Securities Regulation Code:

Rules of Business Conduct and Rules Against

Manipulative, Fraudulent and Prohibited Acts

Erwin M. Romanes
Lecturer

www.company.com
Dealing with the Investing Public– SRC Rules on
Business Conduct

Prompt execution rule – execute promptly in accordance with

client instruction.

Best execution rule – execute client orders on the best/most

favorable available terms SRC Rule 32.2 (a)) – diligence to
ascertain best available price

Done transactions are promptly and fairly allocated to client

accounts. In giving clients advice, ensure it is based on thorough
analysis, taking into account available alternatives
Dealing with the Investing Public– SRC Rules on
Business Conduct

Client priority

➢ Customer First Policy. Handle client orders fairly, in the order in

which they are received. Client orders have priority over
Registered Person’s account/orders
➢ For aggregated orders, give priority to client
➢ Insider trading prohibition
➢ In case of business failure/cessation (whole or in
part), promptly notify client and promptly complete business or
transfer to another registered person.
Dealing with the Investing Public– SRC Rules on
Business Conduct

Conflicts of Interest- when RP has material interest in

a transaction with/for a client which gives rise to a
conflict in interest, he is not to advise or deal in
connection with the transaction unless he DISCLOSED
the conflict and has taken all reasonable steps to
ENSURE FAIR TREATMENT

Client Assets – ensure client assets/positions are

ACCOUNTED for PROPERLY and PROMPTLY and
ADEQUATELY SAFEGUARDED.
Dealing with the Investing Public– SRC Rules on
Business Conduct

Confirmation of Customer Orders-

➢ Report all transactions.
➢ Send written confirmation as promptly as possible on the day
these are made.
➢ Employee, salesman of Broker not allowed to accept
confirmation on behalf of client.
➢ Clients to be given option to choose manner of confirmation
(courier, fax, or email) in the CAIF. For fax or email, clients are
to confirm via fax or email no later than 12:00 noon of next
business day (if no reply, assume client attests to accuracy of
invoice). Broker to keep printout of reply together with the data
being confirmed.
➢ Confirmation must state whether the BD is broking for client or
for itself and if the BD is controlled be, controls, or is under
common control with the issuer of the security.
Dealing with the Investing Public– SRC Rules on
Business Conduct

•Discretionary Accounts.

BD cannot effect a transaction unless client or his

authorized representative specifically authorizes
transaction. Client can authorize IN WRITING that BD
can effect transactions on his behalf (in such case
client agreement to specify it is a Discretionary
Account)
Dealing with the Investing Public– SRC Rules on
Business Conduct

Suitability Rule – recommendations to client must be suitable

based on client’s other security holdings , financial situation and
other needs. Prior to executing a transaction, a CAIF must be
executed.

Customer Account Statements- must be sent not less than

monthly. Contains stock position, money balances, account
activity (buy, sell, dm, cm, dividends, scm, sdm). Must disclose
that free credit balances are not segregated and may be used in
BD operations but payable upon customer demand.
Dealing with the Investing Public– SRC Rules on
Business Conduct

Charges for Services Performed- charges for services

(collection, securities transfer, custody etc) must be reasonable.
BD to file a schedule of minimum commission rates. No discounts
or rebates shall be made from the minimum commission rates.

Customer Complaint Rule – BD to keep (1) file of all written

complaints and action taken by BD (2) separate record of the
complaints indexed and referenced to files containing related
correspondence . In its main office, BD to keep files of all
complaints and action taken, indexed to related correspondences.
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

Principles of Markets - market prices should reflect free interplay

of supply and demand. Distortion of market forces, generally,
prohibited and unacceptable. Market success depends on
PERCEPTION that it is FAIR, EFFICIENT, TRANSPARENT.

SRC SEC 24.1

Unlawful for a person acting for himself or through BD, directly or
indirectly
a) to create a false/misleading appearance of active trading
by:
(i) Wash Sale - effecting transaction involving no change
in beneficial ownership
(ii) Improper Matched Orders - entering orders with
knowledge of a simultaneous matched order
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

b) to effect , alone or with others, a SERIES of

transactions that:

(i)raise price, to induce purchase

(ii)depress price, to induce sale

(iii) creates active trading through manipulative

devices such as MARKING THE CLOSE, PAINTING THE
TAPE, SQUEEZING FLOAT, HYPE AND DUMP, BOILER
ROOM OPERATIONS, etc.
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

c) disseminate info that price is likely to rise or fall

because of manipulative operations

d) to knowingly make a false/misleading statement of

material fact so as to induce purchase or sale of a security

e) to effect a series of transactions to peg, fix or

stabilize price (unless allowed by SRC or SEC rules).
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

Sec 24.2 No one shall employ any manipulative device or

contrivance. No short sale or stop loss order to be executed
unless in accordance with SEC Rules (uptick rule).
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

SRC Rule 24.1 (b)1 – Manipulative Practices

1.) Unlawful for any person to bid or offer so as to create a false or

misleading appearance of active trading, market or price

2.) Unlawful for any BD, AP or Salesman (RP) to bid or offer on

account of another person, where the RP INTENDS to create or
KNOWS the other person intends to create, or taking into account
the circumstances, SUSPECTS the other person intends to create –
a false or misleading appearance of active trading, market or price
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

3.)Prohibited Conduct
A. Painting the Tape - engaging in a SERIES of
transactions to give impression of activity or price
movement
B. Marking the Close/End-of-Day Price Ramping –
buying/selling at the close of the market in an
effort to alter the closing price
C. Improper Matched Orders- both buy and sell
entered at the same time, same price and quantity
by DIFFERENT but COLLUDING parties
D. Wash Sales- engaging in transactions with no
genuine change in actual ownership. Has the
appearance of a bona fide transaction
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

3.)Prohibited Conduct
A. Painting the Tape - engaging in a SERIES of
transactions to give impression of activity or price
movement
B. Marking the Close/End-of-Day Price Ramping –
buying/selling at the close of the market in an
effort to alter the closing price
C. Improper Matched Orders- both buy and sell
entered at the same time, same price and quantity
by DIFFERENT but COLLUDING parties
D. Wash Sales- engaging in transactions with no
genuine change in actual ownership. Has the
appearance of a bona fide transaction
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

E. Hype and Dump/Pump and Dump- engaging in buying activity at increasingly higher
prices and then selling at the high OR engaging in selling activity at lower prices and then
buying at the low. Often occur in the internet - posted messages urging readers to buy or
sell quickly, claiming “inside” info, or even economic or market data as the basis for the
recommendation.

F. Squeezing the Float/Withholding – taking advantage of shortage of supply of a

security, by controlling the demand and exploiting market congestion to create artificial
prices. (Example: In an IPO, the underwriter transfers the allotted IPO shares to its own
trading account, or to related parties with whom it has reciprocal arrangements. The
supply becomes restricted and not all in investors are able to buy at the IPO price,
resulting in a high aftermarket price. The underwriter then sells the IPO shares from its
own trading/related party accounts at the higher aftermarket price.)

G. Disseminating false/misleading market info through media to influence price

H. Others, including creation of temporary funds to be used in manipulative

practices
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

4.) Factors to consider in determining a case can be made for manipulation

(failure to consider these factors raises the presumption that the transaction is
manipulative) :

A. Whether the order would materially alter the market for, and/or the price
of the security
B. Time the order is entered or any instructions concerning the time of
entry of the order
C. Whether the client of a party related to the client may have an interest
in creating a false/misleading appearance of active trading , market of
price of the security
D. Whether the order is accompanied by settlement, delivery or security
arrangements which are unusual.
E. Whether the order appears to be part of a SERIES of orders that is
unusual
F. Whether there appears to be a legitimate commercial reason or basis
in placing the order not related to an intention to mislead
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

SRC RULE 27.1 Insider trading Unlawful for insider to sell /buy a security while
in possession of material info regarding the security that is NOT GENERALLY
AVAILABLE TO THE PUBLIC, unless: (a) insider proves the info was not gained
from his relationship with the issuer; or insider proves (b) (i) he disclosed the
insider info to the party he is selling to/buying from, or (ii) he had reason to believe
the other party was also in possession of the insider information.

A purchase/sale made by an insider or his spouse, or relatives within 2nd degree of

consanguinity will be presumed to have been done while in possession of material
non-public information IF transacted after such info came into existence but prior to
public dissemination and the lapse of a reasonable time for market to absorb the
info. This presumption can be rebutted by the insider by proving he was not aware
of the info at the time of his purchase/sale.

Unlawful for insider to communicate material non-public info to another person,

who then becomes an insider, if the insider communicating the info has reason to
believe the other person will likely buy or sell the security while in possession of
the inside information.
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

Information is deemed MATERIAL NON-PUBLIC if:

1.) It is not generally disclosed to the public and would affect market price
after it’s disseminated and a certain period has lapsed for the market to
absorb said info.
2.) It will be considered by a reasonable person as important in
determining whether he buys or sells

“INSIDER” means:
1.) The issuer
2.) A director, officer, or person controlling the issuer
3.) Person whose relationship or former relationship to issuer gave him
access to insider info
4.) Govt employee, director, officer of an exchange, clearing agency, or
SRO who has access to insider info
5.) A person who learns the info by a communication from any of the
foregoing insiders
MANIPULATIVE, FRAUDULENT AND OTHER
PROHIBITED PRACTICES

Elements of an insider trading violation:

1.) insider possessed NON-PUBLIC information about the issuer

2.) the information was MATERIAL
3.) insider bought or sold the issuer’s shares
4.) insider owed a duty to disclose the info to the
counterparty buying from or selling to him
5.)insider failed to disclose the info