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 socially‐conscious 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 SEC’s jurisdiction under Section 5 of PD No. 902‐A (intra‐corporate 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 profit‐making
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 non‐proprietary 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, asset‐backed securities
4. Derivatives – options and warrants
5.
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 non‐registration?
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.
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. Broker’s transactions executed upon the customer’s 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 issuer’s:
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 by‐laws 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 account’s 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 broker‐principal 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 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.
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 self‐regulatory
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 non‐public”?

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)
3.
 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).