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SPECIAL LAWS

January 23, 2014

Today we will take up PD 902-A. It is known as the REORGANIZATION decree.

It even antedated the corporation code. It was passed earlier than the
corporation code.

It reorganized the SEC. It placed the SEC under the jurisdiction or oversight
of the Presidents office. Now, it has been brought back by executive order to
the Secretary of Finance.

What is more, the jurisdiction of the SEC over cases listed under section 5
has been transferred to the regular courts (special Sala of the court that is
designated as having jurisdiction over Intracorporate cases). Now, there is a
new ruling as to intracorporate cases.

Philippine overseas telecommunication operations vsAfrica 700 SCRA 453

(2013)

It is settled that there is an intra-corporate controversy when the dispute

involves any of the following relationships, to wit:

(a) between the corporation, partnership or association and the public;

(b) between the corporation, partnership or association and the State in so

far as its franchise, permit or license to operate is concerned;

(c) between the corporation, partnership or association and its stockholders,

partners, members or officers; and

(d) among the stockholders, partners or associates themselves.

But you have to prove, you have to add the proviso that in these instances,
the law that is used to solve the dispute must be the corporation code or the
SEC law. Because if the law to be used is some other law, then it is not an
intracorporate dispute.

It must still be under the jurisdiction of RTC but not the intracorporate court.
In other words, pagfilemadalanasa ordinary raffling but if it intracorporate,
only one sala will handle it.

So what happens if the clerk of court makes a wrong assessment? It is in fact

an intracorporate but he places it in a different sala other than the
designated intracoporatesala. What is the effect? Supposed the judge makes
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a decision. Is that decision valid? It is my submission that the decision is licit,

nonlicit (anasi father licit taposananapudxanonlicit) but valid.

Why? Because it still the same court only wrong sala.

The court has jurisdiction. The law states that the Supreme Court shall
designate the sala. Remember: Is it the court or the law that grants
jurisdiction? It is the law.The SC only designates the particular Sala. That
requires clear inkling of remedial law.

Alright, what are these cases in Section 5 that are now transferred by the
SEC RA 8799 specifically section 5.2 from the SEC to regular courts:

a) Devices or schemes employed by or any acts, of the board of

directors, business associates, its officers or partnership, amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission.

Short hand term for this: devices and schemes

What is the short hand term even for this: pyramiding scheme

When a particular business does not involve anything of commercial

value but there is a transaction of money that is a pyramiding scheme.

It operates this way: you place with us minimum 100,000 we will be

giving you an interest of 2% a month, you can collect it every month,
so annually you have 24%. Kinsa man makatuo in ana?
Pangutanunnimo, how are you able to pay this interest, they will
answer you, secret, you might imitate us. In other words, it is too good
to be true. If it is too good to be true, it must be false. 72/24 is 3 so
your money doubles in 3 months.

How do you differentiate pyramiding scheme or PONZI scheme ( as

known in the Western world from an Italian guy) from networking
(example is that of AVON)?

In networking, the system is direct selling. You yourself will sell the
product and from the proceeds is where you get the commission, if you
get somebody to sell the product, he will get a commission, you will
also get an overriding commission and so on, down the line.
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According to the opinion of the SEC, the difference between PONZI

scheme and networking is that, in networking, there is a thing of
commercial value or there is a service. Avon, kanangmgapintura,
those have value. Or herbalife, those with no approved therapeutic
claim.

Have you heard of Dokalternatibo? Announcer ran a xa, human

karonna doctor na..hismediecines are not covered by the BFAD. There
is supposed to be no therapeutic claim but then all their
advertisements claiming cure for ailments.

So if it is Amway, avon, herbalife, there is a thing of value. In Ponzi,

there is none. If there is Ponzi scheme, who has jurisdiction? It is the
special court. Now, you think that solves the problem, it does not.
Why? because there is another party who claims jurisdiction over this. I
know from experience, because right away, if you are engaged in
PONZI scheme you are engaged in money laundering, so the BSP
wants jurisdiction over this, the SEC will also say we have
administrative jurisdiction. So you have a class of jurisdiction. How do
you solve that? I still do not know how to solve that.

Normally, the BSP immediately comes in and wants to get all the
records.

b) Controversies arising out of intra-corporate or partnership relations,

between and among stockholders, members, or associates; between
any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the state
insofar as it concerns their individual franchise or right to exist as such
entity;

The Supreme Court adds, in the case of POTC vsAfrica, that

controversies in the corporate may include between such corporation,
partnership or association and the public.

So if a corporation is denied a certificate of incorporation. That is an

intracorporate dispute.
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If you file a complaint alleging that you have been unjustly denied and
therefore you filed a mandamus, you filed it before the regular courts,
the special intracorporate court. What is the madamus? An order
mandating the SEC to register you as a corporation.

I will just recite to you the grounds for the denial, cancellation or
suspension of a certificate of incorporation.

1. Fraud, in procuring its certificate of registration;

2. Serious misrepresentation as to what the corporation can do or is

doing to the prejudice of the general public;

3. Refusal to comply or defiance of a lawful order of the SEC

restraining the commission of acts which will amount to great
violation of its franchise;

4. Continuous inoperation for a period of at least 5 years;

5. Failure to file its bylaws within 1 month after receipt of the notice
of the issuance of the certificate of incorporation by the SEC

6. Failure to file required reports on appropriate forms as

determined by the SEC within the prescribed period.

c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnerships or associations.

Short hand for this: election controversies

That means stockholders, the stockholders elect the BOD. Or if

Nonstock/Nonprofit, it is the members who elect the BOT. so you
examine the voting. You make a review on the voting

If it is the appointment of officers by the BOD, you examine the actions of the
board. Remember I told you there is this list of cases that the NLRC cannot
intervene. You have been serving as treasurer but that is a board
appointment. After serving for 10 years, you are not reappointed. Can you
sue illegal dismissal? No you cannot because your position is provided in the
bylaws.
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The NLRC has no jurisdiction to look into the actions of the board.
Remember there are 2 exceptions:

1. Gregorio Aranta University vs CA long time faculty member appointed by

the board to become the vice president of the university.He has been
appointed every year for 10 years. At the 11 th year, he was not reappointed.
So he sues with the NLRC. SC said NLRC has jurisdiction because he has
security of tenure by virtue of being a professor. He was first an employee
so there is security of tenure, he got promoted through appointment. He can
still sue for illegal dismissal.

2. Insular life subdivision remember that head of security. He hasbeen

thehead of security for more than 10 years, and all of the sudden, the
association amends the bylaws to create a head of security asa position to
be apoointed by the Board. Once the amended bylaw is approved, the board
did not renew the appointment of head of security. Can he sue for illegal
dismissal? Yes. SC said that the amendment to the bylaws is malicious. It is
in bad faith. The tenure has already vested.

New decision

Zuellig freight vs NLRC 701 SCRA 561 (2013)

Zuellig filed a petition with SEC to change their articles and bylaws. After that
was approved, they called the workers. Bag o naning bylaws. Pang
resignnamo,tagaanmogkwarat. There was one who disagreed. The
corporation made that argument. This is what the SC said. The corporation
code defined and delineated the different modes of dissolving a corporation,
and amendment of the articles and bylaws was not one of those modes.

Is that correct? Amendment of the articles is not one of the modes? take a
look at section 120. Is it not that you can dissolve the corporation by
amending the term of the corporation? Sayopcla. They should have said. The
amendment of the articles to introduce a new name is not one of the modes.
But when you say amendment is not one of the mode, you are mistaken
because amending the term is a mode resulting in dissolution.

d) petition of corporations, partnerships and associations to be

declared in a state of suspension of payment in cases where the
corporation, partnership and association possesses sufficient assets to
cover for the liabilities but foresees the impossible of meeting them.

Shorthand term: suspension of payments

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They are now with the regular courts. Not just the regular courts, they
are now transferred not to the special intracorporate court but to the
FRIA court under the Financial Rehabiliation and Insolvency Act of
2010. That same law mandates that the SC designates a special sala
that can only entertain proceedings covered by the FRIA law. Such as
voluntary insolvency, involuntary solvency, liquidation, suspension of
payments.These now cover individual and juridical persons and all
other pre agreed proceedings. They must be field with the FRIA courts.

Watch out for devises and schemes, Ponzi schemes, intra-corporate disputes,
election controversies and suspension of payments of a corporation.

January 24, 2014, Part 1

SECURITIES REGULATION CODE

The SRC is classified as a Blue Sky Legislation. The intention of blue

sky legislation is the protection of the investing public from machinations and
fraudulent schemes perpetrated in the investment market which are often
reduced to nothing more than selling a few feet of the blue sky. That is why it
is called a blue sky law.

So the beneficiary is the investing public. There are many who say that
they are money public whether he likes it or not is really an investor because
indirectly you are putting your money and the banks that hold your money
are investing either in the money market or in the futures market. Example,
just by being a member of the SSS or GSIS you are really an investor of the
different kinds of markets. Why? Because the SSS has to invest the money
and they put it in the bank market or in the equities market according to
guidelines of the charter of the SSS or GSIS.
So when you say investing public, it is very broad. It is almost like the
public itself whether investing directly or indirectly, is the beneficiary of a
blue sky law, because you are an indirect participant of the investment
market.

What are the investment markets?

Basically they are classified into Equities and Credit Markets. Credit
markets are classified into two:
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1. Money markets, IOUs that have a term not exceeding one year and
bonds in excess of ___.

2. Futures market. Futures market that are agricultural in nature. They

are commodities market. (Rice, corn, oats..all sorts of grains). The
ones who issue the futures certificate undertake to sell a certain
no. of bushes (US) or tons (Europe) of grains at some future date at
a pre-agreed price regardless of the price of the commodity at
present.

The purpose of the commodities market, futures market is to hedge on

risk, to protect yourself against risk. If you are like Lucio Tan, who has
100,000 sows1 million pigs in his piggery. You will need a lot of grain to
feed them. And what happens when there is a spike in the price of grain? You
might not be able to afford it. That is why you buy a futures commodity
contract. Somebody will undertake to sell you at some future date.

Come that date, 6 months later, the actual price is higher than the
price that you pre-agreed, the latter would prevail. But if the price is lower
than that you have agreed upon, you will just tear that contract. You will not
make the issuer sell you at that price because the price in the open market is
lower. Gision nalng na nmu kay mamalit nalang ka sa gawas.

What is the purpose? It is not to raise capital. It is to prevent loss, to

manage risk. That is the purpose of that particular market. It is to help you
absorb the risk.

In the Equities market, You forgot to raise capital. You sell shares. In
exchange for the money of other people, you surrender a certain part of
control of your business. You let them in to your business. Now, if they get
the majority, they will displace you. You who are selling shares of stock. Now,
if you dont let them come in, you just cede part of your control (wa jud ko
kasabot). When you say part, you just need one share in order to exercise
the rights of a shareholder (such a right to inspection of your books). Now
how many business men enjoys people looking at their shoulders as they
conduct business? No one likes to do that. You are granting that right by
selling shares.
If you dont want to, you raise your own capital. How? Borrow from the
bank. What is that? Thats the credit market, thats not the equity. If your
cash flow is so fast that you can envision you can pay the money you borrow
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within one year, then you go to the money market. If not, then you go to the
bond market. There is this short term bond, medium term bond, and long
term bond.

1. Short term bonds- beyond 1 year up to 3 years

2. Medium term bonds- begin at 3 years 5years
3. Long term bonds begins at 5 years and onwards.

So it all depends on your cash flow. You might be surprised because

public companies announce that they are borrowing money in order to pay
bonds that are already maturing. Do you think that, that kind of statement
generates confidence? They are selling 10 billion worth of bonds, and yet the
analysts are saying that this 10 billion will be oversold. So they are prepared
to sell 15 billion instead of 10. What is the interest rate? The 5 year bond is
between 5-6%, The 10 year bond is between 6-7%, lower than what the
banks may charge.

Now, what is the purpose for going into the IOU(ambot) market? You
go to the credit market to raise capital without surrendering any of your
prerogatives as a businessman. In exchange for that, you pay interest. You
go to the equities market shares of stock, you get other peoples money
without paying interest. What do you pay? You pay dividends but you can
decide whether you will distribute dividends or not for as long as you are
within the law and the law says for as long as your unrestricted retained
earnings or your surplus profits does not exceed 100% of paid-up capital,
you can postpone the granting of dividends.

So that is the duty of equities market. You do not have to pay interest.
You are using other peoples money but you surrender in return part of the
control of the corporation because they have the right of a stockholder.

So there you have credit market, equities market, futures market.

Remember, the futures market is not only reserved for agriculture. There are
also futures market that are industrial wastes, the metals market, the price
of gold, copper, iron. Then you have futures market of currencies (forward
exchange contract). (story napud). All these markets are covered by the
Securities Regulated Code or RA 8799 which became effective in year 2000.
All those instruments issued or transacted, bonds, money market
instruments, shares of stocks, all those are securities and they are the
subject of coverage of the Securities Regulation Code.
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What is the basic policy with respect to the Securities market? The policy is
declared in section 2 of RA 8799:

Section 2. Declaration of State Policy. The State shall establish a socially

conscious, free market that regulates itself, encourage the widest
participation of ownership in enterprises, enhance the democratization of
wealth, promote the development of the capital market, protect investors,
ensure full and fair disclosure about securities, minimize if not totally
eliminate insider trading and other fraudulent or manipulative devices and
practices which create distortions in the free market. To achieve these ends,
this Securities Regulation Code is hereby enacted.

The State shall establish a socially, conscious, free market that

regulates itself. So, SRO is a policy which was not placed before under the
Revised Securities blab la. SRO is Self-Regulatory Organizations. The SEC
comes in only if the organization pains to correct itself. Example, Phil. Stock
Exchange. They have their own enforcement and surveillance department.

They are the first to cry out insider tradings supposed to be. They
investigate the irregularities in the trading. Only when they fail does the SEC
comes in because the SRC has this policy of Self-Regualtion. Again,
encourage the widest participation of ownership in enterprises. They
encourage Corporations to sell shares of stocks to the public to widen ways
of ownership. How do they do that? By reducing to the bare minimum the
capital gains tax.

If you sell or buy capital gains tax, what is the capital gains tax rate? If
above 100k 10%. If below, 5%. In the stock market it is only of 1%. That is
how they encourage you to sell shares of stocks in the stock market, because
the CGT is only of 1%.

In our Jurisdiction its really lower than that because, they are already
engaged in so called in Scriptless trading (double check lang sa term).
The cost of trading shares of stock has gone down because theres no more
paper. The evidences of trading are already electronic. So, wa nay stock
certificate, recording nalang, Electronic Signatures, etc. So The Capital gains
tax, the commission of the brokers is even lower, because the cost of the
transaction is very much lower, because its already digitalized. That is
SCRIPTLESS TRADING. That is the dream of the Phil. Stock Exchange, the
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emphasis is DREAM (haha). (story napud kay all big markets scriptless
trading na daw)

What else is the policy? enhance the democratization of wealth. You

know, that is the biggest controversy now in the Economic World Conference
in Switzerland. (story napud..50% of the wealth of the world is owned by 1%
of the population daw including me kay rich man mi..aw kamo tanan naa
lang mo so other 50% lol).Our constitutional and legislative thinking is that
the stock market can democratize wealth, can help spread the benefits of
wealth by broadening the stock ownership. And then, this law is envisioned
to promote the development of the capital market, protect investors, ensure
full and fair disclosure about securities. Again, there is this policy that with
disclosure, you prevent fraud.

Kung imung ipakita, iyagyag nimu sa kadaghanan, wala nay tikasan.

That is the premise behind it. To minimize if not totally eliminate insider
trading and other fraudulent or manipulative devices and practices which
create distortions in the free market. Those are the policies. Im giving this
to you because, there might be some examiners who will ask you an essay
question do you agree with the policy of disclosure mandated by Securities
Regulation Code?. So wala tay mahimu, magdiscuss ta ana. There is no
wrong or correct answer, but there is only an irrelevant answer.

Many businessmen do not tell the true status of their business. If you
are in the stock market, you are required to maintain a state of financial
records that is comparable to that of other jurisdiction so that there will be
more accurate records of income, surplus profits that you should share with
your stockholders. That is the idea behind disclosure. So make sure that you
have something to say about this policy. I am not joking ahhhh

Alright, let us go to the definition of Securities. The law does not

define securities. It gives examples of securities.

Section 3. Definition of Terms. - 3.1. "Securities" are shares, participation or

interests in a corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instruments, whether
written or electronic in character. It includes:

(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness,

asset-backed securities;
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(b) Investment contracts, certificates of interest or participation in a profit

sharing agreement, certifies of deposit for a future subscription;

(c) Fractional undivided interests in oil, gas or other mineral rights;

(d) Derivatives like option and warrants;

(e) Certificates of assignments, certificates of participation, trust certificates,

voting trust certificates or similar instruments

(f) Proprietary or nonproprietary membership certificates in corporations; and

(g) Other instruments as may in the future be determined by the

Commission.

In one bar examination, the question was asked. What is the Howie
Test? The Howie test was enunciated by the US Supreme Court in the
celebrated case of Securities and Exchange Commission vs. WJ Howie Inc. in
1946. The Securities Act in the US used an all embracing phrase to lump
together securities that were neither equities, nor notes nor bonds into that
particular phrase of investment contracts. So, the question is asked,

When is an investment contract a security?

In the Howie test, the SC said the following 4 elements must be
present:
1. There is an investment that is made.
2. There is a common enterprise between the investee and the
investor.
3. There is expectation of profit.

4. And this profit is to be derived through the essential management

efforts only of the investor.

How is this verified in the Howie test? It is verified in the following

manner:

Howie and Co. had a very big farm in Florida, raising oranges. Howie
decided to subdivided his farm into two hectare lots and each two hectare
lots were sold with the option that upon selling you can give it back to Howie,
let him handle it and you will just receive a portion of the profits of that farm,
the two hectares. If you decide, you can yourself work in the farm. But you
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can alsodecide to buy it and sign the papers turning it over to Howie. The
issue is, Howie did not register to the SEC before they began to subdivide
and sell it. Why? Because they say this is not a security. The SEC says it is. It
is an investment contract because:

a. There is an investment. Ang kwarta nga imu ghatag sa Howie

aron maka kuha ka anang 2 ha.
b. There is a common enterprise. Howie gets to handle it after
you bought it from Howie himself.
c. The investor is promised a share of the profits
d. The investor finally gets profits not because of his strenuous
work but the efforts of planting by Howie alone. So it is the
investors work that realized profits.
That is a security according to US Supreme Court. So 4 elements
makes an investment contract a security.

January 24, 2014, Part 2

What do you have to do before you can float a security or sell any securities,
whether it is shares of stock? The technical term is ISSUE. Before you can
issue a security, which means stock dividend is covered, you cannot issue a
stock dividend without registering with the SEC.

You have to undergo the particular process of issuing a security. Remember

that a security includes membership in a recreational club that entitles you
to playing rights without giving you access to the profits of the club itself or
any dividends or shares from the club itself. The club may be non-stock non-
profit but the membership is transferable for valuable consideration and
some members split it. They issue playing rights to another.

Of course, the naked owner could no longer play but they have separated
their playing rights and sell it to others. That is the security of the
membership. The club cannot issue it without registering it with the SEC. Can
a non stock non profit issue a security? Yes, they can issue a security. They
can issue playing rights. They can issue membership certificate. They can
issue bonds. So not only stock corporation can issue securities.

Another example, derivatives are securities. What are derivatives?

Derivatives are either __________ contracts, options, or warrants. These are
securities, the underlying asset of which is another security. It is security
because it is derive from another security.
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What is your right? Your right is you can buy 100 shares of PLDT at a price of
P2, 000. That is your right. How much do you have to pay for that right? You
only paid P1, 000 for the right to purchase 100 shares of PLDT. Suppose at
2015, the price of that PLDT shares is only P3,000, and you have the right to
purchase at P2,000. That option can be very expensive. That will not just be
P10 per share option but you only paid a fraction of the value. What is the
security? The security is the right to purchase another security. Mind you the
derivatives market is the biggest market in the world. The problem is it is
unregulated. How much is the value of the derivatives market in the world? It
is 600 Trillion USD. What is the size of the world's bonds market? It is 3 times
the size of equities market, it is about 150 Trillion USD. What is the size of all
the stock market in the world? It is only about 50 Trillion USD.

What is the procedure? How do you go about issuing?

1. You file in the SEC a so-called sworn REGISTRATION STATEMENT.

Please remember this terminology REGISTRATION STATEMENT. A registration

statement is sworn and verified. What does it contain? It must describe in
detail not only the security that is issued but the substantial facts that ought
to be known by the investor that is behind the security. The company, that is
issuing it, its capitalization, its purposes, plans, difficulties. You have to
outline it in the registration statement. You have to outline the biography of
all the key officers, board members.

Now if one of this board members is already convicted in another jurisdiction

of fraud and you did not disclose it, that you are guilty of submitting a
fraudulent sworn registration statement. That is a ground for nullifying it. So,
it must be completely honest.

I told you about the registration statement of PCCW ( Pacific Century Central
Works, Inc.), formed and organized in HK. They put down one of their key
officers is Richard Lee. They said having graduated from Stanford University
with a bachelors degree in Mechanical Engineering. He was not able to
graduate. He attended the entire 4 years but on the last 2 months even after
he took some of the final examinations, by the way he did not fail any of the
subjects, all of a sudden he said that he did not need a degree and he went
to Canada. (Story about engineering, accounting and calculus)

What are the so-called material facts that you have to be faithful to in the
registration statement? The material facts are such that would influence a
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reasonable mind of an investor in his decision whether or not to purchase the

security. That is the criterion.

If that particular fact that you don't disclose or that you falsify influences the
investor in his decision to invest or not, then you will be guilty of fraud. Let
us say instead of putting the date subscribed and sworn to this 23rd day of
January instead of 24th, nasayop ka ug butang didto, are you guilty of fraud?
Of course not, that is NOT MATERIAL as to whether or not the investor will
invest. Kung nasayop ka ug butang Sa edad sa chairman, 48, human iyang
edad jud kay 84. Subscribed and sworn to. Naa pa jud verification: That I am
the president of this company. That I caused the following so and so. That I
have read through the same. That all that is written here is true and correct
to the best of my personal knowledge.

Will you in vest in an undertaking or project of construction of a bridge and

the chairman is 84? Will you invest? It is MATERIAL. So I am telling you, you
might be given a problem. The date must influence a reasonable mind as to
whether or not to invest.

2. 45 days after the filing of the registration statement, what happens to the
security? The security is considered as effective unless the SEC returns the
registration statement as rejected. The SEC does not approve the registration
statement.

Why? Because it might be considered that the SEC is endorsing to the public
to buy the security. It merely becomes effective, which means that
subsequently if there are irregularities associated with the particular security
and it is later on discovered, the SEC can order the suspension or revocation
of the authority to sell this particular security that is covered by the
registration.

3. After 45 days lapsed and the security is considered effective, the issuer
can now engage in the production of prospectus. What is a prospectus? A
prospectus is a simplified form of advertisement of the security based on the
registration. The registration is the legal document. The prospectus is the
marketing document. It now contains pictures of the proposed project; it
now contains pictures of the men behind the project; and, it shows graphs,
etc. to illustrate in popular understanding the merits of the particular
security.

If you appreciably depart from the registration statement in you prospectus,

then the prospectus can also be cancelled by the order of the SEC.
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Subdivision, real estate company, unya ilang prospectus kay airline na. The
prospectus cannot appreciably depart from what is contained in the
registration statement.

What are the exceptions to the registration of securities rule?

1. Securities that are exempt need not be registered.

2. Securities that are subject of exempt transactions need not be
registered.

What are the securities that are exempt securities?

(a) 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.

If Davao City issues bond, Davao City need not register. It is exempt.
The government, every Monday, they auction treasury bills. The
treasury bills need not be registered.

(b) 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 Commission may require compliance
with the form and content for disclosures the Commission may
prescribe.

(c) Certificates issued by a receiver or by a trustee in bankruptcy duly

approved by the proper adjudicatory body.

(d) Any security or its derivatives the sale or transfer of which, by law,
is under the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.

(e) Any security issued by a bank except its own shares of stock.

Why can a bank issue securities without need of registration? Because

the bank cannot issue it without clearance and security of the BSP. So,
the public is already adequately protected by the oversight of the BSP.
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What is that exempt transactions?

(a) At any judicial sale, or sale by an executor, administrator, guardian or

receiver or trustee in insolvency or bankruptcy.

You might think that there is an estate, there is an executor. The estate
because the deceased owns certain securities, shares of stock and he
sells and therefore it is exempt. NO. That is not the security that we are
talking about. The executor precisely creates a security ti generate
funds to meet the expenses of the estate. When he issues a security
and sells it to the people who are investors, let us say a bank, so that
he can have cash to pay for the workers that are needed in
maintaining the estate, that is exempt. Why? Because the court must
look into the issuance of the security. It is the court that approves the
issuance of the security. There is already a scrutiny from the court.
That is why it is an exempt security.

(b) By or for the account of a pledge holder, or mortgagee or any of a pledge

lien holder selling of offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the provision of this Code, to
liquidate a bonafide debt, a security pledged in good faith as security for
such debt.

(c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner therefore, or by his representative for
the owners account, such sale or offer for sale or offer for sale, subscription
or delivery not being made in the course of repeated and successive
transaction of a like character by such owner, or on his account by such
representative and such owner or representative not being the underwriter of
such security.

(d) The distribution by a corporation actively engaged in the business

authorized by its articles of incorporation, of securities to its stockholders or
other security holders as a stock dividend or other distribution out of surplus.

Declaration of dividends and it covers only the existing stockholders of

a corporation that is not listed in the stock market. It is a close
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corporation. That is an exempt transaction. That is allowed without

registration.

(e) The sale of capital stock of a corporation to its own stockholders

exclusively, where no commission or other remuneration is paid or given
directly or indirectly in connection with the sale of such capital stock.

(f) The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, when the entire mortgage together with all the
bonds or notes secured thereby are sold to a single purchaser at a single
sale.

(g) The issue and delivery of any security in exchange for any other security
of the same issuer pursuant to a right of conversion entitling the holder of
the security surrendered in exchange to make such conversion: Provided,
That the security so surrendered has been registered under this Code or was,
when sold, exempt from the provision of this Code, and that the security
issued and delivered in exchange, if sold at the conversion price, would at
the time of such conversion fall within the class of securities entitled to
registration under this Code. Upon such conversion the par value of the
security surrendered in such exchange shall be deemed the price at which
the securities issued and delivered in such exchange are sold.

(h) Brokers transaction, executed upon customers orders, on any registered

Exchange or other trading market.

(i) Subscriptions for shares of the capitals stocks of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital
stocks under the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration 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 subscription 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 increase.

(j) The exchange of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
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(k) The sale of securities by an issuer to fewer than twenty (20) persons in
the Philippines during any twelve- month period.

(l) The sale of securities to any number of the following qualified buyers:

(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of
the Philippines or any political subdivision thereof or manage by a bank
or other persons authorized by the Bangko Sentral to engage in trust
functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as
qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial and
business matters, or amount of assets under management.

The transaction is considered as exempt mostly because there is already an

overseeing done by another agent or instrumentality of the government or
the public is not involved. It's already an existing group of investors.

What are the grounds for rejection of registration of securities?

Section 13. Rejection and Revocation of Registration of Securities. 13.1. The

Commission may reject a registration statement and refuse registration of
the security there-under, or revoke the affectivity of a registration statement
and the registration of the security there-under after the due notice and
hearing by issuing an order to such effect, setting forth its finding in respect
thereto, if it finds that:

(a) The issuer:

(i) Has been judicially declared insolvent;

(ii) Has violated any of the provision of this Code, the rules promulgate
pursuant thereto, or any order of the Commission of which the issuer
has notice in connection with the offering for which a registration
statement has been filed

(iii) Has been or is engaged or is about to engage in fraudulent

transactions; (example: pyramiding)

(iv) Has made any false or misleading representation of material facts

in any prospectus concerning the issuer or its securities;
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(v) Has failed to comply with any requirements that the Commission
may impose as a condition for registration of the security for which the
registration statement has been filed; or

(b) The registration statement is on its face incomplete or inaccurate in any

material respect or includes any untrue statements of a material fact
required to be stated therein or necessary to make the statement therein not
misleading; or

(c) The issuer, any officer, director or controlling person performing similar
functions, or any under writer has been convicted, by a competent judicial or
administrative body, upon plea of guilty, or otherwise, of an offense involving
moral turpitude and /or fraud or is enjoined or restrained by the Commission
or other competent or administrative body for violations of securities,
commodities, and other related laws.

These are the grounds either for rejection of the registration or revocation of
the registration of the security.

What are the consequences of the suspension of the registration of the

security?

1. The moment that there is an order for the suspension of the registration of
the security, the issuer, underwriter, dealer and broker is immediately
notified and no further offer or sale of any security shall be made.

2. Upon the issuance of an order of suspension, the SEC shall conduct a

hearing. What is the purpose of the hearing? The SEC determines that the
sale of the security shall be revoked and if it does, it shall issue an order
prohibiting the sale of such security.

Reportorial Requirements:

If it is a corporation that is listed in the stock market, or if it is a corporation

that has at least 50 Million in assets with 200 or more stockholders of which
100 stockholders own 100 shares then this corporation will be required:

a. Engaged an independent director;

b. Must comply with reportorial requirements.

What are these reportorial requirements?

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1. The moment there is a stockholder that is the owner of at least 5% of the

outstanding capital stock, the corporation must report to the SEC the
beneficial owner of the shares of stock. In other words, the titular ownership
reporting is not enough. There must be disclosure as to its beneficial
ownership.

2. When the person intends to acquire 15% or more of the equity shares of a
public company, pursuant to an agreement made between or among the
person and one or more sellers, then that person must make a tender offer.
He must inform them that he is willing to purchase 15% so that the other
stockholders will have the same chance to put the price the person is willing
to purchase. That is the protection of ______. Sa ato pa, the buyer cannot
just go to the stockholder and buy his shares, and if it is already 15%, you
cannot purchase it right away, he must make a tender offer: I am willing to
buy 15%. Kung daghan gani mo, proportionate. If you are 10% of the
outstanding capital stock, the 10% lang imong mapalit sa 15% na gusto nimu
so that the others can have the chance. That is the result of a tender offer.

3. If the person intends to acquire 30% or more of the equity shares of a

public company within a period of 12 months, he must also make a tender
offer.

4. If a person intends to acquire shares that would result into ownership of

more than 50% equity of the company, then he must make a GENERAL
OFFER not just a tender offer. He must make a general offer, which means all
the rest of you, I am willing to you at the price that I have bought the 50% of
the company.

These are TENDER OFFER RULES.

Proxy Rules

You know of course that a proxy cannot be denied in a stock corporation. You
cannot provide in your by- laws denying proxy voting. In the by- law, if there
is specific form of proxy, then that form must be followed. If there is no
requirement as to the form, then what is needed is that the proxy must be in
WRITING, it need NOT BE IN A PUBLIC INSTRUMENT.

The corporation's controlling owner cannot make a proxy solicitation unless it

circulates a PROXY STATEMENT. That is the rule. What is a proxy statement?
It is like a registration statement. It is a write up as to the project for which it
is requesting for proxy vote which will be taken up in a stockholders meeting.
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It must be a thorough description of the issuer. If it is n amendment, the

amendment must be fully explained. And, that is UNDER OATH.

If there is another faction in the corporation that is against that and would
like also to conduct a proxy campaign and solicit proxy vote, then the
corporation must grant access to the other faction as to its list of
stockholders, their addresses so that they can, at their own expense,
circulate their own proxy statement.

Key feature in a proxy statement is the opening sentence. The opening

sentence is a clear and an unambiguous declaration that they are asking for
your proxy, you MUST BE CLEAR. Suppose you just want to explain the
operations of the corporation, you must be clear that you are not asking for
proxy, you must state that this is an explanation of the operations of the
corporations, this is NOT A PROXY SOLICITATION because the law DOES NOT
FAVOR an IMPLIED PROXY SOLICITATION. You must come up with a proxy
statement that states clearly that you are soliciting proxy.

Who has jurisdiction over sufficiency and validity of a proxy? Is it the SEC or
the regular courts?

This issue was raised in the case of Winston Garcia v. Anthony Rosete,
Secretay of Manila Electric Company.

This happened during the annual meeting of MERALCO, when there was a
proxy hike between Garcia, the president and general manager of GSIS and
the Lopez controlling interest of MERALCO. You know MERALCO's ownership
and control was tenderously held by Lopez. Lopez had only very slightly
higher than 20% of MERALCO's outstanding capital stock. It aligns itself with
the electric power company in Spain that also had 15%. Together with that
they have also other proxies in the Philippines who sided with them. That is
why they always have the majority control and on that basis they were able
to install a boar according to their majority choice. You know Board meeting,
not all stockholders will be present. It's always about 80% are made up of
physically present or represented by proxy. If you have 45%, unsa mana, na
80% lang man jud ang present. Since there was hike for control because
originally there are certain people who want to take over the Lopez group
and Garcia was the solvent of this group that is why Garcia questioned the
proxy at that time. The problem is he raised the question during the day of
the meeting. The by-laws of MERALCO provided that your proxies must be
entered in the transfer book with the stock and transfer agent and the
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secretary of the corporation 1 month before the meeting, so also the

candidates to the BOD.

In the afternoon, he produced a TRO which was signed by just one of the
commissioners of the SEC. There is an issue as to the validity of the TRO
coming from the SEC signed only by one of the SEC commissioner. Later on,
Garcia defended that this one signature is the signature of the majority. Four
commissioners and one chairman. But the signature is equivalent to 3 since
he has the authorization of 2 more.

Can the SEC on the basis of the filing of the proxy question retrain the
corporation from conducting an election of the BOD?

The Rosete group and Lopez group position no different to me. Section 6 of
the Securities Regulation Code transferred the section 5 cases to regular
courts. According to Rosete, the SEC no longer has jurisdiction to stop the
election . Garcia's stand is that the SEC has jurisdiction because this is not
an issue of election, this is an issue of proxies. Garcia said that the SEC has
the sole and exclusive power to determine the sufficiency and validity of
proxies. So who is correct?

The SC said that it is true that the SEC has the sole and exclusive power to
determine the sufficiency and validity of proxies if the issue is just proxy.
However, when it comes to proxy in an election of BOD, the jurisdiction
shifts, it is now the regular courts. The TRO by the SEC is ultra vires, beyond
its powers. It cannot issue a TRO to stop an election on the basis of irregular
proxies or a thorough examination of the question of proxies.

To summarize the ruling, if the issue is JUST PROXIES AND NOTHING ELSE, it
is the SEC that will look into it and NOT the regular courts. If it is an
ELECTION AND THERE IS AN ISSUE OF PROXIES, the SEC is HANDS OFF and it
is already the REGULAR COURTS that will determine the sufficiency and
validity of proxies.

January 27, 2014, Part 1

Before we leave tender offer I would like to bring your attention to this,
_______v National Light Insurance Co. of the Phil. 529 S 355 (2007). Does the
ruling on mandatory tender offer apply when you do not actually file the
shares of stock of the traded company but you buy the shares of stocks of
the holding company of the corporation that is traded in this stock market.
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So there is no stock market transaction, let us say the stock in question is

MERALCO, and you buy the equivalent of 51 percent of Meralco securities
corporation, which owns the entire controlling shares of MERALCO, does that
require the buyer to make a general offer because he was purchasing in
effect 51% percent in effect of Meralco, that is the issue to said holdings and
the SC says YES.

Why? Because if the ruling were otherwise, that it is very easy for you to
escape the tender offer rule, by the mere rubric of creating a holding
company. So, that is the ruling, the provision in this Securities Regulation
Code should be amended or should be understood as whether or not n you
are buying this percentages in the corporation directly or indirectly because
it applies now even if you do not directly file it.

The tender offer rule must be made to all holders and class of shares to be
acquired when:

1. Any person or group of persons acting in concert intends to acquire 35%

or more of the equity shares of a public company directly or indirectly.

If you acquire 35% or directly or indirectly of the equity shares you must
make a tender offer, you announce to everybody that you acquiring 35%. For
those who are to sell they can sell it you, they are the ones who makes the
tender offer, the buyer makes the announcement that you are tendering the
offer at the price you can buy.

2. When any person or group of persons acting in concert intends to acquire

35% or more equity shares in a public company in one or more transactions
within a period of 12 months. The shortcut of that the language of business
is Creeping 35%. Creeping 35% acquisition within the period of 12 months.
What is the difference between kausa ka mukuha o mu creeping ka ug 12.
When you acquire 35%, kausa ra ka acquire but only one shareholder that
comes withinthey will right away ask a over an d above the price of
pemium, because when you obtain 35% you are right away a blocking
minority.

When will you become a blocking minority? When you have acquire 33.33%
of the OCS of the corporation because you need for the absolute control of
the corporation 66.66%, if you do not have 66.66 then you cannot pass
those 8 instances found in section 6 in the CC because you need 2/3 of the
OCS, voting and non voting shares included. You cannot amend if you dont
have 66.66 in you control.
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Now the best way to control that is to omit, if .manita kag proxy.. If you
just acquire 35% by bits over a 12 months period, you will need to acquire
more than 5% every month, that is very noticeable, hantud mu cgeg pamalit
people will begin to notice so musaka na ang presyo in the end you will still
pay the premium.

But the law The got wants to protect the minority SH to give them a chance,
because the purpose o the tender offer rule: to protect the interest the
minority of the SH of the target family ________that dilutes the shares it
provides the minority shareholders the opportunity to withdraw or exit the
company in reasonable terms, allow them to sell their shares than those of
the majority sh.

3. if the acquisition of even less than 35% would result in the ownership of
over 51% o of the total spending equity securities in company then the
purchaser must made a general offer of all the outstanding equity securities
for the remaining sh of the said company, that is not the general offer. if your
acquisition shares reaches 51% would result in the ownership 51% that
means you are now a majority, then you must make a general offer. The 49%
if they choose to sell to you, you must buy.

Why is it a problem? It s bad finance, if you try to control a corporation and

make it do generally by just a vote 51% why would you want to spend for the
49%. (story about using 20% of the clothes you have for the entire year).

Thats why you go back to the tender offer rule, if you purchase up to 51%
the law requires you to make a tender offer, palitun na nimu ang remaining
for their sake, you will give them a chance like the 51% to be about to exit
the company at a right price. You know Ramon Tan?

In his effort to take over Meralco, he bought about 27% of Meralco but
because he was lost to the powers like .it was very easy fpr him to arrange
that, and the tender offer did not apply because .% who are those who
sold to him GSIS, SSS, Land Bank, he was able to .in a very short time.
From then, his next move was to acquire, the lower which is around 23%
he would have then 50-51% but the offices did not want to sell it so he was
.at % what was his price?

At that time MERALCO was being traded at 60-65, his price was 90 pesos per
share payable in three years in three branches, what happened? After four
years MERALCO becomes 2070 300 so gamay an gang.than..investigated
by Congress..he paid for the.three years installment, .he tender offer
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rule..did it help? Without the help of the tender offer ruleand he was
laughing all the way to the bank.

When is a mandatory tender offer not applicable?

Section 20. Any purchase of shares from the unissued capital stock provided
that the acquisition will not result of a 50% or more ownership of shares by
the purchaser, so this is a question of pre emptive right it is not a question
not a buying of existing shares

Any purchase from an increase in an authorized capital stock, this is new

creation of shares not from existing unissued shares but from new creation
of shares, again this is approved by the existing SH, the first is approved as
a denial of pre emptive right the 2ned is approved as an amend of aoi, so the
existing sh has already waived their right.

Purchase in connection with foreclosure proceeding involving duly

constituted . for security arrangement where be a cessation is made by the
debtor or creditor, why is it not covered? Because the creditor is a whole
purchaser there is a bonded option of the share there is no one who will buy,
therefore the creditor is a forced buyer of the sharedoes not apply.

Purchase in connection corporate rehabilitation under court supervision. It is

mandated by the court. It is not a so-called market purchase, a purchase
necessitated by rehabilitation.

Merger or consolidations. Which may involve purchases of shares of stock in

excess of the 35% or 51% . lines of the securities and commission code,
here in merger and consolidations, remember the confirmatory vote of the
SH 2/3, so the SH themselves waived their right to tender offer by approving
merger or consolidations.

PROXIES

Proxy Solicitations.

20.1. Proxies must be issued and proxy solicitation must be made in

accordance with rules and regulations to be issued by the Commission;
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20.2. Proxies must be in writing, signed by the stockholder or his duly

authorized representative and filed before the scheduled meeting with the
corporate secretary. Or as provided by the by-laws

20.3. Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended. No proxy shall be valid and effective for a
period longer than five (5) years at one time.

It is only good for the meeting. The intention is not expansive but
contractive.

20.4. No broker or dealer shall give any proxy, consent or authorization, in

respect of any security carried for the account of a customer, to a person
other than the customer, without the express written authorization of such
customer.

Remember street certificates, katong kipalitan nimu, nipiramsa sa cos niya

pero ikaw wa pa nimu kiingnjan ang secretary , wa pa nimu pailisdi. Kikuptan
pa sa broker, nganuman, kay gasto pa man mubayad napud ka para
certificate. Gamitun na niya, magbinuang sya,I buy and sell niya, that is
worst than appointing a proxy. So you should give consent to the broker for
him to issue proxy for the shares of stocks. (kwento tatak sa sinehan)

20.5. A broker or dealer who holds or acquires the proxy for at least ten per
centum (10%) or such percentage as the Commission may prescribe of the
outstanding share of the issuer, shall submit a report identifying the
beneficial owner within ten (10) days after such acquisition, for its own
account or customer, to the issuer of the security, to the Exchange where the
security is traded and to the Commission.

The rule is 5%, if the broker obtains a security for a third party equivalent of
the 5% of the shares of stiock, the broker must disclose who the beneficial
owner is otherwise the name the one appears in the certificate of stock is
not presumed by the rule to be the owner that will benefit from the
transaction he is just the beneficial owner, the real owner still needs to be
disclosed.

What are the unlawful acts in the sale of .securities?

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23.3. It shall be unlawful for any such beneficial owner, director, or officer,
directly or indirectly, to sell any equity security of such issuer if the person
selling the security or his principal: (a) Does not own the security sold; or (b)
If owning the security, does not deliver it against such sale within twenty
(20) days thereafter, or does not within five (5) days after such sale deposit it
in the mails or other usual channels of transportation; but no person shall be
deemed to have violated this subsection if he proves that notwithstanding
the exercise of good faith he was unable to make such delivery or deposit
within such time, or that to do so would cause undue inconvenience or
expense.

So 20 days if you are a broker, and 5 days if you are principal of the broker.

24.1 It shall be unlawful for any person acting for himself or through a
dealer or broker, directly or indirectly:

a) To create a false or misleading appearance of active trading in any

listed security traded in an Exchange or any other trading market (hereafter
referred to purposes of this Chapter as Exchange):

(i) By effecting any transaction in such security which involves no change in

the beneficial ownership thereof;

(ii) By entering an order or orders for the purchase or sale of such security
with the knowledge that a simultaneous order or orders 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; or

(iii) By performing similar act where there is no change in beneficial

ownership.

How do you do that? Wash sale, what is that? A wash sale is a sale of
security wehn there is really no valid and true change of owner ship. You call
broker A, buy San Miguel at this price and you call broker B sell San Miguel at
this price, ikaw ran a ang nagtrade, muregister na didto, iut shows that as if
there is transaction because somebody is buying it. You are making a false
impression that the equity is actively trading.

Match Order this time you are two main actor, the buyer and the seller,
magsabot mung duha, after an hour ako na sad baligya kaw na pud palit, puli
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puli lang ta, it is a simulation to the market. (story about atong nag atik atik
sa tansan). The idea there is to simulate.

b) To effect, alone or with others, a series of transactions in securities

that:

(i) Raises their price to induce the purchase of a security, whether of the
same or a different class of the same issuer or of a controlling, controlled, or
commonly controlled company by others;

How do you do that? You spread rumors, how you spread rumors? The
effective way is to tell someone, they say ayaw saba that is the best way
to spread rumors.

(ii) Depresses their price to induce the sale of a security, whether of the
same or a different class, of the same issuer or of a controlling, controlled, or
commonly controlled company by others; or

(iii) Creates active trading to induce such a purchase or sale through

manipulative devices such as marking the close, painting the tape,
squeezing the float, hype and dump, boiler room operations and such other
similar devices.

Marking the close stock tables in the newspaper, that is the last price the
last transaction is made, paubos na ang price, so you purposely purchase
shares of stock in a closing time at a higher price than the actual price, you
are marking the close para pagka following day you can sell the share at
such price.

c) To circulate or disseminate information that the price of any security

listed in an Exchange will or is likely to rise or fall because of manipulative
market operations of any one or more persons conducted for the purpose of
raising or depressing the price of the security for the purpose of inducing the
purchase or sale of such security.

d) To make false or misleading statement with respect to any material

fact, which he knew or had reasonable ground to believe was so false or
misleading, for the purpose of inducing the purchase or sale of any security
listed or traded in an Exchange.
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e) To effect, either alone or others, any series of transactions for the

purchase and/or sale of any security traded in an Exchange for the purpose
of pegging, fixing or stabilizing the price of such security, unless otherwise
allowed by this Code or by rules of the Commission.

January 27, 2014, Part 2

WHAT IS AN INSIDER?

Who is an insider?

An insider is the issuer, or someone controlled by the issuer. A director officer

of the issuer or person controlling the issuer. A person whose relationship or
former relationship with the issuer gives him or her access to material
information about the issuer or the security.

An insider can also be a government employee or a director or officer of an

exchange, trading agency or self-regulatory organization and his position
gives him access to material information about the issuer or the security.

An issuer could be a person who learns such information by a communication

of any of the foregoing insiders.

So if you are a nobody and you receive information from an insider, you
become an insider.

If you have a wife, who does not know anything, picks up your information,
she too becomes an insider. Even if she doesnt know her left arm from her
right.

An insider does not mean somebody with knowledge.

Can the insider be liable even is he does not trade the security?

Section 27.3. YES! It shall be unlawful for any insider to communicate

material nonpublic information about the issuer or the security to any person
who by virtue of such communication becomes an insider as defined under
the law.

Pasagad kag yawyaw. You talk about a material nonpublic information to

anybody, you have created an insider, and that is against the law.

What is material nonpublic information?

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Section 27.2. It is one:

1. That 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 market to absorb such
information
2. It could be considered by a reasonable person as important under any
circumstances in determining his course of action whether to buy, sell
or hold the security.

That is a material nonpublic information.

It influences or it would likely affect the market price.

(storya storya si father)

What is a material non public information?

Information which affects the market price of the security or it is certainly

considered by a reasonable person as material when he makes a decision
whether or not sell, buy or hold securities on the part of the investor.

What are the acts of an insider that are prohibited? What are his duties when
he trades an insider?

To be an insider it is not prohibited to trade with insider information, but you

must make it known to the one you are trading. Unless, the insider is able to
prove that the information was not gained from such a relationship for being
an insider.

Or if the person selling or buying from the insider or his agent is identified
and the insider is able to prove that he disclosed the nonpublic information
to the other party.

Or that he had reason to believe that the other party otherwise is also in
possession of nonpublic information.

Otherwise if you trade with anyone, you are an insider and it is during the
time that this material nonpublic information already exists, there is a
presumption that you are engage in insider trading. You must prove
otherwise.

If there is a material nonpublic information exist, you are an insider and you
buy sell shares of stock, then you are presumed engaged in insider trading.
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It is very common, this insider trading.

(storya storya si father)

Insider trading is not rare. That is why there is a law on it.

What is the presumption on insider trading?

The presumption of IT (insider trading) is that if all information is disclosed

then the true price will come out. If you hold certain material public
information, then others are at a disadvantage.

In NY the problem is structural IT. Why is it called Structural IT?

Because Apple will do an advance press conference. A week before they

come out with a new product they already called those who are invested with
them. They call them in a special meeting. Ginastoryahan na nila sa tanan. It
is in a guise of a lecture about the company.

The public has been complaining about that.

(storya storya si father about an article na makahilak daw ka. For Love of
Money)

Independent Directors

There are corporations that are required to have independent directors. What
are these?

1. Those listed in the stock exchange;

2. Those with assets in excess of 50 million and having 200 or more
holders, at least (200) of which are holding at least one hundred (100)
shares of a class of its equity securities;
3. Those corporation though not listed in the stock market have sold
securities that is required to be listed by SEC; and
4. Banks, quasi-banks and other financial institutions that are under the
supervision of the Bangko Sentral ng Pilipinas.

Those are the kinds of corporations which require independent directors.

How many independent directors do you need?

At least 20% of your directors or 2 whichever is lower. So normally it is 2. But

many corporations to show their goodwill they put in 3 or 4 independent
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directors, just to show that they are serious about the checking functions of
independent directors.

Now, the law defines persons who cannot be independent directors. If you
are not this you can be an independent director.

Who cannot be an independent director?

1. If he or she is a substantial shareholder of the corporation of more than

10% of any class of equity securities of the corporation or of its related
companies.

What do you mean by related?

Upwards the holding company of this corporation you own 10% at least, you
cannot be. Its subsidiary, you are a stockholder of a subsidiary to the extent
of 10%, then you cannot be.

2. If you are related.

What do you mean by related?

If you are a spouse, parent, child, brother, sister of such person who has at
least 10% or more of equity stocks. And you a spouse of such child, brother,
or sister of any director, officer or substantial shareholder of the corporation,
then you cannot be an independent director.

So, what you have to know is who cannot be an independent director.

Because the law does not define who an independent director is. The law
defines who cannot be.

3. Or if he has been employed in any executive capacity by that public

company. Any of its related companies or any of its substantial
shareholders within the last years. You have been employed in an
executive capacity of the corporation, holdings, subsidiary or a
substantial shareholder; you cannot be an independent director.
4. Or of you have been retained, you are not employed, but you are
retained in a professional capacity. You have been the lawyer; you have
been the professional adviser. Management consultant. Or you have
been the independent external auditor of the corporation, its holding
company, subsidiaries or a substantial shareholder, then you cannot be
an independent director.

So what is the thinking behind the independent director?

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There are supposed to be the watchdog for and in behalf of the general
investing public. That no irregularities occur within the corporation, so that it
would mean that they are not worthy to be listed or to be dealt with and
trusted by the public. That is the idea of an independent director.

MARGIN TRADING

What is margin trading?

Refers to the purchase of securities by an investor using the credit of a

broker, to pay for part the said securities. It is regulated for the purpose of
preventing the excessive use of credit for carrying the securities.

Just for your information. Normally before you can begin trading in shares of
stocks since you cannot go there and buy or sell yourself you have to avail of
the services of a broker. You must open an account with a broker. Mudeposit
ka ug kwarta sa broker.

Normally a broker, in the beginning will ask you for your reference, like the
banks, etc. Then the broker will say okay, open an account with me. From
then on you can already set orders to the broker.

Then the broker will confirm with you and they will execute the orders. Now
pagkahurot sa imong kwarta, the broker will no longer execute. That is when
the one will say pautanga ko ug kwarta nimo. Then the broker say why
should I lend you? Because I have shares of stocks with you. Kadto diay
akong gipamalit sa una. Wala man nay stock certificate, ikaw may nagagunit
ana. Mao na akong collateral nimo.

From then on you are engaged in margin trading.

You are buying shares of stock out of the credit extended to you by your own
broker. And there is a limit to that credit. Usually it is limited by the value of
your shares of stock held by the broker.

He cannot exceed that value. The issue is how is that value determined?

It is very complicated the formula. Never mind about the formula. (Haay
salamat! Haha) because they will not ask it. They will ask it only if you are
applying for a license to be a broker.

What are the transactions of brokers and dealers that are prohibited?

This is under Section 30.1.

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No brokers or dealer shall deal in or otherwise buy or sell, for its own
account or for its own account or for the account of customers, securities
listed on an Exchange issued by any corporation where any stockholders,
director, associated person or salesman, or authorized clerk of said broker or
dealer and all the relatives of the foregoing within the fourth civil degree of
consanguinity or affinity, is at the same time holding office in said issuer
corporation as a director, president, vice-president, manager, treasurer,
comptroller, secretary or any office trust and responsibility, or is a controlling
of the issuer.

Once a broker sells you shares of stock of a corporation where he has a

relative as a responsible person of that corporation, that is presumed as
irregular because that is prohibited.

What should a broker do?

The broker will say, go to another broker because I am prohibited. I cannot

broker you for this transaction.

What is the whole purpose there?

To safeguard you. The investing public. Because you do not know the market.
There might be recent event where this particular issuer is already in trouble.
You do not know about it. Kinsa man ilang masaligan, ilang paryente. The
broker will unload to you the shares.

What happens to you?

Unwittingly you just buy because you trust your broker, then that it the end
of you.

So the law prohibits that. Transactions like that are presumed to be irregular
because they are prohibited.

What is a settlement offer?

This is what is done by the investment banks in Wall Street.

The settlement offer is a written proposal made to the SEC by a party being
investigated on any of the charges of irregularity in the Securities
Regulations Code.
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The SEC may agree to a settlement offer based on its findings that such
settlement is in the public interest. It saves the government money
prosecuting, etc.

Any agreement to settle shall have no legal effect until publicly disclosed;
such decision may be made without a determination of guilt on the part of
that person making the offer.

So, no fault settlement offer. That is complete terminology of this

settlement.

Under investigation ka, muingon na lang ka, no fault settlement offer aron
matiwas ni tanan, bayad ko, without admission of guilt.

Who may be sued on account of an irregularity?

1. The issuer and every person who signed the registration statement.
2. Every person who is a director or any other person performing similar
functions or a partner of the issuer at the time of the transaction.
3. Every person who is named in the registration statement as being or
about to become a director.
4. Every auditor or auditing firm named as having certified any financial
statement used in connection with the transaction.
5. Every person who with his written consent which shall __ with
registration statement, has been named as having prepared or certify
any part of the registration statement.
6. Every selling shareholder who contributed to and certified as to the
accuracy of a portion of the registration statement.
7. Every underwriter with respect to some security.

So, almost everybody who participates in the transaction can be sued. That
is how far reaching the law is.

What is the prescriptive period for the enforcement of actions under civil
liabilities on account of false registration statement or civil liabilities arising
in connection with the prospectus, communications, and reports?

Answer: 2 years after the discovery of the untrue statement or the omission,
if the action is to enforce liability created in connection with the prospectus
within 2 years after the violation upon which it is ___.

In no event shall such action be maintained to enforce any liability created

under Section 56 or 57 of this Code unless brought within two (2) years after
the discovery of the untrue statement or the omission, or, if the action is to
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enforce a liability created under Subsection 57.1 (a), unless, brought within
two (2) yeas after the violation upon which it is based. In no event shall an
such action be brought to enforce a liability created under Section 56 or
Subsection 57.1 (a) more than five (5) years after the security was bona
fide offered to the public, or under Subsection 57.1 (b0 more than five (5)
years after the sale.

So within 2 years from discovery but not more than 5 years after the security
was offered for sale or more than 5 years after receipt.

What are the damages that may be collected?

Actual damages, treble damages, that is damages in an amount not

exceeding triple the amount of the transaction, this for bad faith.

Or moral damages, exemplary damages in cases of bad faith, fraud,

malevolence, wantonness, attys fees not exceeding 30% of the award.

So, that is the Securities Regulations Code.

Remember, who are to be registered?

1. Broker
2. Dealer
3. Associated person of a broker or dealer
4. Sales persons
5. Issuer

The securities is to be registered, exchanges. Stock exchange is to be

registered. The clearing houses are to be registered.

The brochures that are created out of registration statements. These are all
to be registered with SEC.

Let us begin the Bangko Sentral ng Pilipinas Law 7653.

We are talking now, no longer about blue sky law. We are talking about
monetary policy.

This is an implementation of the Constitutional provision mandating that the

State should create an independent monetary authority.

Monetary authority has to do with strengthening stability of the currency, the

Philippine peso. Stability of prices of commodities that has to do with
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inflation or deflation. The exchangeability of the peso. Exchange for what?

For other currencies.

When you say exchangeability of the peso, it is as to foreign currencies.

Purchasing power of the peso and the availability of credit. Because the peso
as the legal tender is dependable, that is all embraced in monetary policy.

Monetary policy is distinguished from fiscal policy.

What is fiscal policy?

Largely a mandate to Congress, first to create the sources of funds from

which government make expenditures, tax laws, revenue raising measures.
That is the first thing about fiscal policy.

Then, what will be the items that the government will apply these proceeds
from revenue that is the appropriations act.

So, it is Congress that determines these sources of funds by raising tax laws.
It is Congress that determines what expenses are made to be made out of
the tax laws.

It is Congress that determines borrowings of the government as other

sources of revenues. They empower various agencies, like the treasury, the
GOCC to make borrowing for and in behalf of the government, in cases where
the revenues do not come on time so the that the government has the
wherewithal to make the expenditures mandated by the appropriations act.

That is fiscal policy.

Exchangeability of the peso, stability of the peso, sources of credit, inflation,

deflation, that is monetary policy.

Who is in charge?

BSP, principally the Monetary Board. The Monetary Board is the one
responsible.

The Monetary Board is now under the control not so much of the
government, since the most number of members of the Board come from the
civilian sector. Only two come from the government sector.
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The governor of the BSP who is the ex-officio member of the MB and other
cabinet member, usually the Secretary of Finance but not necessarily, and all
the 5 others are taken from the private sector.

Take note that the Bangko Sentral ng Pilipinas law provides that the Central
Bank Givernor must be confirmed by the Commission on Appointment, but
this has been struck down as an invalid law because of SC has said that
those that need confirmation, under the Constitution, can no longer be
added upon by Congress, because that is a limitation of its appointing power.

None of the 7 in the Monetary Board requires confirmation. Not even the
monetary board chairperson, who is the Bangko Sentral governor.

Does the Bangko Sentral Governor has to be a lawyer?

Not necessarily. Does not have to be a lawyer. He just have to be

experienced in banking. Either form the social sciences, economics,
sociology or from law, legal studies. But should have unquestioned probity
and honesty, which is very difficult to determine.

Then, they must divest whatever interest they have in any bank, quasi-bank
other institution subject to supervision or examination by the BSP. They must
divest themselves.

After they have served their office, they cannot be hired or engaged by any
bank, quasi-bank as their consultant or officer within 2 years after expiration
of their term.

So, 1 year to divest, 2 years before they can be reconnected to any bank.

If the bar examinations will raise questions on the Monetary Board, it might
be on the issues now being discussed by Congress as to the amendment of
the Bangko Sentral Law. Because now, the amendments they are asking for
is immunity from suit, not only for the Bangko Sentral to be immuned from
suit but also the Monetary Board and all its members.

Because they say in the past years, history, so many of the Central Bankers
have to spend so much of their retirement money to defend themselves
against suits even after they have already served their terms.

Even if the law now says that they can be reimbursed for legal expenses, it
still means that you have to spend your money first before you can be
reimbursed. So you are forced to be timid in your enforcement of the Bangko
Sentral Law.
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January 30, 2013Resci Angelli

We are in GENERAL BANKING LAW OF 2000up for so many amendments.

There are amendments discussed by both senate and House of
Representatives done simultaneously along with New Central Bank Act.

We went through the classification of banks and I want to point out that the
general banking law has these provisions sections 40, 43, 44provisions on
MICROFINANCING.What is in many jurisdictions properly classified as not a
formal banking practice, our law seeks to formalize it. We cannot help it but
we want to always make it formal.

Rural banks have to engage in microfinancing and there is no requirement of

loanable funds that must be put into microfinancing. That is by virtue of BSP
Circular 272 mandating the grant of small loans called microfinance
loans to the basic sectors as described in social reform and Poverty
Alleviation Act of 1997. This is over and above the so-called Pantawid
Program of Pnoy administered by the social welfare. They go out and seek
this people and they are given money by way of loans also.

MICROFINANCE LOANSThese are supposed to be loans for the poor and

low-income households for their micro-enterprises and small business so as
to enable them to raise their income levels and improve their living
standards. These loans are granted on the basis of the borrowers cash flow
and are typically UNSECURED.

Again you always have this rule where the BSP does not mediate. The banks,
for the sake of its depositors and the general banking public cannot loan
money without collateral. Then here is a BSP circular which says that you!
10% of your loanable funds must be microfinance loans. What is the
definition of microfinance? NO COLLATERAL. So what is the result? The
biggest loss of banks is in microfinance! For your education, know that that is
now part of the supervision of the BSPthis microfinancing. In India and
Pakistani, this thrived because precisely, it is not supervised by the
monetary/banking authority. It is a social project there. If you insist, ibutang
na nimu into formalang kanang mga personnel sa banko, they are trained
to be formal. So ang mahitabo ana kay mamakak nalang na sila. Kay they
are so form-determined. When the whole thrust of microfinancing is other
than enterprise bid out and so on.

FOREIGN AND DOMESTIC STOCKHOLDINGS

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What is the total number of voting stocks of a domestic bank that is

now to be owned by, let us say, a Filipino or a domestic non-bank
corporation?What is the total number of voting stocks of a domestic bank
that is allowed to be owned by a foreign individual or a foreign non-bank
corporation?

For a FILIPINO INDIVUDUAL/Domestic corporationeach one may own

up to 40% of the outstanding voting stock of a domestic bank. Not more than
40%. But YOU ARE NOT LIMITED TO ONE BANK.

If you are a foreigner..

FOREIGN INDIVIDUAL/FOREIGN NON-BANK CORPORATION40% of the

outstanding voting stock of a domestic bank; Its also limited to 40% of the
AGGREGATE foreign-owned stocks.

So you can only own 40% as a general rule if you are foreign.

Exception:SECTION 8 OF RA 7721--AN ACT LIBERALIZING THE ENTRY OF

FOREIGN BANKS.

Philippine corporations whose shares of stocks are listed in the Philippine

Stock Exchange or are of long standing for at least ten (10) years shall have
the right to acquire, purchase or own up to sixty percent (60%) of the voting
stock of a domestic bank.

In other words, what does that say? If you are a foreign banking
institution that has been long standing for at least 10 years, you have the
right to acquire and purchase up to 60% of the voting stock of a domestic
bank.

Note also that under SECTION 73 OF GENERAL BANKING LAW, the Monetary
Board may authorize a foreign bank to acquire up to one hundred percent
(100%) of the voting stock of only one (1) bank organized under the laws of
the Republic of the Philippines, Within seven (7) years from the effectivity of
this Act and subject to guidelines issued pursuant to the Foreign Banks
Liberalization Act
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Remember: BRANCHES DO NOT CONSTITUTE A BANK. So you may have a

bank with several branches but it is owned 60% or as the exception may
warrant, 100% owned by the foreign non-bank corporation. That is allowed.
Thats whyyou have Citibank. Sigurista ang Americano Why? Have you
seen Citibank in Davao? Citibank is only in Makati, QC, Cebu.

You are a Filipino or you are considered to be a Philippine corporation,

WHEN ARE THE STOCKHOLDINGS DEEMED OWNED BY A FAMILY GROUP OR
RELATED INTEREST? Thats answered by SECTION 12.

SECTION 12. Stockholdings of Family Groups or Related Interests.

Stockholdings of individuals related to each other within the fourth
degree of consanguinity or affinity, legitimate or common-law, shall be
considered family groups or related interests and must be fully
disclosed in all transactions by such an individual with the bank.

Why is ownership so particular that you are a family within 4 th degree of

consanguinity? That is because of DOSRI. Daghan na members sa family and
baylo2x lang sila pahimulos sa banko. Mapurdoy ang banko! Thats why the
law is very particular.

COMMERCIAL V. UNIVERSAL BANK

I have already described to you the difference between a commercial and
universal bank.

COMMERCIAL BANKthe license is for commercial banking.

Commercial banking is characterized by DEMAND DEPOSITS (timailhan
ana is checking accounts). Thats a technical term in banking. The
operant term there is current account. You are given a license to
operate commercial bankyour basic transaction is commercial
transaction, demand deposits, letters of credit.

You are a savings bank..why is it that you can open a demand deposit
checking account? That is by SPECIAL PERMISSION from the BSP over and
above your thrift bank license. In other words, paghatag nimu ug thrift bank
license, wala ka dayon maka-abri ug demand deposits. Tagaan ka ug special
permission because that is not part of the thrift bank business.
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The UNIVERSAL BANKcan engage in non-financial allied

enterprises.

What are those non-financial allied enterprises? What is the significance that
these have to be established?

Non-financial allied enterprisesare enumerated under the law as:

1. Warehousing companies,
2. Storage companies,
3. Safe deposit box companies,
4. Companiesprimarily engaged in management of mutual funds (but not
in the mutual funds themselves),
5. Managementcorporations engaged in an activity similar to
management of mutual funds
6. Companies engaged in providing computer services, etc.

Now, Even if they are non-financial, the moment the BSP goes to the
universal bank to examine or inspect the books, it can also audit the non-
financial corporations with which the universal bank has engaged in. the BSP
can now go to the warehouses if the universal bank has corporation engaged
in warehousing. Nganong naa man nay warehousing ang universal bank?
That is because they are interested in financing the sugar planters and they
have decided to finance their agricultural inputs i.e. fertilizer, fungicide,
suicide! so the universal bank ends up financing letters of credit i.e.
planters association importation of potash. They import it and they
warehouse it because they make the planters sign trust receipts. So they will
have a hold of the proceeds of the farm.

What are other non-financial allied enterprises?

1. companies engaged in house-building and home development
companies providing drying and milling facilities for agricultural crops
2. bank service corporations
3. Philippine clearing house corporations
4. Philippine central depository incorporated is also a warehouse but it
does not warehouse physical properties but it warehouses securities. It
enables corporation or requires corporations to be or at a percentage a
Filipino. They are able to obtain foreign investment by warehousing
their shares int eh Philippine Central Depository in issuing securities
traded in foreign stock market.
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So that is the difference.

In the old central bank law, BSP cannot audit a corporation that is neither a
banking or quasi-banking corporation. NOWthey CAN AUDIT if there is a
bank or quasi-bank that has equity in those corporations.

SECTION 35SINGLE BORROWERS LIMIT

What is a single borrowers limit? All its money will lend to just 1
borrower. Is that allowed? A single borrower can only borrow up to 20% of
the net worth of the bank concerned.

IF SOMEBODY WANTS TO BORROW AND IT EXCEEDS ALL THE SBL OF

ALL THE BANKS, THAT IS WHEN HE WILL BE FORCED TO FLOAT A BOND.

PLDT is borrowed is borrowing 15 billion. It has floated a bond because

the capital of a universal bank is only 5billion! The banks cannot answer.
Sometimes the banks create what they call a SYNDICATION2 or more
banks come together and they provide up to their maximum SBL and they
lend it to this 1 borrower. There is always a LEAD LENDER. What is his
purpose? He is the one who holds the collateral of the syndicated loan. That
means the amount involved exceeds the SBL of all the banks that are
involved.

LIMITATIONS AS TO THE BANKS ACQUISITION OF REAL ESTATE

SECTION 51. Ceiling on Investments in Certain Assets. Any

bank may acquire real estate as shall be necessary for its own use in
the conduct of its business: Provided, however, That the total
investment in such real estate and improvements thereof, including
bank equipment, shall not exceed fifty percent (50%) of combined
capital accounts: Provided, further, That the equity investment of a
bank in another corporation engaged primarily in real estate shall be
considered as part of the bank's total investment in real estate, unless
otherwise provided by the Monetary Board.

So 50%. The bank must keep that limit in capital expenditures in real
property. Now what happens if the bank is already 50% in real property but
to collect a loan, the bank has to foreclose real property? And then there are
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no bidders so the bank becomes the default winner in the auction sale of
that property. Eh will be forced to take in real property in excess of 50% of
the maximum. The bank will have to report that to the BSP and the latter will
give it a time limit. It must get rid of the real property as much as possible to
bring it back to the 50% maximum.

WHAT ARE THE SERVICES CAN A COMMERCIAL BANK PROVIDE AS

ENUNCIATED BY THE GENERAL BANKING LAW?

SECTION 29. Powers of a Commercial Bank. A commercial bank

shall have, in addition to the general powers incident to corporations,
all such powers as may be necessary to carry on the business of
commercial banking, such as accepting drafts and issuing letters
of credit; discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of debt;
accepting or creating demand deposits; receiving other types
of deposits and deposit substitutes; buying and selling foreign
exchange and gold or silver bullion; acquiring marketable
bonds and other debt securities; and extending credit, subject
to such rules as the Monetary Board may promulgate. These rules may
include the determination of bonds and other debt securities eligible
for investment, the maturities and aggregate amount of such
investment.

Muingon ka--Ang kinadak-ang gold diay sa Diwalwal kay kini diayng bangko?
NO. it cannot buy!

They do not have the technicality of determining if gold ba ilang gipalit or

gold-plate ba na. lisud man na. not anybody can buy gold.

Technically speaking, they can buy foreign exchange and gold or silver
volume. They can buy at their own risk but many will not risk that.

OTHER SERVICES THAT WILL BE PERFORMED

SECTION 53. Other Banking Services. In addition to the

operations specifically authorized in this Act, a bank may perform the
following services:

53.1. Receive in custody funds, documents and valuable

objects;
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53.2. Act as financial agent and buy and sell, by order of and for
the account of their customers, shares, evidences of
indebtedness and all types of securities;

53.3. Make collections and payments for the account of

others and perform such other services for their
customers as are not incompatible with banking
business;

53.4. Upon prior approval of the Monetary Board, act as

managing agent, adviser, consultant or administrator of
investment management/advisory/consultancy accounts; and

53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted under Subsections 53.1,
53.2, 53.3 and 53.4 as depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects which it receives duly
separate from the bank's own assets and liabilities.
The Monetary Board may regulate the operations authorized by this
Section in order to ensure that such operations do not endanger the
interests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly

announces a bank holiday, or in any manner suspends the payment of
its deposit liabilities continuously for more than thirty (30) days, the
Monetary Board may summarily and without need for prior hearing
close such banking institution and place it under receivership of the
Philippine Deposit Insurance Corporation.

53.3. Make collections and payments for the account of others and
perform such other services for their customers as are not
incompatible with banking business;

Ang ibayad nimu sa davao light, ideposit nalang nimu sa bangko.

Thats one of those services.What are those services as are not
incompatible with banking services? Ni-overcharge ang davao light,
kinsa may paulion nimu ana? Ang bangko lang gihapon kay naa man
silay resibo sa imung gideposito. Remember davao light? It was
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charged by the SC as having overcharged. It was sued by Mr. Diaz of

Imperial Hotel.

53.5. Renting Safety deposit boxesthat is another service. Mind you--

That is the true safety box that is fire-proof.

53.2 Act as financial agent and buy and sell, by order of and for the
account of their customers, shares, evidences of indebtedness and
all types of securities;

kanang sa mga bangko nga nay mag-retail ug mga Landbank bonds

mga agents na sila. Nag-ahente na sila. Tawagon na nila mga nay cash
nga nay tindahan.

BANK ENGAGED IN INSURANCE BUSINESS

A bank cannot directly engage in the insurance business as the insurer.

However, if it is a universal bank, it can invest in the equity of an insurance
company. Once it is invested, then they can seek insurance business within
the premises of the bank. (i.e. Metrobank with Axa as their insurance
company) thats one of the services they can offer.

WHAT FUNCTIONS COULD A BANK OUTSOURCE?

This is defined in section 55 and further elaborated on BSP Circular no. 268,
December 5, 2000.

THE BANK CANNOT OUTSOURCE INHERENT BANKING FUNCTIONS.

What are those inherent banking functions?

1. tellers and service deposit transactions of the formerthat is an

inherent banking function because they receive money for and in
behalf of the bank. They disburse money for and in behalf of the bank.
They are also responsible for the banks obligation to maintain
confidential and secret the deposits of all its clients.
What can be outsourced?

1. information technology,
2. programming systems processing, etcyou can outsource that.
3. Data imaging, storage, retrieval
4. Printing of bank deposit statements
5. Credit card services
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6. Printing of bank loan statements

7. Credit investigation and collection
8. Processing of export/import and other trading transactions
9. transfer agent services for debt and equity securities;
10. property appraisal;
11. property management services;
12. messenger, courier and postal services;
13. security guard services;
14. vehicle service contracts;
15. janitorial services
16. and such other activities as may be determined by the Monetary
Board.

Then in SECTION 55.4, there is this caveat:

Consistent with the provisions of Republic Act No. 1405, otherwise

known as the Banks Secrecy Law, no bank shall employ casual or
nonregular personnel or too lengthy probationary personnel in the
conduct of its business involving bank deposits.

So, tellers? The shortest possible probationary period. That is the holding of
the General banking law.

WHAT ARE THE CIRCUMSTANCES CONSIDERED BY THE MONETARY BOARD IN

DETERMINING WHETHER THE PARTICULAR ACT MAY BE DEEMED AS
CONDUCTING BUSINESS IN AN UNSAFE OR UNSOUND MANNER?

SECTION 56. Conducting Business in an Unsafe or Unsound

Manner. In determining whether a particular act or omission, which
is not otherwise prohibited by any law, rule or regulation affecting
banks, quasi-banks or trust entities, may be deemed as conducting
business in an unsafe or unsound manner for purposes of this Section,
the Monetary Board shall consider any of the following circumstances:

56.1. The act or omission has resulted or may result in material

loss or damage, or abnormal risk or danger to the safety,
stability, liquidity or solvency of the institution;
56.2. The act or omission has resulted or may result in material
loss or damage or abnormal risk to the institution's depositors,
creditors, investors, stockholders or to the Bangko Sentral or to
the public in general;
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56.3. The act or omission has caused any undue injury, or has
given any unwarranted benefits, advantage or preference to the
bank or any party in the discharge by the director or officer of
his duties and responsibilities through manifest partiality,
evident bad faith or gross inexcusable negligence; or
56.4. The act or omission involves entering into any contract or
transaction manifestly and grossly disadvantageous to the bank,
quasi-bank or trust entity, whether or not the director or officer
profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its
business in an unsafe or unsound manner, the Monetary Board may,
without prejudice to the administrative sanctions provided in Section
37 of the New Central Bank Act, take action under Section 30 of the
same Act and/or immediately exclude the erring bank from clearing,
the provisions of law to the contrary notwithstanding.

LIMITATIONS OF THE BANK IN DECLARING DIVIDENDS

Remember: bank cannot declare dividends without prior clearance from the
Bangko Central or the Monetary board.

SECTION 57. Prohibition on Dividend Declaration. No bank or

quasi-bank shall declare dividends greater than its accumulated net
profits then on hand, deducting therefrom its losses and bad debts.
Neither shall the bank nor quasi-bank declare dividends, if at the time
of declaration:
57.1 Its clearing account with the Bangko Sentral is overdrawn;
or
57.2 It is deficient in the required liquidity floor for government
deposits for five (5) or more consecutive days; or
57.3 It does not comply with the liquidity standards/ratios
prescribed by the Bangko Sentral for purposes of determining
funds available for dividend declaration; or
57.4 It has committed a major violation as may be determined
by the Bangko Sentral.

WHAT IS A TRUST ENTITY?

It is an entity duly authorized to engage in a trust business.

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SECTION 79. Authority to Engage in Trust Business. Only a

stock corporation or a person duly authorized by the Monetary Board
to engage in trust business shall act as a trustee or administer any
trust or hold property in trust or on deposit for the use, benefit, or
behoof of others. For purposes of this Act, such a corporation shall be
referred to as a trust entity.

Normally, the license to conduct a trust business is also granted to a bank.

That is why, bank officers and the board are required to undergo a special
training for purposes of engaging in trust business. And between the
banking operations and trust business, the law requires that there
should exist a CHINESE WALL. There must not be any connection
between the 2. They cannot collude.Because trust business means
managing a bank, investing it for the benefit of the beneficiaries. If the bank
is the trusteemao na iyang buhaton. Kining isa, sige deposit. What is the
form of collusion that can happen? Muingon ang bankkining tawhana
daghan ni xa ug deposit. Ibutang na diri. Invest ta ana. Nag-invest atong
nagahimu ug condominium. Una nag-invest didto kay ang trust fund. Unya
nalugi naman. Ipasa niya didto sa taas ug deposito. Nganong mahitabo man
na? kay nagstorya ang trust fund ug banking business. There should be a
chinese wall!

Trust business must be conducted separately.

IF THE BANK BECOMES INSOLVENT, THE TRUST ASSETS OR ASSETS HELD IN

TRUST ARE NOT PART OF THE ASSETS THAT HAVE TO BE LIQUIDATED. They
are separate and distinct!

FEBRUARY 3, 2014, Part 1

Today, we take up Secrecy of Bank Deposits and FRIA.

SECRECY OF BANK DEPOSITS because this enables us to review also the

AMLA Law.

What is the purpose of this law, RA 1405 (Which became effective

September 9, 1955)?
It is to encourage people to deposit their money in the banks thereby
discourage private hoarding so that the banks may lend out the money
and assist in the economic development of the country.
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So, it is not exactly to help you safeguard your money. It has an economic
purposed to help the economy.

What are the acts prohibited by RA 1405?

1. Section 2 the examination or inquiry or looking into all deposits of

whatever nature in banks in the Philippines, including bonds issued by the
government or its political subdivisions and instrumentalities, by any
person, government official, bureau or office.

So, if you have saving account in the bank, it is covered. If you have time
deposit, it is covered.

But if you make a special placement with the bank to be in one of its funds
(sometimes they have a special fund and it is handled by a portfolio
manager) that is NOT included.

Because it says deposit of all kinds.

If you have a trust account with a bank, not as a bank but as a trust
company, is that included? The answer is NO. It is not included in the
Secrecy of Bank Deposits Act.

So, what are included?

a. Savings
b. Time deposit
c. Investment with the bank in government bonds or bonds issued by any
of its political subdivisions or instrumentalities

If you put money with the bank together with the funds of the bank invested
in Land Bank bonds, that is covered.

2. Second prohibited act - Disclosure by an official or employee of any

bank to any unauthorized person of any information concerning
those deposits

So, examination inquiry or disclosure.

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Alright, under what situations could the examination or disclosure of

information about these deposits be allowed?

So, we are now looking at the exceptions that are covered by law.

[Exceptions to the examination or disclosure of information about

deposits:]

A. Upon written permission of the depositor

Example of this is DOSRI loans. Directors, officers, stockholders and

related interests, if they make borrowings or credit accommodations
with the bank, then they are required before their DOSRI loans are
approved that they must waive their right of secrecy of deposit.

So, that means that they give their consent to the disclosure of these
deposits.

Now, the disclosure here is to the Monetary Board because the MB

requires an active list of all DOSRI loans of all banks.

It does not mean that the MB really has this list. No. They just require
the banks to have a program that feeds to the database of the BSP.
And what activates there are those DOSRI loans that are xxx loans
taken in good standing. If you do not pay then, you will register there.

The list actually remains with the banks but they have a direct access
to the DOSRI list.

So, that is the requirement written permission by the depositor.

Otherwise, you are not supposed to be lent money by the bank.

B. Second exception In cases of impeachment

Remember the impeachment of CJ Corona? What was the issue?

The issue was not his deposits covered by the Secrecy of Bank
Deposits; it was his deposits in foreign exchange.

Because the foreign exchange Act contains an absolute prohibition as

to the disclosure of the bank balances.
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Now, what is the purpose for the non-disclosure there in that law? The
purpose is to encourage foreigners to put their money here in the
Philippines.

It is not to encourage people who are guilty of graft and corruption to

exchange their money in dollars so that it is beyond the reach of the
authorities.

So, it is stretching the law to invoke that and refuse.

But the problem with CJ Corona was that he actually waived it in open
court. He made a promise before the Senate, the judges. He said that
he had no objection and that he was willing to open up his books and
accounts and that he had nothing to hide. Subsequently, he was
opposing. That was his problem. Xxx

So, in cases of impeachment, you cannot hide behind the Secrecy of

Bank Deposits Act.

C. Third Upon order of a competent court in cases of bribery or

dereliction of duty of public officials.

So, that is explicit in the Secrecy of Bank Deposits Act.

The court can order the disclosure, production of records, if the issue is
funds involved in bribery and dereliction of duty.

Of course, the court orders it after there has been notice and hearing
as to the issue of whether or not it should be disclosed.

Because normally, this will be under the name of somebody other than
the accused. And the allegation is always is this is a dummy account.
And so, they will want to know. Why? Because (for example) this fellow
is just a driver, and why does he have an account with several
millions?

Example: Atty. Quasha in the landmark Quasha case penned by Justice

B.L. Reyes. At the end of the (Parity Rights), Quasha, an American had
a residential lot in Forbes Park. He transferred his title to his own
driver. His driver became the transferee of the house and lot in Forbes
Park. And that was questioned xxx and finally, Quasha had to admit
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that he transferred it for his convenience. And then he cited the case
of UP.

UP case cited UP became the transferee of two house and lots of

Forbes Park from Caltex because an American company can no longer
continue to hold them. So, until now, UP had the lots. xxx

So, upon order of the competent court.

D. Fourth In cases where the money deposited or invested is the subject

matter of the litigation.

Normally, what happens is you will resort to an ancillary remedy such

as attachment. You file a bond in court and you ask that the money be
attached.

Time and again the SC says that it is not a violation of the Secrecy of
Bank Deposits because there is actually no disclosure.

The amount is not disclosed.

Whatever account is there, it is just frozen. It is attached.

Now, especially if the account there, the monies in that account, is the
subject matter of litigation.

Example: A sues B. B is this teller. Why does A sue B? Because A has

already paid and A says the amount that B received was deposited. It
was a check, it was in the account, it was already paid. B says, I have
not been paid. So, why do you have that account? That money is the
subject matter of the controversy. Can it be exempt from the Secrecy
of Bank Deposit? YES, because it is the subject matter of the
controversy.

E. Fifth Upon the order of the court in case of unexplained wealth under
Section 8 of the Graft and Corrupt Practices Act.

Unexplained wealth

This is the case of the wife of General Garcia. He has a bank account
with several millions. Mrs. Garcia and General Garcia just filed one tax
return. And she is listed as a housewife. How does a housewife have
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so many millions in her own bank account? So, the military

ombudsman is asking for an account of this particular bank account. It
has to be explained.

Of course, the court has to order. So, there must be a hearing. Part of
that general exception, that it is the court that can order the banks to
disclose the amounts involved that are deposited under these persons
that are the subject of anti-graft and corrupt cases.

F. Sixth Upon order of the BIR Commissioner in respect of the bank

deposits of a decedent for the purpose of determining such decedents
gross estate.

The Commissioner can order the disclosure of the deposit.

How does the Commissioner find out?

Example: If you have this very big obituaries in the newspaper. That is
a sign to the BIR. Why is it that your obituary notice is page of the
Philippine Daily Inquirer? xxx So, the Commissioner wants to find out
your gross estate.

Now, when you have somebody who has no next of kin and he has a
sizeable bank deposit, and he is already terminal stage in the hospital.
And then, he dies, and there is a considerable bill. Whoever is left
behind who will attend to the affairs of the decedent, can he go to the
bank and say will you release money from this account for the
payment of his last illness? But the last illness stretched for about a
year. YES. The moment you do that, the BIR is not far behind. They
will come and check the account.

Now, the bank will always pay if it is the last illness. It is provided in
the NIRC that the expenses of the last illness of the decedent can be
charged with his/her estate.

The moment the bank releases money, the BIR is there.

The bank will issue a managers check for and in behalf of the
decedent. That is supported by receipts, charged to the account of the
decedent.
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Funeral expenses can also be charged. Reasonable funeral expenses.

Cost of a tombstone can also be charged. And if he has a widow, the
apparel of the widow.

And the BIR can determine what the gross estate is. It is gross
because the allowable expenses have to be deducted. And then, what
remains is the taxable net estate. That is the amount that which the
estate tax is levied.

G. Seventh Upon order of the BIR Commissioner with respect to the

bank deposits of a taxpayer who has filed an application for
compromise of his tax liabilities under Section 204(A)(2) NIRC by
reason of financial incapacity to pay his tax liabilities.

So, know very well that the Revenue District Officer has power to
compromise with respect to an indigent taxpayer subject to the
approval of the Commissioner.

He will make recommendations, then he hears that this person seeking

exemption has a bank account. So, he seeks to uncover this bank
account because his application to be relieved is understood to be a
waiver of Secrecy of Bank Deposits.

H. Eighth Upon order of the court in cases filed by the Ombudsman and
upon the latters authority to examine and have access to bank
accounts and records.

This is the case of Marquez et al vs. Desierto (2001).

I. Ninth In case of unclaimed balances under Act No. 3936.

When is it considered an unclaimed balance?

If for 10 years, there is an account in the bank that has not undergone
any transaction, whether deposit or withdrawal, dormant, then the
bank is obligated to make a report to the Treasurer of the Philippines.
That there is this existence of the bank accounts that have not been
moving.
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Now, there is a universal practice in banks if you do not make any

withdrawal or deposit in your account after a number of years (i.e. 3 or
5 years), the bank yearly begins to deduct a penalty, a cost for
maintaining your account. Because the bank is incurring expenses to
keep track of your account and you are not conducting any transaction.

Now, technically, the bank is also paying interest. But, then it begins
to deduct a penalty.

Now, nevertheless, if there is still a considerable balance, this will be

reported to the Treasurer of the Philippines and the Treasurer will
delegate the Solicitor General to conduct escheat proceedings.

They will as for the court to declare that these accounts are now the
right of the state to appropriate because its owner has disappeared or
has abandoned the same.

So, escheat proceedings.

Unclaimed Balances Act 10 years and the bank has to make a report,
every year, to the treasury on the accounts that have not been moving
for the past 10 years.

Now, if your deposit is very small, the Treasurer will not bother.

But, if the amount is considerable, you can be sure that the Treasurer
will make the move. In the very least, the government, the treasury
should not use this money in the process of reclaiming the unclaimed
balances. It must be worth the while of the Republic.

J. Tenth Without need of a court order, if the Anti-Money Laundering

Council determines that a particular deposit or investment with any
banking institution is related to any one of the following unlawful
activities:

There are three crimes where there is no need for any court order. Just
the order of the Anti-Money Laundering Council.

If the funds that are deposited is the result of or proceeds from

kidnapping for ransom under Article 267 of the RPC.
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Section 3(I)(1) of RA 9160 [??? RA 9160 talaga ang sabi ni Fr.

Gus] that is the amendatory provision of the RPC of Article 267
Kidnapping for Ransom

Remember that policeman in Zamboanga who identified one of

the Abu Sayyaf commanders who went to the bank to withdraw a
sizeable amount of money. He was identified by the police. The
AMLC went in right away and issued an order of the bank not to
allow any releases.

When you are moving a lot of money, it is very difficult not to

move it through proper channels.

Again, if it is the proceeds for the violations of Sections 4, 5, 6, 8, 9, 10,

12, 13, 14, 15, 16 of RA 9165 otherwise known as the Comprehensive
Dangerous Drugs Act of 2003

Dangerous Drugs, no need for a court order.

Manufacturing, selling, importing, transporting these are the

acts where the penalty is high under the Dangerous Act

Using lower penalty

And then, you have hijacking and other violations such as destructive
arson, murder, as defined under the RPC, including those perpetuated
by terrorists against non-combatant persons and similar acts.

So, these are terrorist acts.

What is involved here is if you have money in your account

precisely to fund these terrorist acts, and the way to prove it now
is from the source.

If the source is not here, then, it must be terrorist.

Example: In the U.S. on racketeering, etc. Not a single act is

criminal, not a single deposit is criminal, but the sum total seen
in its context is in fact leading towards the funding of organized
crime. Then, that is subject to Anti-Money Laundering Law and
there is no need for a court order
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Now, these are the exceptions. Because of the heinous nature of these
crimes, the victims here do not want them to be hiding behind the
privilege of secrecy of bank deposits. They want them to be under a
strict basis.

K. Eleventh Upon order of the court, if the AMLC determines that a

particular deposit or investment with any banking institution is related
to any one of the unlawful activities under Section 3(5) except those
all the money laundering offense under Section 4. [??? not sure sa
naka.italics]

What are these?

These are the so-called suspicious transactions.

Suspicious transactions as distinguished from the jurisdictional

transactions of the Anti-Money Laundering.

If your transaction with the bank, your deposit or withdrawal, is at least

P500,000, then it must be subject to AMLA reporting.

The computer program of the bank immediately registers these

transactions and it is reported to the AMLC.

Is that an act of unauthorized disclosure? No, because it is mandated

by the AML Law. You must report it. All transactions now that are
P500,000 and above.

In dollar terms, it is $10,000 and above.

If you travel now to any country, one of the questions that they will ask
you is whether you are carrying with you $10,000 or more USD or its
equivalent in other currencies.

If you say yes, then they will report you. They will not stop you, but
they will report you.

If you say no, but upon examination of your luggage they discover bills
and it is more than $10,000, that is violation of the AML Law.

It took the Philippines more than 3 years to amend the AML Law to
conform to international standards.
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So, that is the trigger amount P500,000 or $10,000.

There is also another amount lower than that if the transaction is

suspicious.

When is the transaction suspicious?

If the depositor or the one withdrawing his identity is not

known.

Xxx no visible means of income

Suspicious transactions that is reported, that is disclosed.

Who has the obligation to disclose? The bank itself. The tellers, the
cashiers, the operations manager, the branch manager they are
trained of the AML Law to report the suspicious transactions.

FEBRUARY 3, 2014 PART 2

Final exemption is inquiry or examination of a deposit or investment with any

banking institution when the examination is made by the BSP to insure
compliance with AML law in the course of a periodic or special examination in
accordance with the rules of examination of the BSP.

This is what happened to that thing in Iligan. The pyramiding scheme was
discovered by a regular examination of the BSP. So many small accounts
were opened simultaneously. Thousands of accounts were opened in a week.
These were original depositors of the pyramiding scheme. This was how they
were getting their monthly interest payments. But then, these were
subsequently closed. The banks could not do anything to stop this because
they were still waiting for the order of the BSP. And the BSP takes a long time
to order. It was still a written order. In days of internet, dali ra kayo na Pila
lang man na magsira ug account. Binlan lang nimo 100php. Iwithdraw nimo
tanan. Asa ba na nimo pangitaa? That is the problem of the BSP. Its still
operating in the days of paper and pencil.

[Thats what I said. If our publication is still ESCRIBA, pagsuwat pa lang nimo
ana, outdated ka na. The only good thing about that is that law students will
be writing. But you can also write without having to -- for me its a useless
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expense. College newspapers....your news is late. You go to internet. The Phil

star and Daily Inquirer is available there. All the newspapers have already
been sold. The Washington Post was just bought by Amazon. The New York
Times is about to be sold. They went out of business because theyre always
late. You can tailor your own newspaper according to your interest and you
can put all kinds of alerts and it will just come out in your computer. And here
they are putting out a school publication twice a year. Are you kidding?

Secondly, I dont believe students should be made to contribute to pay for

publication. To train to be newspaper people, you shouldRegurgitation
conspiracy theories of 911this guy does not even read the official account
of 911Pagkapait sad anaI dont think he has an idea that there is an
official version]

Financial rehabilitation. RA 10142. Lapsed into law July 18, 2010.

This replaces the rehabilitation provisions in PD 902-A. it replaces the

insolvency law. It replaces the provisions on the rehabilitation because here
are lumped together the different proceedings that are connected with
natural persons and juridical persons that are in financial distress.

The law is explicit as to who are not covered. Sec 5 precisely exempts from
coverage of FRIA:

1. Banks and financial institutions (sec 138) because it is covered by the

New Central Bank Act. However even banks, once they go into
liquidation phase, is covered by the FRIA law because the BSP does not
have jurisdiction to conduct liquidation and the BSP, according to the
New Central Bank act itself, dictates that the BSP will ask the aid of
courts when proceedings flow into liquidation.

2. Insurance companies under PD 1460 (insurance code). Insurance

companies are under jurisdiction of the Insurance Commissioner. They
are dealt with by the Insurance Code and the Insurance Commissioner,
the oversight instrumentality of government with this proviso that
when it comes to liquidation, again they have to be endorsed by the
courts.

3. Pre-need companies. They are under the special jurisdiction of the SEC
because from the Securities Regulation Code (SRC), pre need plans are
securities. They are not insurance policies. They are basically securities
by explicit provision of the SRC.
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4. GOCC when their specific charter so provides. They are under the
responsibility, many times, of the government. They are also, many
times, under the responsibility of general specific law, like the SSS. The
benefits that are supposed to be given or received under SSS are
guaranteed by the government itself. How can you go bankrupt unless
government itself is bankrupt? If SSS or GSIS runs out of money and
can no longer give benefit, the recourse is, that legislators pass laws to
enhance the financial capability of the SSS and GSIS. Government
borrows money from local sources or aboard to meet financial
obligations because it is guaranteed by the government.

5. Then there is a partial exemption with respect to securities market

participants as to trade-related claims of clients or customers for
purposes of investor protection. Because under sec 136, they are
under the regulatory power of the SEC commission and they are
supposed to be self regulatory organizations. The other reason is, of
course, we do not want to disappoint or turn-off foreign investors. The
fastest way the foreign investors come in into Philippines is by
investing into stock market or bond market. That is also the most
mobile form of investment. If they can very easily come in by investing
in the stock market, they can easily go out by withdrawing their
investments, by selling their shares/bonds that they bought. We do not
want a bad name out in the international investment community. All
the broker has to do is to declare bankruptcy. Before, an investor is
stuck because he cannot pull out any money. Somebody who buys and
sells in the stock market, even when broker is already insolvent, what
is bought and sold is not covered so that there is the necessary
liquidity on investors to go out of the market if they want. That is the
rule in FRIA. The broker may be declared insolvent as to all other
assets he has but not as to the merchandise that it serve which are
actually shares of stocks. The shares of stocks he transacts are not
covered by the proceedings for financial rehabilitation or insolvency.

Kinds of proceedings that are provided for in the FRIA law:

1. Financial rehabilitation. Financial rehabilitation is of 3 kinds:

a. Court-supervised rehabilitation
b. Pre-negotiated rehabilitation
c. Out-of-court or Informal restructuring agreements. They are
called rehabilitation plans that are agreed upon out of court.
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Q: Why is it that if it is already agreed upon, its pre-negotiated,

why do they still need to go to court? Even if there is out-of-court
informal restructuring agreement, why do they still need to go to
court?

A: they want to make the proceeding in rem, binding against the

whole world so that all and sundry will respect the agreement. All
that the court has to do is examine and publish. Give a chance to
anybody who has objection to come in and be heard. After that
the court will give its imprimatur to this out-of-court restructuring
agreement or to this pre-negotiated rehabilitation agreement.

2. Insolvency. Insolvency is when assets are less than your liabilities.

How about, kung wala na gyud ka kwarta, nya naputos ka sa utang?

Insolvency gyapon. You have no more assets to answer to your
liabilities.

The minimum requirement is: you have more liabilities than assets.
How is that met? Then the law itself will dictate how your limited
assets will be divided among your creditors. There will always be a
number of creditors that will not be satisfied as to their credits. Only
the government with respect to its sovereign claims, which are
taxes. Taxes are not credits. They are sovereign claims. The claim
arises from law, not contract. The concurrence and preference of
credits are hierarchy created by law of creditors. That means that
their claims arose from contracts. Taxes are always under what?
Whatever concurrence and preference of credits laws, they are
always number 1. They must be satisfied in full, not just most of the
taxes. The taxes must be paid in full before any other creditor is
paid.

3. Liquidations. Voluntary and involuntary. That is another proceedings

provided for in RA 10142.

4. Then you have suspension of payments. Suspension of payments is

a proceeding resorted to when a debtor has actually enough assets
or more than enough assets to meet its liabilities but its assets are
not maturing at exactly the same time that its credits are becoming
due. So it asks for a suspension of payment. An order suspending
the dates due to its payment of the obligation.
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5. Ancillary proceedings. Cease and desist order. Partial judgment. Etc.

These are all ancillary proceedings. Under FRIA law, the proceedings
may be individual, corporate, voluntary or involuntary.

There is a special feature in the FRIA law in that the court has power to
convert any of these proceedings into liquidation proceedings. Before, when
you file a suspension of payment proceedings and you are a corporation, you
have to file with the SEC. When it comes out that you really do not have
more than enough assets to met liabilities, or you are short of your assets to
meet liabilities, the SEC has to dismiss your case because it cannot convert it
into liquidation. It cannot convert into insolvency. So you have to re-file it
with regular court. Now, there is no problem. Only one has jurisdiction, the
regular court. You file a suspension of payments petition. The court
discovers...It just has to give an order.

So a proceeding may be converted to a liquidation proceeding:

1. Upon a finding that: (a) debtor is insolvent; (b) No substantial

likelihood for debtor to be successfully rehabiliated as determined in
accordance with the rules to be promulgated by SC. That is Sec 25.

2. Sec 72. The proceedings may be converted into liquidation if no

rehabilitation plan is confirmed within the period of 1 yr from the date
of filing the petition to confirm the rehabilitation plan. The proceeding
may, upon motion or motu proprio, be converted into one for the
liquidation of the debtor. D makasabot ba. So no rehabilitation plan is
approved. Then there will be liquidation.

3. Sec 75. There is a conversion into liquidation proceedings if the

rehabilitation proceedings are ordered terminated by the court due to
the failure of rehabilitation or dismissal of the petition for reasons other
than technical grounds. The proceedings shall be immediately
converted into rehabilitation as provided in Sec. 92.

4. Sec 90. The proceedings may be converted to liquidation in cases

where the petition for voluntary liquidation or the motion, as the case
may be, is sufficient in form and substance, the court shall issue a
Liquidation Oder. The means that the debtor himself files motion.
gikapoy na cya. Dli na niya kaya. Maypa bahinon n lng ni tanan para
human na.
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5. Sec 92. At any other time upon the recommendation of the

rehabilitation receiver that the rehabilitation of the debtor is not
feasible. Thereupon, the court shall issue the Liquidation Order
mentioned in sec 112 hereof.

Once again, just like the SRC where the SC designates an intra-corporate
court, sec 6 of the FRIA law says, "The Supreme Court shall designate the
court or courts that will hear and resolve cases brought under this Act and
shall promulgate the rules of pleading, practice and procedure to govern the
proceedings brought under this Act.

You will notice there is no jurisdictional amount. What gives court

jurisdiction? If it is any of the proceedings mentioned in FRIA, if it is
suspension of payments petition, voluntary insolvency petition, rehabilitation
petition, any of those proceedings, the court, regardless of amount involved,
has jurisdiction.

Then, it says, the SEC may promulgate rules of procedure that allow court to
join other entities affiliated with the debtor as parties in the proceedings
(Sec. 7). So, we await a possible amendment to the interim rules on
corporate rehabilitation which is now a special rule number. There are still
this and that but I think the SC is coming up with a new corporate
rehabilitation and insolvency rule following 10142.

This act establishes rules on commingling or aggregation of assets and

liabilities of the debtor with those of a related enterprise. When is that?

(a) there was commingling in fact of assets and liabilities

(b) the debtor and the related enterprise have common creditors
and it will be more convenient to treat them together. So that can
be joined or aggregate petition for rehabilitation. One controlling
interest that has several corporations and theyre all in distress,
they could be joined together to file the corporate rehabilitation
proceeding. That is not alien. At least the law is open to such a
joining.

(c) the related enterprise voluntarily accedes to join the debtor as

party petitioner and to commingle its assets and liabilities with the
debtor's; and
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(d) The consolidation of assets and liabilities of the debtor and the
related enterprise is beneficial to all concerned and promotes the
objectives of rehabilitation.

It is possible now to have rehabilitation petitions together.

Theres a landmark case decided by the SC with respect to suspension of

payments. A corporation asked for suspension of payments petition. Then,
the controlling stockholder joins, asked in a motion to be joined in the
petition. It was approved by the SEC. Subsequently, that was questioned by
the no. 1 creditor. According to him: the controlling interest is not allowed
because he is natural person and the SEC does not have jurisdiction over
natural persons, only corporations and partnership. SC cannot do anything
but to uphold that in the interest of a more orderly and a more
comprehensive rehabilitation, that controlling interest should have been
allowed. NOW that can be done because there is only one forum that has
jurisdiction over rehabilitation and that is the courts. Before, with the division
of the different fora available, that cannot be done.

February 6, 2014

REPUBLIC ACT 10142 (July 18, 2010)

AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF

FINANCIALLY DISTRESSED ENTERPRISES AND INDIVIDUALS

Section 1. Title. - This Act shall be known as the "Financial Rehabilitation and
Insolvency Act (FRIA) of 2010".

Section 4. Definition of Terms. - As used in this Act, the term:

(hh) Rehabilitation receiver shall refer to the person or persons, natural or

juridical, appointed as such by the court pursuant to this Act and which shall
be entrusted with such powers and duties as set forth herein.

Rehabilitation receiver (RR) is a natural or juridical person. His appointment

can be an incident of a hearing. I just found out this afternoon that the
INTRA-CORPORATE COURT in Davao and the FRIA COURT are ONE and THE
SAME. It is presided over by our own alumna, Judge Katrina Fuentes, whose
father is used to be RTC Judge. She will appoint the rehabilitation receiver.
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Now, is it possible for a juridical person to be a rehabilitation receiver? Who

will appear before the court if it is a juridical person? If the rehabilitation
receiver is a juridical person, who will appear before the court? That is why
section 28 says...

Section 28.Who May Serve as a Rehabilitation Receiver. - Any qualified

natural or juridical person may serve as a rehabilitation receiver: Provided,
That if the rehabilitation receiver is a juridical entity, it must designate a
natural person/s who possess/es all the qualifications and none of the
disqualifications as its representative, it being understood that the juridical
entity and the representative/s are solidarily liable for all obligations and
responsibilities of the rehabilitation receiver.

New specific qualification for a rehabilitation receiver is under Section 29(c):

(tas gisumpayan nya og letter d afterwards)

Section 29. Qualifications of a Rehabilitation Receiver. - The rehabilitation

receiver shall have the following minimum qualifications:

xxxx

(c) Has the requisite knowledge of insolvency and other relevant commercial
laws, rules and procedures, as well as the relevant training and/or experience
that may be necessary to enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and

(d) Has no conflict of interest: Provided, That such conflict of interest may be
waived, expressly or impliedly, by a party who may be prejudiced thereby.

Now, it is the court who appoints the receiver. However, if the qualified
natural person or entity is nominated by more than 50% of the secured
creditors and general unsecured creditors and satisfactory evidence is
submitted, the court shall appoint the creditors nominee as the
rehabilitation receiver.

Examples of SECURED CREDITORS are the motagagees, pledges, and all the
GEES. (hehe.) They are all secured. Unsecured (ordinary) are those basic
suppliers of raw materials, retainer, etc. The unsecured creditors are the
most liberal in giving terms. The secured creditors are the ones who is
scoving(?) big type of giving terms because if the obligor fails in any- one or
two instalments, etc. Then, the obligee can foreclose of the mortgage,
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execute, etc. They are of little patience because, they have lots of power.
Kung gamay ka og power, pasensyoso ka.

Section 32.Removal of the Rehabilitation Receiver. The rehabilitation

receiver may be removed at any time by the court either motu proprio or
upon motion by any creditor/s holding more than fifty percent (50%) of the
total obligations of the debtor, xxx

But the list or grounds of the acts are not exclusive under section 32. If there
are more than fifty percent of the creditors, they can cause you to be
removed.

Grounds under section 32: (For your reference)

Xxxxxx on such grounds as the rules of procedure may provide which shall
include, but are not limited to, the following:

(a) Incompetence, gross negligence, failure to perform or failure to exercise

the proper degree of care in the performance of his duties and powers;

(b) Lack of a particular or specialized competency required by the specific

case;

(c) Illegal acts or conduct in the performance of his duties and powers;

(d) Lack of qualification or presence of any disqualification;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of

the stakeholders.

The court can appoint a management committee (MC) or the RR assumes

the power of the management of the debtor, both the MC and the RR can
engage the services of the specialized professionals or experts to assist them
in their performance and duties, and that is done upon the approval of the
court and after notice and hearing. As a general rule, the management of the
juridical debtor shall remain with the existing management unless there are
grounds for the appointment of a MC or RR.

Pay attention! The RR is not synonymous with MC. You can appoint over and
above the RR a MC. This is true especially if the debtor is a complex business
undertaking. If it is a very specialized business undertaking, a RR that is a
natural person may not have the resources to rehabilitate and at the same
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time keep the debtor going. Remember, when there is rehabilitation, the
business is working or is on-going.

Muingon ka og unsaon mana pag on-going na wa naman gani kwarta! One of

the effects of the CEASE and DESIST ORDER is that the suppliers of raw
materials to the entity cannot just stop. They have to continue, that is why
by virtue of the cease and desist order, the court can hold creditors. If you
are secured, you cannot foreclose. If you are not secured, you cannot fight
any case outside. The debtor is allowed to continue its business. The
suppliers of raw materials have outstanding debts, are those paid? NO, that
is not paid. But the debtor is obligated to pay whatever it is that they will
supply heads --- (???). Bayran ang gi-supply ra after the issuance of cease
and desist order. So, padayon ang operations sa debtor while the
proceedings are going on for the rehabilitation.

We have taken up RR. What is a rehabilitation plan?

Section 4. Definition of Terms. - As used in this Act, the term:

Xxxx

(ii) Rehabilitation Plan shall refer to a plan by which the financial well-being
and viability of an insolvent debtor can be restored using various means
including, but not limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion en pago, debt-equity
conversion and sale of the business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed in Section 62 hereof, or other
similar arrangements as may be approved by the court or creditors.

Rehabilitation Plan (RP) makes use of all of these remedies like dacion en
pago, reorganization, etc.

Reorganization - is a new formation for firing. They fire a lot of people.

Debt rescheduling - Wa koy nadungog nga rescheduling na muubos ang

panahon sa pagbayad sa utang. Dili. Muingon gani og rescheduling,
padugayon ang pagbayad sa utang. Imbes na ang utang utang ni mature og
3 years, nahimo na noong ten, that is reschedule of payment.

Debt-equity conversion some creditors might be amenable to conversion

of credit to equity. They become part-owners. They become one with the
debtor because now they have equity with the debtor.
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Some may involve with sale of the business (or parts of it) as a going
concern. Putlon ang imong kamot og tiil aron mabuhi. Gangrene na na imong
tiil. Kasagaran aning sakita kanang nay diabetes. Aron mabuhi ang nahibilin
pa sa imong lawas. Sale of parts of the business, they realize cash and have
more working capital because you have sold part of the business.

When does the RP first appear? A RP is attached to the petition for the
Rehabilitation. The RP plan may be approve by the creditors more than 50%
of the total claims, confirmed by the court after approval of the creditors, or
even without such approval, or even over the objection of the creditors.

Why would creditors object to a sound RP? There are some creditors that will
object even if the plan is good. Why? There are some creditors, especially
secured creditors, the most senior... let us say, kanang una pa sila
nakapautang sa debtor pero nakapetition for rehabilitation. And the
mortgage that they have secured is far, far, far more valuable than their debt
that they extended. Why? Because the real property that was mortgaged to
them has increased in value. Og ako ng byaan nga mu-enforce niini, pag
auction sale ini, way makapagtag iya.. akoa na kung ma-default... makabawi
pa kog sobra pa sa akong gipautang plus interest.. ngano musugot man ko
anang rehabilitation?

That is why under the new law, there is this CRAM DOWN rule.

So, what is this Cram down rule? The translation of this is tinal rule. Ngano
paimnon mana nimo og pugngan imong ilong unya ihulog nimo dinha aron
tunlon ang imong gipainom. That is the rough way of illustrating it. But mary
poppins will say just a little bit of sugar makes the medicine go down. That
is also cram down in a refined way. (Chos!) the court can do that the cram
down rule.

Section 86. Cram Down Effect. - A restructuring/workout agreement or

Rehabilitation Plan that is approved pursuant to an informal workout
framework referred to in this chapter shall have the same legal effect as
confirmation of a Plan under Section 69 hereof. The notice of the
Rehabilitation Plan or restructuring agreement or Plan shall be published
once a week for at least three (3) consecutive weeks in a newspaper of
general circulation in the Philippines. The Rehabilitation Plan or restructuring
agreement shall take effect upon the lapse of fifteen (15) days from the date
of the last publication of the notice thereof.
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Rehabilitation confirmed by the court shall be binding upon the debtor and
all those persons who may be affected by it including the creditors, whether
or not these persons have participated in the proceedings, opposed the plan,
or whether or not the claims have been scheduled.

Section 69.Effect of Confirmation of the Rehabilitation Plan, - The

confirmation of the Rehabilitation Plan by the court shall result in the
following:

(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor
and all persons who may be affected by it, including the creditors, whether
or not such persons have participated in the proceedings or opposed the
Rehabilitation Plan or whether or not their claims have been scheduled;

xxx

The court has crammed down. There are certain conditions that have to be
followed.

Now, what is the stay or suspension order? It means no creditor can run after
the petitioning debtor except within that forum when the petition is valid.
They cannot file another case. They cannot foreclose even if they are
secured. Stay is an American idiom or analogy - obedience rule for dogs.
Hehehe.

Pagpagawas gani sa court ana, stay tanan mga creditors.

When is it issued? The moment you file a petition for rehabilitation and it is
received by the court, the court issues the stay or suspension order as a
matter of course for as long as the petition is sufficient in form and
substance. Make sure you have the form. Kumpleto imong attachments sa
imong petition like the schedule of creditors (technical term of list of all your
creditors), list of all your assets both realizable and assets which are about
to go into partition, and then, whatever arrangements you have made with
certain creditors in order to satisfy them or to hold them in abeyance or to
make them re-accommodations... all of them should be attached to your
petition. Mao manay lisud buhaton. The more complete, the faster the court
will come to a resolution as to whether or not a stay order should be issued.
A stay order is very important because these are the effects:

Section 15. Action on the Petition. xxx

(q) include s Stay or Suspension Order which shall:

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(1) suspend all actions or proceedings, in court or otherwise, for the

enforcement of claims against the debtor;

Naka-file ka na og petition for rehabilitation, kalit lang sila og file og action to

foreclose the mortgage. Padalahan ka na og notice of foreclosure. Paggawas
sa notice og stay order,sagpaon na nimo sila sa imong stay order, di
nakamahadlok. hehehe. That is the effect of stay order.

(2) suspend all actions to enforce any judgment, attachment or other

provisional remedies against the debtor;

Take note - any judgment. Pildi naka sa imong kaso. Unya pag-execute,
STAY. they cannot execute because it is superior. What is the thinking behind
the law? It is the universal settlement of all the creditors so as to enable the
debtor to restart his business. This law favors the debtor. Mao nig evangelio
na paboran ang mga makasasala.

Another effect... (ambot asa ni nya gikuha. Wala sa enumeration)

Xxx All pending actions including the execution of the judgment should be
suspended pending termination of the rehabilitation proceedings.

What is the judge to do if he has (----)? Kadawat syag stay order, unya RTC
ko, RTC sya. Pareho ra mi. Naa ba nay ing-ana? Wala. Stay!!! Ana na. Di na
mahimo. There is no defiance even if the judgment is already final. You have
filed the case, waiting for the result of the rehabilitation. Suspend na.

By the way, what is the difference of postpone and archive?

Postpone there is a definite date in the future na maghearing usab.

Archive/suspend because of the stay order, there is no definite date

thats why it is set aside. There is no definite date. Archive.

(3) prohibit the debtor from selling, encumbering, transferring or disposing in

any manner any of its properties except in the ordinary course of business;
and

After the suspension order, they are supposed to go back to business. They
cannot say I lack raw materials because all his suppliers, even if they were
not paid before what is supplied to them, they cannot stop. They must
supply. Thats part of the order of the court. Now, that contemporaneous
supply he must pay only despite the suspension order. Thats the ordinary
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course of business. He must pay all his suppliers. Pero kadtong past, in
arrears to, he does not have to pay.

The petitioning debtor is also obliged not to sell, encumber, transfer, or

dispose of properties. Unsa mana iyang buhaton? Aron maluwas sya, Manago
na sya sa iyang assets. Huna-hunaa na diay sya parente nga nagpautang
nya, duol sya aning creditor than the others. He is prohibited from settling
the debt to the prejudice of the others. He must settle together with the
other creditors. Kung makig compromise sya sa iyang biggest creditor para
makigtunga sya sa nahibilin nya nga na property kay nahapay na sya, hes
prohibited from doing that.

(4) prohibit the debtor from making any payment of its liabilities outstanding
as of the commencement date except as may be provided herein.

THE debtor is prohibited from making payments of outstanding liabilities that

are not in the ordinary course of the business except as he may be allowed
by the court.

Now, the exceptions to the stay order of the court...

Section 18. Exceptions to the Stay or Suspension Order. - The Stay or

Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme Court as of
commencement date Provided, That any final and executory judgment
arising from such appeal shall be referred to the court for appropriate action;

Now, the SC says stay mong tanan, but ako will continue to hear in its own
way the case that is already pending before them.

(b) subject to the discretion of the court, to cases pending or filed at a

specialized court or quasi-judicial agency which, upon determination by the
court is capable of resolving the claim more quickly, fairly and efficiently
than the court: Provided, That any final and executory judgment of such
court or agency shall be referred to the court and shall be treated as a non-
disputed claim;

(c) to the enforcement of claims against sureties and other persons solidarily
liable with the debtor, and third party or accommodation mortgagors as well
as issuers of letters of credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of the debtor as
determined by the court upon recommendation by the rehabilitation
receiver;
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They are not part of the debtor. The surety is a third party. The secured
creditors can proceed against surety or solidarily persons unless they joined
with the petition for rehabilitation. If they do not join, they can be proceeded
against.

Accomodation mortgagors ikaw may nangutang with property na gi-

mortgage. Imo intawon imong inahan nga 95 years old unya imong
gipapirmahan ang papel kay magpakoral ka sa inyong yuta unya mortgage
papers diay to. hehehe

Case: Jackfrel Development Corp. Vs. Security Bank (650 scra 645; 2011)
Supreme Court says a creditor can demand payment from the surety
solidarily liable with the corporation seeking rehabilitation it being not
included in the list of stay order.

That is why it is very difficult to be a surety. Naa gani muhangyo nimo na

magsurety ka, hinumdumi ni. Even with a stay order, you cannot be stayed.

(d) to any form of action of customers or clients of a securities market

participant to recover or otherwise claim moneys and securities entrusted to
the latter in the ordinary course of the latter's business as well as any action
of such securities market participant or the appropriate regulatory agency or
self-regulatory organization to pay or settle such claims or liabilities;

Another exception is where the debtor is securities market participant. As to

his transactions in the stock market, they cannot be stayed. Those who have
bought securities from him cannot be prevented from the mandate of the
security code. If that security was bought a long time ago, and it is in
possession of the broker in street certificate, if the client demands that it be
transferred in his name and pays, that stock certificate cannot be stayed
because those are not the assets of the broker. Those assets are held in trust
for the real owner; the client who has paid for it to the broker.

Actions to recover money, securities entrusted to the broker in the ordinary

course of the business or settlement of claims from the stock exchange.

Other exceptions:

(e) to the actions of a licensed broker or dealer to sell pledged securities of a

debtor pursuant to a securities pledge or margin agreement for the
settlement of securities transactions in accordance with the provisions of the
Securities Regulation Code and its implementing rules and regulations;
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(f) the clearing and settlement of financial transactions through the facilities
of a clearing agency or similar entities duly authorized, registered and/or
recognized by the appropriate regulatory agency like the Bangko Sentral ng
Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or
entities to reimburse themselves for any transactions settled for the debtor;
and

(g) any criminal action against individual debtor or owner, partner, director
or officer of a debtor shall not be affected by any proceeding commend
under this Act.

Remember, criminal cases cannot be compromised. It is the states interest

is involved. Hence it cannot be compromised.

Case: UMALI vs. SAB Realty Corp. (652 scra 215; 2011)

The SC says there is no reason that criminal proceedings should be

suspended during corporate rehabilitation. Please remember that.

So we are finished. Read FRIA. Ill point out one particular provision. The law
says the moment it is issued order that the petitioner is insolvent and then it
goes into liquidation. After the liquidation, all the properties have gone, the
court is supposed to report to the SEC the petitioning debtor so that the SEC
can improve the corporation and those whose corporate franchise has been
cancelled. That is the constitutionality in question. The object of the law is..
sa dihang nangatangtang na tanan, settled. You are ordered relieved. You
have no more obligation. Tangtangan naman hinuon ka sa imong corporate
personality. Mura kag gipatay. You cannot start again. It does not follow.
Someday this will be brought into question because it runs against the grain
of all insolvency proceedings of other jurisdiction.

The end.