.

Section 26

Penalties. —

Breach by the Servicer of its obligations arising from the failure to abide by the standard of conduct set
forth in the preceding section shall subject the Servicer to the penalty of revocation of its corporate
registration and a fine of not less than One million pesos (P1,000,000.00) and shall subject its officers
and employees responsible for such noncompliance with the standard of conduct referred to above, to a
penalty of imprisonment for not more than five (5) years and a fine of not less than One hundred
thousand pesos (P100,000.00). Breach arising from bad faith or gross negligence shall subject the
Servicer to revocation of its corporate registration and a fine of not less than Five million pesos
(P5,000,000.00) and shall subject the officers and employees responsible for such breach to a penalty of
imprisonment for not less than six (6) years and one (1) day up to a maximum of twenty (20) years and a
fine of not less than Five hundred thousand pesos (P500,000.00).

Article IV

Tax and Other Related Issues

Section 27

Income Taxation of Special Purpose Entity. —

The SPE in the form of an SPC shall be subject to income tax under Section 27(a), Chapter IV of the
National Internal Revenue Code of 1997. An SPE constituted as an SPT shall be subject to income tax in
accordance with the provisions of Section 61, Chapter X of the same Code.

Section 28

Transfer of Assets. —

The sale or transfer of assets to the SPE, which includes sale or transfer of any and all security interest
thereto, if made in accordance with the Plan shall be exempted from value-added tax (VAT) and
documentary stamp tax (DST), or any other taxes imposed in lieu thereof. Except for registration fees
with the Commission, all applicable registration and annotation fees to be paid, related or incidental to
the transfer of assets, or the security interest thereto, shall be fifty percent (50 percent) of the
applicable registration and annotation fees.

The transfer of assets by dation in payment (dacion en pago) by the obligor in favor of an SPE shall not
be subject to capital gains tax as provided under Section 27(d)(5) of the National Internal Revenue Code
of 1997.

Section 29

Issuance and Transfer of Securities. —

The original issuance of ABS and other securities related solely to such securitization transaction, such
as, but not limited to, seller's equity, subordinated debt instruments purchased by the originator, and
other related forms of credit enhancement shall be exempt from VAT, or any other taxes imposed in lieu
thereof, but subject to DST. All secondary trades and subsequent transfers of ABS, including all forms of
credit enhancement in such instruments, shall be exempt from DST and VAT, or any other taxes imposed
in lieu thereof.

Section 30

Non-Classification of SPE as a Bank, Quasi-Bank or Financial Intermediary. —

The SPE, created pursuant to a Plan, shall not be classified as a bank, quasi-bank or financial
intermediary under the provisions of the New Central Bank Act, the General Banking Law and the
National Internal Revenue Code of 1997, and shall not be subject to the gross receipts tax (GRT) or any
other tax imposed in lieu thereof.

Section 31

Securities not to be Categorized as Deposit Substitutes. —

The ABS issued by an SPE pursuant to the Plan approved by the Commission shall not be considered as
deposit substitutes under the laws mentioned in Section 30 hereof: Provided, however, That for
purposes of taxation, the yield from the ABS shall be subject to a twenty percent (20%) final withholding
tax, except those held by tax-exempt investors.

Section 32

Re-transfer of Assets. —
Where the implementation of the Plan or the provisions of this Act requires or provides a transfer of the
assets and collateral back to the Originator or Seller, then the provisions of Section 28 shall apply to such
transfer.

Section 33

Incentives for Securitization. —

In order to promote the securitization of the mortgage and housing-related receivables of the
government housing agencies as may be determined by the Housing and Urban Development
Coordinating Council (HUDCC) and the Department of Finance (DOF), the yield or income of the investor
from any low-cost or socialized housing-related ABS shall be exempt from income tax.

Section 34

Waiver of Rights. —

For purposes of securitization pursuant to this Act, the buyer of real estate on installment payments
may agree to waive his rights under Republic Act No. 6552, the provision of Section 7 of the said Act
notwithstanding.

Article V

Secondary Mortgage Institution

Section 35

Registration of Secondary Mortgage Institution (SMI). —

An SMI, which shall be primarily responsible in providing liquidity mechanism to primary mortgage
lenders/holders as well as in developing a secondary market for mortgage and housing-related ABS,
shall also be registered with the Commission.

Section 36

Registration of Business and Operational Plan. —

The SMI shall also register its business and operational plan with the Commission and shall, as a
minimum, be subject to the same disclosure requirements as SPCs.

Section 37

Promulgation of Rules. —

The Commission, in consultation with the BSP and the Insurance Commission (IC), shall promulgate rules
regarding the ownership, organization, capitalization, and operation of the SMI.

In promulgating such rules, the Commission shall consider the size of the asset pools to be held by the
SMI, the amount of debt to be issued by it, the extent of its operation and the powers of the SMI
specified under this Act.
Section 38

Powers of the SMI. —

For purposes of securitization under this Act and pursuant to the Plan submitted to the Commission, the
SMI may perform any or all of the following:

a. Wholesale purchase of residential mortgages and housing-related contract receivables;

b. Buy and sell residential mortgage and housing-related ABS;

c. Provide loans to primary lending institutions against residential mortgages;

d. Issue housing-related ABS through an SPE, and issue bonds and other debt instruments;

e. Perform ancillary functions including, but not limited to, title insurance, through a subsidiary,
wholly or partially owned by an SMI, and loan servicing; and

f. Perform such other functions as the Commission may determine necessary to mobilize and
channel funds from the capital markets to the mortgage and housing finance sector.

Section 39

SMI Capitalization and Organizational Requirements. —

Any SMI established for the housing sector shall be a stock corporation and shall have a minimum initial
paid-up capital of Two billion pesos (P2,000,000,000.00): Provided, That the total obligations of the SMI,
including both actual and contingent obligations, shall not exceed fifteen (15) times its paid-up capital:
Provided, further, That the actual obligations of the SMI shall not exceed ten (10) times its paid-up
capital: Provided, furthermore, That the ratios indicated herein may be adjusted by the Commission
with the approval of the DOF and the BSP upon a showing that the conditions of the secondary and
primary markets and the financial viability of the SMI warrant such adjustments: Provided, finally, That
the investment of financial entities in the SMI shall be subjected to and be made to comply with the
rules and regulations of the appropriate regulatory agency.

Government financial institutions and government-owned or -controlled corporations, may collectively

hold and own up to a maximum of thirty percent (30%) of the SMI's capital: Provided, That such
investment does not conflict with their existing charters.

A government financial institution may invest up to a maximum of ten percent (10%) of its total
investible funds in housing-related assets or five percent (5%) in non-housing related assets: Provided,
That such investment does not exceed five percent (5%) of the total amount of each ABS issue.

Within ten (10) years of its incorporation, the SMI shall offer and list at least twenty percent (20%) of its
common shares in the stock exchange, which period shall be extendible only upon approval of the
Commission in instances where the lack of financial viability of the SMI warrants such extension.

Section 40

Prohibited Activities of the SMI. —

The SMI shall be prohibited from:

 a. Originating or financing individual mortgage loans;

b. Providing loans to other parties engaged in a business other than that approved in the Plan
submitted to the Commission; and

c. Providing capital equity to other companies.

Section 41

Extension of Benefits to the SMI. —

The benefits provided to the transactions entered into by the SPCs under Sections 28 to 33 of this Act
shall also be granted to the same transactions entered into by the SMIs for purposes of securitization in
accordance with the provisions of this Act.

Section 42

Dissolution of the SMI. —

The Commission shall order the dissolution and liquidation of the SMI upon a finding that it:

a. Cannot continue to undertake its business; or

b. Is not operating actively; or

c. Is engaging in activities that conflict with its objectives as an SMI; or

d. Has fulfilled a condition for dissolution specified in its Articles of Incorporation.

Article VI

Rating System

Section 43

Rating of ABS. —

No ABS shall be issued unless such ABS has been rated by a duly accredited credit rating agency.

Section 44

Credit Rating Agency. —

Every credit rating agency which now exists or which may hereafter be formed shall be subject to the
provisions of this Act.

Section 45

Accreditation of Credit Rating Agency. —

No credit rating agency shall commence rate-making operations pursuant to this Act until it shall have
obtained an accreditation from the Commission under such rules and regulations as the Commission
may deem appropriate.

Section 46
Examination of Credit Rating Agencies. —

Credit rating agencies shall be subject to examination by the Commission as the latter may deem
warranted: Provided, That the Commission shall conduct an examination of the credit rating agencies at
least once every three (3) years.

Section 47

Noncompliance of Accredited Rating Agencies. —

The Commission may suspend or revoke the accreditation given to any credit rating agency which fails to
comply with the Commission's lawful order within the time limited by such order, or any extension
thereof which the Commission may grant.

Article VII

Penal Provisions

Section 48

Penalties. —

Any person who violates any of the provisions of this Act, or the rules and regulations promulgated by
the Commission under authority hereof, or any person who, in a registration statement, notice, or Plan
filed under this Act, makes any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not misleading, shall, upon
conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million
pesos (P5,000,000.00) or imprisonment of not less than six (6) years and one (1) day nor more than
twenty-one (21) years, or both in the discretion of the court. If the offender is a corporation, partnership
or association or other juridical entity, the penalty may in the discretion of the court be imposed upon
such juridical entity and upon the officer or officers of the corporation, partnership, association or entity
responsible for the violation, and if such officer is an alien, he shall in addition to the penalties
prescribed, be deported without further proceedings after service of sentence.

Article VIII

Miscellaneous Provisions

Section 49

Implementing Rules and Regulations (IRR). —

The Commission, in coordination with the BSP, DOF and the IC, shall promulgate the implementing rules
and regulations which shall be submitted to the Congressional Oversight Committee which shall review,
revise and approve the same: Provided, That the Commission, BSP, DOF and the IC may continue to
issue separate regulations that will apply exclusively to the institutions under their respective
jurisdiction, consistent with the IRR as approved by the Congressional Oversight Committee.

Section 50

Congressional Oversight Committee. —

There is hereby created a Congressional Oversight Committee composed of seven (7) members from the
Senate and seven (7) members from the House of Representatives. The members from the Senate shall
be appointed by the Senate President with at least two (2) Senators representing the Minority. The
members from the House of Representatives shall also be appointed by the Speaker with at least two (2)
members representing the Minority. After the Oversight Committee has approved the IRR, it shall
thereafter become functus officio, and therefore cease to exist.

Section 51

Repealing Clause. —

All laws, executive orders, rules and regulations, and parts thereof which are inconsistent with this Act
are hereby repealed or amended accordingly.

Section 52

Separability Clause. —

If for any reason any article or provision of this Act or any portion thereof or application of such article,
provision, or portion thereof to any person, group, or circumstance is declared invalid or
unconstitutional, the remainder of this Act shall not be affected by such decision.

Section 53

Effectivity Clause. —

This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at
least two (2) newspapers of general circulation, whichever comes earlier.

What is a Real Estate Investment Trust (REIT)?

Under the Republic Act No. 9856 or the Real Estate Investment Trust (REIT) Act of 2009:

Real Estate Investment Trust or REIT is a stock corporation established in accordance with
the Corporation Code of the Philippines and the rules and regulations promulgated by the Commission
principally for the purpose of owning income-generating real estate assets. 

The Real Estate Investment Trust (REIT) Act of 2009 aims to promote the development of the capital
market, democratize wealth by broadening the participation of Filipinos in the ownership of real estate
in the Philippines, use the capital market as an instrument to help finance and develop infrastructure
projects, and protect the investing public by providing an enabling regulatory framework and
environment under which real estate investment trusts, through certain incentives granted.

Investment in the REIT shall be by way of subscription to or purchase of shares of stock of the REIT. A
REIT must distribute annually at least ninety percent (90%) of its distributable income as dividends to its
shareholders not later than the last day of the fifth (5 th) month following the close of the fiscal year of
the REIT. The dividends shall be payable only from out of the unrestricted retained earnings of the REIT.
The percentage of dividends received by the public shareholders to the total dividends distributed by
the REIT from out of its distributable income must not be less than such percentage of their aggregate
ownership of the total outstanding shares of the REIT. Any structure, arrangement or provision which
would have the effect of diminishing or circumventing in any form of the entitlement to dividends shall
be void and of no force and effect. Distributable income excludes proceeds from the sale of the REIT’s
assets that are re – invested by the REIT within one (1) year from the date of the sale.

As to taxes, a REIT shall be subject to income tax on its taxable net income. Income payments to a REIT
shall be subject to a lower creditable withholding tax of one percent (1%). The sale or transfer of real
property to REITs, which includes the sale or transfer of any and all security interest thereto, shall be
subject to fifty percent (50%) of the applicable Documentary Stamp Tax (DST) imposed under the tax
code. The incentives granted under the law can be availed of by an unlisted REIT, provided it is listed
with an Exchange not later than two (2) years from the date of the initial availment of the incentives.

Cash or property dividends paid by a REIT shall be subject to a final tax of ten percent (10%), unless: (a)
the dividends are received by a nonresident alien individual or a nonresident foreign corporation
entitled to claim a preferential withholding tax rate of less than ten percent (10%) pursuant to an
applicable tax treaty; or (b) the dividends are received by a domestic corporation or resident foreign
corporation, or an overseas Filipino investor in which case, they are exempt from income tax or any
withholding tax: Provided, That in the case of overseas Filipino investors, they are exempt from the
dividends tax for seven (7) years from the effectivity of the tax regulations implementing the Act.

[REPUBLIC ACT NO. 8366]

AN ACT LIBERALIZING THE PHILIPPINE INVESTMENT HOUSE INDUSTRY, AMENDING CERTAIN SECTIONS
OF PRESIDENTIAL DECREE NO. 129, AS AMENDED, OTHERWISE KNOWN AS THE INVESTMENT HOUSES
LAW

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

SECTION 1. Declaration of Policy. – It is the policy of the State to expand and strengthen the capital base
of the economy in order to ensure sustained economic growth and development. Toward this end, the
Philippine investment house industry is hereby liberalized, increasing foreign equity participation and
raising the minimum capitalization of investment houses to enable them to meet the present and future
demands of the market.

SEC. 2. Section 5 of Presidential Decree No. 129, as amended, otherwise known as the Investment
Houses Law, is hereby further amended, to read as follows:

“SEC. 5. Citizenship requirements. – At least forty percent (40%) of the voting stock of any Investment
House shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned
voting stocks in Investment Houses, the basis for the computation shall be the citizenship of each
stockholder, and, if the stockholder is a corporation, the citizenship of the individual stockholders
holding voting shares in that corporation. In approving foreign equity applications in Investment Houses,
the Securities and Exchange Commission shall approve such applications only if the same or similar
rights are enjoyed by Philippine nationals in the applicant’s country.
“Foreign nationals may become members of the board of directors to the extent of the foreign
participation in the equity of said enterprise.”

SEC. 3. Section 8 of the same Decree is hereby amended to read as follows:

“SEC. 8. Capital requirements. – In the case of newly-organized Investment Houses, the minimum paid-in
capital shall be Three hundred million pesos (P300,000,000). The minimum paid-in capital of the existing
Investment Houses shall be Three hundred million pesos (P300,000,000) to be built up in two (2) years
after the effectivity of this Act in the following manner: Two hundred million pesos (P200,000,000) after
the effectivity of this Act and an additional Fifty million pesos (P50,000,000) for every year thereafter
until the minimum capitalization is attained. The Monetary Board may prescribe a higher minimum
capitalization in order to promote and ensure the stability of the Philippine capital market and the
competitiveness of the investment house industry in line with the national economic goals. The
Monetary Board shall, within six (6) months, prescribe a risk assets to capital ratio and other capital
adequacy ratios in order to provide broader protection to the investing public.”

SEC. 4. This Act shall take effect fifteen (15) days from its publication in a newspaper of general
circulation.