Answers to Assignment in Commercial Law Review

under Atty. Juliet A. Sapling-Imperial

Submitted on April 11, 2018

1. What features of the Securities Regulation Code provide for the protection of the
investing public?

The following features provide protection to the investing public:

1. Securities shall not be sold or offered for sale or distribution within the Philippines, without
a registration statement duly filed with and approved by the Commission (except Exempt Securities
and Exempt Transactions). Prior to such sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall be made available to each prospective
purchaser.

“Section 8. Requirement of Registration of Securities.

8.1. Securities shall not be sold or offered for sale or distribution within the Philippines,
without a registration statement duly filed with and approved by the Commission. Prior to
such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.”1

2. A trust fund is established and facilitated by the Commission for the purpose of
compensating investors for extraordinary losses or damages suffered by them due to business
failure, or fraud or mismanagement of the persons with whom they transact.

“36.5. (a) The Commission may establish or facilitate the establishment of trust funds which
shall be contributed by Exchanges, brokers, dealers, underwriters, transfer agents, salesmen
and other persons transacting in securities, as the Commission may require, for the purpose
of compensating investors for the extraordinary losses or damage they may suffer due to
business failure or fraud or mismanagement of the persons with whom they transact, under
such rules and regulations as the Commission may from time to time prescribe or approve in
the public interest.

1 Section 8.1, R.A 8799 (The Securities Regulation Code)

 (b) The Commission may, having due regard to the public interest or the protection of
investors, regulate, supervise, examine, suspend or otherwise discontinue such and other
similar funds under such rules and regulations which the Commission may promulgate, and
which may include taking custody and management of the fund itself as well as investments
in and disbursements from the funds under such forms of control and supervision by the
Commission as it may from time to time require. The authority granted to the Commission
under this subsection shall also apply to all funds established for the protection of investors,
whether established by the Commission or otherwise.”2

3. Civil liabilities against persons have been expanded to cover the following:

a.) Those who are controlling persons, aider and abettor (Section 51).3

b.) Those who are responsible for false registration statement (Section 56).4

c.) For circulation of prospectuses, communications and reports violating the Code
(Section 57).5

d.) For fraud in connection with securities transactions (Section 58). 6

e.) For manipulation of security prices (Section 59)7

f.) For commodity future contracts and pre-need plans engaged into, in violation of any
rule or regulation of the Commission (Section 60)8

g.) For insider trading in violation of the Code. (Section 61)9

4. The code enumerates and prohibits certain acts which may be detrimental to the public, such
as manipulation of prices, devises, and practices (Section 24), fraudulent transaction (Section 26),
failure of an insider to disclose without trading (Section 27), and the regulation of option trading
(Section 25), use of an unregistered exchange (over-the-counter market) (Section 32), and violation
of the provisions on segregation of functions of members, brokers, dealers (Section 34).10

2 Section 36.5, R.A 8799 (The Securities Regulation Code)

3 Section 51, R.A. 8799 (The Securities Regulation Code)
4 Section 56, R.A 8799 (The Securities Regulation Code)
5 Section 57, RA 8799 (The Securities Regulation Code)
6 Section 58, RA 8799 (The Securities Regulation Code)
7 Section 59, RA 8799 (The Securities Regulation Code)
8 Section 60, RA 8799 (The Securities Regulation Code)
9 Section 61, RA 8799 (The Securities Regulation Code)
10 Villanueva, Cesar Lapuz, and Villanueva, Gabriel, Commercial Law Review, 2015 edition. P.889-895
5. The application for registration of an issuer judicially declared insolvent, has violated any of
the provisions of the Code or has been or is engaged in fraudulent transactions, has made any false
or misleading representation of material facts in any prospectus concerning the issuer, among others,
is rejected by SEC, and if after registration is allowed, the issuer is eventually found to be in any of
the above situations, the registration may be revoked (Section 13).11

2. Under the Securities Regulation Code, what are acts are considered as manipulation
of security prices?

1. Transactions intended to create active trading:

 To create a false or misleading appearance of active trading in any listed security traded in an
Exchange or any other trading market (referred as “Exchange”).12

a. Wash Sales – engaging in transaction in which there is no genuine change in the actual
ownership of a security.

b. Matched Sale – There is a change of ownership in the securities by entering an order for
the purchase/sale of security with the knowledge that a simultaneous order of substantially
the same size, time, and price, for the sale or purchase of any such security, has or will be
entered by or for the same or different parties.

c. Similar transactions where there is no change of beneficial ownership.

d. Market rigging or jiggling- By performing similar act where there is no change in

beneficial ownership.13

2. Engaging in transactions which induce price to increase or decrease:

 That raises or depresses the price of a security to induce sale or purchase of such security.
 That creates active trading to induce such purchase or sale through manipulative device such
as:

a. Marking the close – buying and selling securities at the close of the market to alter the
closing price of the security.

11 Section 13, RA 8799 (The Securities Regulation Code)

12 Sundiang, Jose, Sr. and Aquino Timoteo, Reviewer on Commercial Law, 2014 edition. P.300
13 Sundiang, Jose, Sr. and Aquino Timoteo, Reviewer on Commercial Law, 2014 edition. P.300
 b. Painting the tape – engaging in a series of transactions in securities that are reported
publicly to give the impression of activity or price movement in a security.

c. Squeezing the float – refers to taking advantage of a shortage of securities in the market
by controlling the demand side and exploiting market congestion during such shortages in a
way to create artificial prices.

d. Hype and dump – engaging in buying activity at increasingly higher prices and then
selling securities in the market at the higher prices.

e. Boiler room operations – the use of high pressure sale tactics to promote purchase and
sale of securities

f. Daisy chain – it refers to a series of purchase and sales of the same issue at successively
higher prices by the same group of people with the purpose of manipulating prices are
drawing unsuspecting investors into the market leaving them defrauded of their money and
securities.

g. Improper matched orders- engaging in transactions where both the buy and sell orders
are entered at the same time with the same price and quantity by different but colluding
parties.

h. Scalping- Where a person, like an investment advisor, purchase securities for his own
account before recommending that security, and then sells the share at a profit upon the rise
in the market price following the recommendation.

i. Flipping- operated where one office buys a particular stock for customers, while another
office simultaneously recommends that its customers sell the stock, with the stock being
shifted from one office to another, and the firm makes a profit and the brokers earn their
commissions.

j. Other similar operations or devices.

3. By circulation or dissemination of information to the effect that the price of any such security will
or is likely to rise or fail because of market operations.

4. To make, regarding any security registered on an exchange, any statement which is false or
misleading with respect to any material fact, and which he knew or had reasonable ground to believe
is false or misleading.

5. To effect series of transaction for the purpose of pegging, fixing or stabilizing the price of security
trade in an Exchange, unless allowed by the SRC or SEC rules.14

14 Villanueva, Cesar Lapuz, and Villanueva, Gabriel, Commercial Law Review, 2015 edition. P.889-890
3. A. What is Wash sale?

Wash sales are defined as engaging in transactions in which there is no change in beneficial
ownership of a security. Hence, they are expressly prohibited by the Securities Regulation Code.15

B. What is Churning?

Churning involves the excessive trading of securities by a broker-dealer in a customer's

discretionary account in order to generate commissions, without regard to the customer's investment
objective.16

C. What is Short Sale?

Rule 24.2-2 - Short Sales

- The term "short sale" shall mean any sale of a security which the seller does not own or any
sale which is consummated by the delivery of a security borrowed by, or for the account of
the seller with the commitment of the seller or securities borrower to return or deliver said
securities or their equivalent to the lender on a determined or determinable future date. A
person shall be deemed to own a security if: (1) he or his agent has title to it; (2) he has
purchased, or has entered into an unconditional contract, binding on both parties thereto, to
purchase it and has not yet received it; (3) he owns a security convertible into or
exchangeable for it and has tendered such security for conversion or exchange; (4) he has an
option to purchase or acquire it and has exercised such option; or (5) he has rights or
warrants to subscribe to it and has exercised such rights or warrants provided, however, that
a person shall be deemed to own securities only to the extent he has a net long position in
such securities.

Rule 24.2-2.3. Order for Short Sale

- Upon receiving an order to sell short a qualified security, the order should be indicated on
the selling order and throughout all the records pertinent to the sale. Prior to acceptance of
any short sale order, the broker dealer shall make a determination that the customer has
already borrowed the security and such will be delivered in good deliverable form within the
prescribed settlement period.

Rule 24.2-2.10. Prohibition on Short Selling

15
2015 IMPLEMENTING RULES AND REGULATIONS OF THE SECURITIES REGULATION CODE
16
356 UST Golden Notes 2017
 The Commission may, motu proprio or upon recommendation of the Exchange, prohibit
short selling in the Exchange indefinitely or for such period as it may deem proper for the
protection of the investors. The Commission may also prohibit short selling in any
Exchange as an emergency measure or whenever such short selling is necessary or
appropriate in the public interest.17

4. What are considered as fraudulent transactions under RA 8799?

The following are the fraudulent transactions under Chapter 7 Section 26 of RA 8799:

Fraudulent Transactions – It shall be unlawful for any person, directly or indirectly, in

connection with the purchase or sale of any securities to:

1. Employ any device, scheme, or artifice to defraud;

2. Obtain money or property by means of any untrue statement of a material fact of any
omission to state a material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading; or

3. Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person.18

5. What works are subject to copyright?

 Section 172 of the Intellectual Property Code lists the works covered by copyright protection
from the moment of their creation, namely:19

(a) Books, pamphlets, articles and other writings;

(b) Periodicals and newspapers;

(c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not
reduced in writing or other material form;

(d) Letters;

(e) Dramatic or dramatico-musical compositions; choreographic works or entertainment

in dumb shows;

(f) Musical compositions, with or without words;

17 2015 IMPLEMENTING RULES AND REGULATIONS OF THE SECURITIES REGULATION CODE < TITLE VII
Prohibitions on Fraud, Manipulation and Insider Trading > (REPUBLIC ACT 8799)
18 CHAPTER VII: PROHIBITIONS AND FRAUD, MANIPULATION AND INSIDER TRADING (R.A. 8799 THE

SECURITIES REGULATION CODE)

19 CHAPTER II: ORIGINAL WORKS (Republic Act No. 8293)
 (g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other
works of art; models or designs for works of art;

(h) Original ornamental designs or models for articles of manufacture, whether or not
registrable as an industrial design, and other works of applied art;

(i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to
geography, topography, architecture or science;

(j) Drawings or plastic works of a scientific or technical character;

(k) Photographic works including works produced by a process analogous to

photography; lantern slides;

(l) Audiovisual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audio-visual recordings;

(m) Pictorial illustrations and advertisements;

(n) Computer programs; and

(o) Other literary, scholarly, scientific and artistic works.

Thus, works are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality and purpose.20

 Moreover, under Sec. 173 of the same Code, the following derivative works shall also be
protected by copyright:

(a) Dramatizations, translations, adaptations, abridgments, arrangements, and other

alterations of literary or artistic works;21 and

(b) Collections of literary, scholarly or artistic works, and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement of
their contents.22

 Lastly, Section 174 on Published Edition of Work. – In addition to the right to publish
granted by the author, his heirs, or assigns, the publisher shall have a copyright consisting
merely of the right of reproduction of the typographical arrangement of the published
edition of the work.23

20
(Sec. 2, P.D. No. 49a)
21
CHAPTER III: DERIVATIVE WORKS (Republic Act No. 8293)
22
(Sec. 2, [P] and [Q], P.D. No. 49)
23
Section 174. Published Edition of Work (Republic Act No. 8293)
6. What works are non-copyrightable? Explain or illustrate, with examples if applicable.

Copyright protection does not cover:

1. Idea, procedure, system method or operation, concept, principle, discovery or mere

data as such, even if they are expressed, explained, illustrated or embodied in a work;
 Examples: basketball scores, telephone numbers, dates of birth, and the number of people at
a protest
2. News of the day and other miscellaneous facts having the character of mere items of
press information;
 Example: Oral arguments on Quo Warranto Petition against Chief Justice Maria Lourdes
Sereno
3. Official text of a legislative, administrative or legal nature, as well as any official
translation thereof;
 Example: Resolution of Both Houses No. 8
4. Work of the Philippine Government, unless there was a prior approval by the
appropriate government agency; and
 Example: Census Reports

5. Statutes, rules and regulations, and speeches, lectures, sermons, addresses, and
dissertations, pronounced, read or rendered in courts of justice, before administrative
agencies, in deliberative assemblies and in meetings of public character.

 Example: Sermons of Pastors every Sunday service in church

7. Discuss the rights of a copyright owner.

The author of a work has copy or economic rights, as well as moral rights over the work. Hence, the
economics right of the author provides for the exclusive right to carry out, authorize or prevent the:

1. Reproduction of the work or substantial portion of the work;

2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation
of the work;
3. The first public distribution of the original and each copy of the work by sale or other
forms of transfer of ownership;
4. Rental of the original or a copy of an audio-visual or cinematographic work, a work
embodied in a sound recording, a computer program, a compilation of data and other
materials or a musical work in graphic form, irrespective of the ownership of the original
or the copy which is the subject of the rental;
5. Public display of the original or a copy of the work;
6. Public performance of the work; and
 7. Other communications to the public of the work.24

Moral rights confer the following on the author of a work:

1. To require that the authorship of the works be attributed to him, in particular; the right
that his name, as far as practicable, be indicated in a prominent way on the copies, and in
connection with the public use of his work;
2. To make any alterations of his work prior to, or to withhold it from publication;
3. To object to any distortion, mutilation or other modification of, or other derogatory
action in relation to, his work which would be prejudicial to his honor or reputation; and
4. To restrain the use of his name with respect to any work not of his own creation or in a
distorted version of his work.25

These are personal rights independent from the economic rights. Being a personal right, it can only
be given to a natural person. Hence, even if he has licensed or assigned his economic rights, he
continues to enjoy the above-mentioned moral rights.26

Case Briefs:

(1) PRIMANILA PLANS, INC., vs SECURITIES AND EXCHANGE COMMISSION

G.R. No. 193791, August 6, 2014

FACTS:

Primanila was registered with the SEC on October 17, 1988 and was issued a Certificate of
Registration. The primary purpose of the company was "to organize, establish, develop, conduct,
provide, maintain, operate, offer, issue, market and sell pension plans under which the savings of
professionals, officers, directors and other personnel of corporations, firms, or entities, and self-
employed individuals can be pooled together, accumulated and invested in profitable placements and
productive enterprises so as to build an Accumulated Fund for each individual participant or
planholder for his retirement, monthly pension or for other [foreseeable] needs in the future."
Primanila then operated as a pre-need company and maintained a business office in Makati City.

On April 9, 2008, the SEC was prompted to issue the subject cease and desist order after an
investigation conducted by the SEC’s Compliance and Enforcement Department (CED) on
Primanila yielded the following factual findings in flagrant violation of RA 8799: Primanila’s website
(www.primanila.com) was offering a pension plan product called Primasa Plan, that no registration
statement has been filed by Primanila for the approval of said Primasa Plan, and that many of its
planholders mostly members of the PNP remitted the total amount of Php 2,072,149.38 to
Primanila representing the aforementioned premium collections via salary deductions, among others.

24 UST Golden Notes 2017 (pp. 425)

25 Section 193, Scope of Moral Rights (Intellectual Property Code)
26
UST Golden Notes 2017 (pp. 426)
 Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift Cease and Desist Order
but was denied by SEC for lack of merit making the cease and desist order permanent. Unyielding,
Primanila appealed the case to the CA but the latter dismissed the petition and affirm in toto the
issuance of SEC. Hence, this petition.

ISSUE: Whether or not Primanila violated Sec. 16 of SRC which barred the sale or offer for
sale to the public of a pre-need product except in accordance with SEC rules and regulations.

HELD:

Yes. The Court held that Primanila clearly violated Section 16 of the SRC and pertinent rules
which barred the sale or offer for sale to the public of a pre-need product except in accordance with
SEC rules and regulations. Under Section 16 of the SRC:

Sec. 16. Pre-Need Plans. - No person shall sell or offer for sale to the public any pre-need
plan except in accordance with rules and regulations which the Commission shall prescribe.
Such rules shall regulate the sale of pre-need plans by, among other things, requiring the
registration of pre-need plans, licensing persons involved in the sale of pre-need plans,
requiring disclosures to prospective plan holders, prescribing advertising guidelines,
providing for uniform plans, imposing capital, bonding and other financial responsibility,
and establishing trust funds for the payment of benefits under such plans.

It is undisputed that Primasa plans were not registered with the SEC. Primanila was then
barred from selling and offering for sale the said plan product. A continued sale by the company
would operate as fraud to its investors and would cause grave or irreparable injury or prejudice to
the investing public, grounds which could justify the issuance of a cease and desist order under
Section 64 of the SRC. Furthermore, even prior to the issuance of the subject cease and desist order,
Primanila was already enjoined by the SEC from selling and/or offering for sale pre-need products
to the public for failure to renew its dealer’s license for 2018. It also had not obtained a secondary
license to act as dealer or general agent for pre-need pension plans for 2008.

(2) SECURITIES AND EXCHANGE COMMISSION vs THE HONORABLE COURT

OF APPEALS, OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING
TIA

G.R. No. 187702, October 22, 2014

FACTS:

Omico Corporation (Omico) is a company whose shares of stock are listed and traded in the
Philippine Stock Exchange, Inc. Astra Securities Corporation (Astra) is one of the stockholders of
Omico owning about 18% of the latter’s outstanding capital stock.
 Omico scheduled its annual stockholders’ meeting on 3 November 2008 where it set the
deadline for submission of proxies on October 23, 2008 and the validation of proxies on October
25, 2008. Astra objected to the validation of the proxies issued in favor of Tommy Kin Hing Tia
(Tia), representing about 38% of the outstanding capital stock of Omico. Astra also objected to the
inclusion of the proxies issued in favor of Tia and/or Martin Buncio, representing about 2% of the
outstanding capital stock of Omico.

Astra maintained that the proxy issuers, who were brokers, did not obtain the required
express written authorization of their clients when they issued the proxies in favor of Tia. In so
doing, the issuers were allegedly in violation of SRC Rule 20 (11) (b) (xviii) of the Amended
Securities Regulation Code (SRC or Republic Act No. 8799) Rules. Furthermore, the proxies issued
in favor of Tia exceeded 19, thereby giving rise to the presumption of solicitation thereof under SRC
Rule 20(2) (B) (ii) (b) of the Amended SRC Rules. Tia did not comply with the rules on proxy
solicitation, in violation of Section 20.1 of the SRC.

Despite the objections of Astra, Omico’s Board of Inspectors declared that the proxies
issued in favor of Tia were valid.

ISSUES: 1. Whether the SEC has jurisdiction over controversies arising from the validation of
proxies for the election of the directors of a corporation.

2. Whether or not SEC may appeal a reversal of its ruling.

HELD:

1. No. The Court held that when proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on
proxy solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC. Hence, the jurisdiction is
still with the Special Commercial Courts.

An election contest covers any controversy or dispute involving the validation of proxies, in
general. Thus, it can only refer to all the beneficial purposes that validation of proxies can bring
about when made in connection with a forthcoming election of directors. Thus, there is no point in
making distinctions between who has jurisdiction before and who has jurisdiction after the election
of directors, as all controversies related thereto – whether before, during or after – shall be passed
upon by regular courts as provided by law.

2. No. The Court held that quasi-judicial agencies do not have the right to seek the review of
an appellate court decision reversing any of their rulings. This is because they are not real parties-in-
interest. Thus, the Court expunged the petition filed by the SEC for the latter’s lack of capacity to
file the suit.
Submitted by:

GROUP III

(1) Fortunato, Moises L.

(2) Antido, Sheryll L.
(3) Domondon, Dakila D.
(4) Soria, Jaynov J.