SECURITIES REGULATIONS CODE

Republic Act No. 8799 (approved July 19, 2000).

OVERVIEW OF THE FINANCIAL MARKETS

The Securities Regulation Code may be better understood if the environment in
which it exists could be described, albeit briefly. The SRC deals with securities and these
securities are, in general, issued in financial markets. These markets are described below
(see A Guide to the Financial Markets by Charles R. Geist, The Macmillan Press Ltd.,
1982):

Capital markets are the places to go to if you want to raise new money.

(a) Equity capital (for the investor, the stock market provides a variable return)
(i) Stock market (Security = shares of stock)
(b) Debt capital (for the lender, the money or bond market provides a fixed return)
(i) Money market (for short-term debts, i.e., those normally maturing within
one year from date of issuance; security = commercial papers)
(ii) Bond market (for long-term debts, i.e., those normally maturing after a
year from date of issuance; security = junk bonds)






Non-capital markets are the places to go to if you want to hedge or mitigate
the risks attached to holding capital assets.

(a) Commodity market The instruments traded in this market are not present
assets like shares of stock, commercial papers or bonds but future contracts calling for
delivery of an asset such as agricultural products, metals and financial instruments. For
this reason, a commodity market is usually referred to as a futures market. (Security =
futures contracts)

(b) Foreign exchange market This market is an over-the-counter market conducted
by international banks and doest not have a central location. (Security = forward
exchange contracts)

(c) Options market It enables an investor to purchase an option giving him the
right to buy or sell a specific number of shares at a future date, at a specific price. For
this right, the investor either pays or receives money but (just like in a commodity
market) the money involved is only a fraction of the market value of the shares
concerned. (Security = call or put options)

LANGUAGE AND STATE POLICY

How do you start the study of the SRC? (Sec. 3)

Unlike most laws, one cannot immediately jump into the body of the Securities
Regulation Code without familiarizing oneself early on with the terms used in the law.
Her e are some of them:

(a) Securities (Sec. 3.1) These are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instrument, whether written or electronic in character. It includes:
(i) shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-
backed securities;
(ii) investment contracts, certificates of interest or participation in a profit
sharing agreement, certificates of deposit for a future subscription;
(iii) fractional undivided interests in oil, gas or other mineral rights;
(iv) derivatives like options and warrants;
(v) certificates of assignments, certificates of participation, trust certificates,
voting trust certificates or similar instruments;
(vi) proprietary or nonproprietary membership certificates in corporations; and
(vii) other instruments as may in the future be determined by the Commission.


The Revised Securities Act (Batas Pambansa Blg. 178, as amended) did not attempt to
define the term securities but contented itself with an enumeration of the various securities
included in the term.

(b) Issuer (Sec. 3.2) It is the originator, maker, obligor, or creator of the security.
Securities statutes have been enacted principally to protect the investing public from
unscrupulous issuers.
(c) Broker (Sec. 3.3) Any person engaged in the business of buying and selling securities
for the account of others. Compare with a dealer.
(d) Dealer (Sec. 3.4) - Any person who buys and sells securities for his or her own
account in the ordinary course of business. Compare with a broker.
(e) Clearing agency (Sec. 3.6) Any person who acts as intermediary in making
deliveries upon payment to effect settlement in securities transactions. Just like an exchange, it
is the desire of the SEC that a clearing agency could develop into a self-regulatory
organization.
(f) Exchange (Sec. 3.7) An organized marketplace or facility that brings together buyers
and sellers and executes trades of securities and/or commodities. Unlike the usual over-the-
counter market, an exchange has a physical facility.
(g) Insider (Sec. 3.8) A very important term, an insider may be:
(i) the issuer;
(ii) a director or officer (or person performing similar functions) of, or a person
controlling the issuer;
(iii) a person whose relationship or former relationship to the issuer gives or gave
him access to material information about the issuer or the security that is not
generally available to the public;


(iv) a government employee, or director, or officer of an exchange, clearing agency
and/ or self-regulatory organization who has access to material information
about an issuer or a security that is not generally available to the public; or
(v) a person who learns such information by a communication from any of the
foregoing insiders.

One is not prohibited from being an insider. It is not a crime to be one. It is a status.
An insider starts to get into trouble when he acts upon the material nonpublic
information he has and buys or sells shares or, under Section 27.3, communicates such
information to another knowing or having reason to believe that such person will likely
buy or sell a security.
(h) Pre-need plans (Sec. 3.9) These are contracts which provide for the
performance of future services or the payment of future monetary considerations at the
time of actual need, for which plan holders pay in cash or installment at stated prices,
with or without interest or insurance coverage and includes life, pension, education,
interments and other plans which the Commission may from time to time approve.
(i) Promoter (Sec. 3.10) A person who, acting alone or with others, takes
initiative in founding and organizing the business or enterprise of the issuer and receives
consideration therefor.
(j) Prospectus (Sec.3.11) It is the document made by or on behalf of an issuer,
underwriter or dealer to sell or offer securities for sale to the public through a registration
statement filed with the SEC. It is a selling document that contains most of the
information set out in the registration statement. If a potential investor wants
information about new issue, his broker will hand him a prospectus of the issue, not the
registration statement of the particular security.

(k) Registration statement (Sec. 3.12) It is the application for the registration of
securities required to be filed with the SEC. The protection of the investing public starts
with an examination and review by the SEC of an issuers registration statement.
(l) Uncertificated security (Sec. 3.14) It is a security evidenced by electronic or
similar records. The increased difficulty in the issuance and cancellation of shares after
every transaction in the exchange, brought about by increases in the volume of
transactions, has led to the development and adoption of the concept of uncertified
securities.
(m) Underwriter (Sec. 3.15) A person who guarantees on a firm commitment
and/or declared best effort basis the distribution and sale of securities of any kind by
another company. The firm underwriter undertakes to buy the unsold portion of the
issue it handles and gets paid a higher fee for its effort than the best efforts underwriter
who does not make the same commitment.

What is the policy of the State in enacting the SRC? (Sec. 2)

The policy of the State is to establish a socially conscious, free market that (i)
regulates itself, (ii) encourages the widest participation of ownership in enterprises, (iii)
enhances the democratization of wealth, (iv) promotes the development of the capital
market, (v) protects investors, (vi) ensures full and fair disclosure about securities, and
(vi) minimizes if not totally eliminates insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free market.



REGISTRATION OF SECURITIES

What securities are required to be registered? (Sec. 8.1)

Except securities of a class exempt under Section 9 (see Paragraph 16.7) or securities
sold in an exempt transaction under Section 10 (see Paragraph 16.8), all securities that
are to be sold or offered for sale or distribution within the Philippines are required to be
registered with the SEC.

What is the Register of Securities? Sec. 8.4)

The Register of Securities is where the record of the registration of securities,
including the orders entered by the Commission with respect to such securities, shall be
kept.

What securities are exempt from registration and why are they exempt? (Sec.
9.1)

The list of exempt securities under Section 9.1 is not exhaustive. Note the catchall
clause in Section 9.2 that the SEC may, by rule or regulation after public hearing add to
the list any class of securities if it finds that the enforcement of the SRC with respect to
such securities is not necessary in the public interest and for the protection of investors.
The securities listed below are exempt either because the issuer of the security is an
entity that could be trusted not to deceive the investor (e.g., the Philippine government or
the government of a country with which the Philippines maintains diplomatic relations)
or the issuer is regulated, supervised or monitored by another government entity who
could be expected to protect the interest of investors in the same manner as the SEC (e.g.,
the insolvency court, Office of the Insurance Commissioner, Housing, and Land Use
Regulatory Board, Bureau of Internal Revenue and the Bangko Sentral ng Pilipinas):

(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;
(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 of 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 Regulatory Board, or the Bureau of Internal Revenue;
(e) Any security issued by a bank except its own shares of stock.
What are the exempt transactions and why are the securities sold in any of
them not required to be registered? (Sec. 10.1)

This list is also not exhaustive. Pursuant to Section 10.2, the SEC may exempt other
transactions, if it finds that the requirements of registration under the SRC is not
necessary in the public interest or for the protection of the investors such as by reason of
the small amount involved or the limited character of the public offering.
The security involved in an exempt transaction is not in itself exempt but the
circumstances under which the security is sold make the requirement of registration
under the SRC unnecessary in the public interest or for the protection of the investors.
The sale of any security in any of the following transactions makes inapplicable the
requirement of registration under Section 8.1 of the SRC:

(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or
trustee in insolvency or bankruptcy;
(b) By or for the account of a pledge holder, or mortgagee or any other similar line
holder selling or offering for sale or delivery in the ordinary course of business and not
for the purpose of avoiding the provisions of the SRC, to liquidate a bona fide debt, a
security pledged in good faith as security for such debt (e.g., the foreclosure of a chattel
mortgage constituted on shares of stock);
(c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative for the owners
account, such sale or offer for sale, subscription or delivery not being made in the course
of repeated and successive transactions 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;
(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 (e.g., the additional issuance of shares by a
corporation out of its authorized but unissued capital stock);
(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, where 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 (e.g., a convertible preferred stock
which the holder could convert at a certain ratio for common shares); provided, that the
security so surrendered has been registered under the SRC or was, when sold, exempt
from the provisions of the SRC, 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 SRC. 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 transactions, executed upon customers orders, on any registered
exchange or other trading market;
(i) Subscriptions for shares of the capital stock of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital stock 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 subscriptions 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 increased;
(j) The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange (e.g., a two-for-one stock split, whereby the 1,000
outstanding shares of a corporation with a par value of P100.00 are divided into 2,000
shares with a par value of P50.00, would require the holders of the outstanding shares of
stock to exchange their holdings for the new shares);
(k) The sale of securities by an issuer to fewer than 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 managed 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 by rule 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 sale of securities to qualified buyers does not require the protective eye of the
SEC as these buyers are sophisticated and experienced entities who are deemed capable
of taking care of themselves.



What is the initial procedure for the registration of securities? (Sec. 12)

All securities required to be registered under Section 8.1 of the SRC (see Paragraph
16.5 above) shall be registered through the filing by the issuer in the main office of the
SEC of a sworn registration statement with respect to such securities. Unlike the Revised
Securities Act, the SRC does not specify in great detail the information which must be
provided and the documents which must be submitted by the applicant issuer, leaving
such matter, including the form of the application, for the SEC to prescribe.

Who are required to sign the registration statement? (Sec. 12.4)

The registration statement shall be signed by the issuers principal executive officer,
principal operating officer, principal financial officer, comptroller, principal accounting
officer, corporate secretary or persons performing similar functions accompanied by a
duly verified resolution of the board of directors of the issuer corporation.

What action may the SEC take in respect of a registration statement? (Sec.
12.6)

Within 45 days after the date of filing of the registration statement, or by such later
date to which the issuer has consented, the SEC shall declare the registration statement
effective or rejected, unless the applicant is allowed to amend the registration
statement as provided in Section 14 of the SRC. The SEC shall enter an order declaring
the registration statement to be effective if it finds that the registration statement
together with all the other papers and documents attached thereto, is on its face complete
and that the requirements have been complied with. The SEC may impose such terms
and conditions as may be necessary or appropriate for the protection of the investors.
Note that the SEC does not approve the registration statement (although Secs. 8.1 and
8.2 refer to the registration statement being approved by the SEC) but simply declares
it effective. The non-use of the word approve is most probably designed to avoid any
suggestion that the SEC is endorsing the particular issue.

What are the grounds for rejecting a registration statement? (Sec. 13.1)

The SEC may reject a registration statement and refuse registration of the security
thereunder, or revoke the effectivity of a registration statement and the registration of the
security thereunder, after due notice and hearing, by issuing an order to such effect,
setting forth its findings in respect thereto, if it finds that:

(a) The issuer
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of the SRC, the rules promulgated
pursuant thereto, or any order of the Commission of which the issuer has
notice in connection with the offering for which the registration statement
has been filed;


(iii) Has been or is engaged or is about to engage in fraudulent transactions;
(iv) Has made any false or misleading representation of material facts is any
prospectus concerning the issuer or its securities;
(v) Has failed to comply with any requirement 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 statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein not
misleading; or
(c) The issuer, any officer, director or controlling person of the issuer, or person
performing similar functions, or any underwriter 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 judicial or administrative body for violations of securities, commodities, and
other related laws.

What is a tender offer?

A tender offer is a publicly announced intention by a person, acting alone or in
concert with other persons, to acquire equity securities of a public company (Sec. 19). It
has also been described as an imprecise term widely used in securities law, generally
referring to a quick, enticing proposal to the shareholders of a corporation that they
tender their shares for purchase by the offeror at a specified price. Tender offer is an
upside-down term: I make the offer, you make the tender. It is usually, not always, part
of an attempt by the offeror to buy enough stock to control the corporation, i.e., a
takeover (also spelled take-over and take over). Accordingly, tender offer is sometimes
called a takeover offer or a takeover bid. (Mellinkoffs Dictionary of American Legal
Usage, supra, p. 641)
Tender offers are regulated to prevent the stockholders of the target company from
being misled by the offeror or the targets management. Thus, a principal requirement of
the SEC rules on tender offers is the disclosure by the offeror of certain information about
the offer, with a copy of such information being given or sent to the stockholders (see
SRC Rule 19.1, para. 7).

Under what circumstances is a tender offer mandatory? (Sec. 19.1(a); SRC Rule
19.1, para. 2)

Except when relief from the mandatory tender offer requirements is granted under
SRC Rule 19.1, paragraph 3, a person is required under the following circumstances to
make a tender offer for equity shares of a public company in an amount equal to the
number of shares that the person intends to acquire:
(a) Where 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;
(b) Where the person intends to acquire 30% or more of the equity shares of a public
company within a period of 12 months; and
(c) Where the person intends to acquire shares that would result in the ownership of
more than 50% of the equity shares of a public company.

When would a person be presumed to be making a voluntary tender offer?
(SRC Rule 19.1, para. 4)

A person may make a voluntary tender offer. He will be presumed to be doing so
when some or all of the following factors are present.
(a) There is active and widespread solicitation of public shareholders for the shares
of a public company;
(b) The solicitation is made for a substantial percentage of the issuers stock;
(c) The offer to purchase is made at a premium over the prevailing market price, at
firm rather than negotiable terms;
(d) The offer is contingent on the tender of a fixed number of shares; or
(e) The offer is only open for a limited period of time.

The foregoing list of factors reflects the so-called eight-factor Wellman vs.
Dickinson test enunciated in an American case of the same name (475 F. Supp. 783,
823-824 [S.D.N.Y., 1979) involving the coordinated private solicitations of 30
institutions and 9 individuals, with a premium price offered and no individualized
negotiations (see Fundamentals of Securities Regulation by Louis Loss and Joel
Seligman, Little Brown and Company, 3
rd
edition, 1995).


What is a proxy and why is its solicitation regulated? (Sec. 20; SRC Rule 20)

A proxy is a formal authorization from a stockholder that empowers someone t vote
in his or her behalf; the term also refers to the person who is so authorized to vote on
behalf of a stockholder (How the Stock Market Works, John M. Dalton, ed., New York
Institute of Finance, 2
nd
edition, 1993, p. 281).
The SRC regulates the issuance and solicitation of proxies. Indeed, it expressly
requires that proxies must be issued and proxy solicitation must be made in accordance
with SEC rules (Sec. 20.1). Thus, proxies must be in writing, signed by the stockholder or
his duly authorized representative and filed with the corporate secretary before the
scheduled meeting (Sec. 20.2); 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 5 years at one time (Sec. 20.3); and a broker or dealer cannot give a
proxy in respect of any security it carries for the account of a customer without the
express written authorization of such customer (Sec.20.4).
The issuance and solicitation of proxies are regulated to minimize, if not avoid, the
abuse and misuse of the proxy device that may lead to the self-perpetuation and
irresponsibility of management. Management has innate advantages in the solicitation
of proxies: it has the stockholders list, if benefits from the usual inertia of stockholders;
and it has access to corporate funds for the normally substantial costs of solicitation
(Fundamentals of Securities Regulation, supra, p. 432).


The terms solicit and solicitation means
(a) any request for a proxy whether or not accompanied by or included in a form of
proxy;
(b) any request to execute or not to execute, or to revoke, a proxy; or
(c) the furnishing of a form of proxy or other communication to security holders
under circumstance reasonably calculated to result in the procurement, withholding or
revocation of a proxy.
The approach of the SEC Rules on proxy solicitation follows the traditional three-way
approach (see Fundamentals of Securities Regulation, supra, p. 437) which (i) calls for a
brief description of the matters to be considered, together with the action proposed to be
taken by the holder of the proxy (SRC Rule 20, paras. 3 and 4); (ii) requires the registrant
(i.e., the issuer of the securities in respect of which proxies are to be solicited), as a
condition of its own solicitation, to mail to record owners the proxy material of any
stockholder upon his or her request at his or her expense (SRC Rule 20, para. 6); and (iii)
adopts a general fraud rule prohibiting the making of any materially false or misleading
statements (SRC Rule 20, para. 7).
No solicitation of proxy shall be made unless each person solicited is furnished,
concurrently or earlier, with a written proxy statement containing the information
required by the SEC (SRC Rule 20, para. 3). The form of proxy, together with the proxy
statement, shall be sent or given to stockholders at least 15 business days prior to the
meeting date (SRC Rule 20, para. 4.f).



When could the profits made by a stockholder, director or officer in a
purchase and sale, or a sale and purchase, of any equity security be
recovered? (Sec. 23.2)

For the purpose of preventing the unfair use of information which may have been
obtained by a beneficial owner of equity securities, director, or officer of the issuer by
reason of his relationship to the issuer, any profit realized by him from any purchase and
sale, or any sale and purchase, of any equity security of such issuer within any period of
less than 6 months, unless such security was acquired in good faith in connection with a
debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of
any intention of holding the security purchased or of not repurchasing the security sold
for a period exceeding 6 months. A suit to recover such profit may be instituted before
the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the
name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within
60 days after request or shall fail diligently to prosecute the same thereafter, but no such
suit shall be brought more than 2 years after the date such profit was realized.

What are the various ways by which security prices may be manipulated?
(Sec. 24; SRC Rule 24.1(b)-1, para. 5)

The following are some examples of the ways by which security prices may be
manipulated:


(a) 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 (SRC
Rule 24.1 (b)-1, para. 5);
(b) Marketing the close Buying and selling securities at the close of the market
in an effort to alter the closing price of the security (id.);
(c) 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 (id.);
(d) Hype and dump Engaging in buying activity at increasingly higher prices and
then selling securities in the market at the higher prices (id.);
(e) Wash sales Engaging in transactions in which there is no genuine change in
actual ownership of a security (id.);
(f) Squeezing the float 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 as to create artificial prices (id.);
(g) Boiler room sales The use of high-pressure sales tactics to promote
purchases and sales of securities (How the Stock Market Works, supra, p. 239);
(h) Daisy chain A series of purchases and sales of the same issue at successively
higher (or lower) prices, by the same group of people with the purpose of manipulating
prices and drawing unsuspecting investors into the market, leaving them defrauded of
their money or securities (ibid., p. 249).
What is an insider prohibited from doing and what is his duty when tradin?
(Secs. 3.8 and 27)

While to be an insider is not prohibited, it shall, however, be unlawful for an insider
to sell or buy a security of the issuer while in possession of material nonpublic
information with respect to the issuer or the security unless
(a) the insider is able to prove that the information was not gained from such
relationship, or
(b) if the other party selling to or buying from the insider (or his agent) is identified,
the insider is able to prove (i) that he disclosed the nonpublic information to the other
party, or (ii) that he had reason to believe that the other party otherwise is also in
possession of the nonpublic information.
The duty of an insider when trading is to disclose the material nonpublic information
to the other party.

Could an insider be liable even if he does not trade? (Sec. 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 the
communication, becomes an insider as defined in Section 3.8 of the SRC, where the
insider communicating the information knows or has reason to believe that such person
will likely buy or sell a security of the issuer while in possession of such information.
Is there a presumption of insider trading? (Sec. 27.1)

Yes. A purchase or sale of a security of the issuer made by an insider or such
insiders spouse or relatives by affinity or consanguinity within the second degree,
legitimate or common-law, shall be presumed to have been effected while in possession
of material nonpublic information if transacted after such information came into
existence but prior to dissemination of such information to the public and the lapse of a
reasonable time for the market to absorb such information; provided, however, that this
presumption shall be rebutted upon a showing by the purchaser or seller that he was not
aware of the material nonpublic information at the time of the purchase or sale.

What is material nonpublic information? (Sec. 27.2)

Material nonpublic information is information that (i) has not been generally
disclosed to the public and would likely affect the market price of the security after being
disseminated to the public and the lapse of a reasonable time for the market to absorb the
information, or (ii) would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy, sell or hold a security.




REGISTRATION OF MARKET PROFESSIONALS AND ENTITIES

Who are the market professionals and entities required to register with
the SEC?

(a) Brokers, dealers, salesmen and associated persons (Sec. 28.1) No person
shall engage in the business of buying or selling securities in the Philippines as a
broker or dealer, or act as a salesman, or an associated person of any broker or
dealer unless registered as such with the SEC.
(b) Exchanges (Secs. 3.7 and 33.2) The applicant for registration must be
organized as a stock corporation and engaged solely in the business of operating an
exchange. No person may beneficially own or control, directly or indirectly, more
than 5% of the voting rights of the exchange. An industry or business group is
similarly limited to not more than 20% of the voting rights of the exchange. Brokers
shall constitute no more than 49% of the Board of Directors of the exchange, while
the remaining 51% shall be composed of 3 independent directors and persons who
represent the interests of issuers, investors and other market participants who are
not associated with any broker or dealer or member of the exchange for a period of 2
years prior to his appointment.
(c) Other securities trading markets The SEC is authorized to determine the
number, size and location of stock exchanges, other trading markets and commodity
exchanges, and other similar organizations in the light of national or regional
requirements for such activities with the view to promote, enhance, protect, conserve or
rationalize investment (Sec. 36.3). The SEC is also authorized to register and license
innovative and other trading markets or exchanges covering the issuance of innovative
securities, securities of small, medium, growth and venture enterprises, and technology-
based ventures (Sec. 37).
(d) Self-regulatory organizations (Sec. 39) A self-regulatory organization is
any securities exchange, clearing or depository agency or other securities-related
organization or association which is so organized and has the capacity to be able to carry
out the purposes of the SRC and to comply with, and to enforce compliance by its
members and persons associated with its members, with the provisions of the SRC, the
rules and regulations thereunder, and the rules of the association (Sec. 39.3[a]). Those
entities which the SEC may register as self-regulatory organizations include associations
of brokers and dealers, transfer agents, custodians, fiscal and paying agents, computer
services, news disseminating services, proxy solicitors, statistical agencies, security rating
agencies, and securities information processors.
(e) Clearing agencies (Secs. 3.6 and 42).

Who is an independent director?

An independent director is a person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other individual having a relationship with
the corporation, which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director (Sec. 38).
More expansively, SRC Rule 38.1 defines an independent director as a person who,
apart from his fees and shareholdings, is independent of management and free from any
business or other relationship which could, or could reasonably be perceived to,
materially interfere with his exercise of independent judgment in carrying out his
responsibilities as a director in the corporation. For example, a person may not qualify as
an independent director under SRC Rule 38.1 if
(a) he is a substantial shareholder (i.e., a beneficial owner, directly or indirectly, of
more than 10% of any class of equity security) of the corporation or of its related
companies (i.e., its holding company, its subsidiary, or subsidiary of its holding
company) or any of its substantial shareholders; or
(b) he is a relative (i.e., the spouse, parent, child, brother and sister of such person,
and the spouse of such child, brother or sister) of any director, officer or substantial
shareholder of the corporation, any of its related companies or any of its substantial
shareholders; or
(c) he has been employed in any executive capacity by that public company, any of its
related companies or by any of its substantial shareholders within the last 5 years; or



(d) he is retained as professional adviser by that public company, any of its related
companies or by any of its substantial shareholders; either personally or through his firm.

Who are required to have independent directors? (Sec. 38)

A part from an exchange, any corporation with a class of equity securities listed for
trading on an exchange, or with assets in excess of P50 million and having 200 or more
holders, at least 200 of which are holding at least 100 shares of a class of its equity
securities or which has sold a class of equity securities to the public pursuant to an
effective registration statement in compliance with Section 12 of the SRC, shall have at
least 2 independent directors or such independent directors shall constitute at least 20%
of the members of such board, whichever is the lesser.

What transactions of brokers and dealers are prohibited? (Sec. 30.1)

No broker or dealer shall deal in or otherwise buy or sell, for its own account or for
the account of customers, securities listed on an exchange issued by any corporation
where any stockholder, 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 time holding office in said issuer corporation as a
director, president, vice-president, manager, treasurer, comptroller, secretary or any
office of trust and responsibility, or is a controlling person of the issuer.


What is the suitability rule? (SRC Rule 30.2-4)

The suitability rule states that in recommending to a customer the purchase, sale
or exchange of any security, a broker, dealer or an associated person or salesman of a
broker or dealer shall have reasonable grounds for believing that the recommendation is
suitable for such customer upon the basis of the facts disclosed by such customer as to his
other security holdings and as to his financial situation and needs.

Can the SEC suspend trading in a security or all trading on any securities
exchange? (Sec. 36.1)

Yes. The SEC is authorized, if in its opinion such action is necessary or appropriate
for the protection of investors and the public interest so requires, summarily to suspend
trading in any listed security on any exchange or other trading market for a period not
exceeding 30 days or with the approval of the President of the Philippines, summarily to
suspend all trading on any securities exchange or other trading market for a period of
more than30 but not exceeding 90 days; provided, however, that the SEC, promptly
following the issuance of the order of suspension, shall notify the affected issuer of the
reasons for such suspension and provide such issuer with an opportunity for hearing to
determine whether the suspension should be lifted.

What is margin trading and why is it regulated? (Sec. 54)

Margin trading refers to the purchase of securities by an investor using the credit of
the broker to pay for part of the said securities. It is regulated for the purpose of
preventing the excessive use of credit or carrying of securities. The margin is the
amount of money or securities that an investor must deposit with a broker to secure a
loan from the broker. When a broker makes a demand on the investor to deposit money
or securities with the broker when a purchase is made or when the investors equity in a
margin account declines below a minimum standard set by the exchange or the broker,
the broker is said to have made a margin call.

PENALTIES AND SANCTIONS

What administrative sanctions may the SEC impose? (Sec. 54)

If there is a violation of the SRC, the SRC Rules or the orders of the SEC, the SEC
shall, in its discretion and after due notice and hearing, impose any or all of the following
sanctions as may be appropriate in light of the facts and circumstances:
(a) Suspension, or revocation of any registration for the offering of securities;
(b) A fine of no less than P10,000 nor more than P1,000,000 plus not more than
P2,000 for each day of continuing violation;



(c) In the case of a violation of Sections 19.2 (the making of an untrue statement, etc.
in connection with a tender offer), 20 (proxy solicitations),24 (manipulation of security
prices, etc.), 26 (fraudulent transactions) and 27 (insider trading), disqualification from
being an officer, member of the Board of Directors, or person performing similar
functions, of an issuer required to file reports under Section 17 of the SRC or any other
act, rule or regulation administered by the SEC;
(d) In the case of a violation of Section 34 (re segregation and limitation of functions
of members, brokers and dealers), a fine of no more than 3 times the profit gained or loss
avoided as a result of the purchase, sale or communication proscribed by such Section;
and
(e) Other penalties within the power of the SEC to impose.

What is a settlement offer? (Sec. 55)

A settlement offer is a written proposal made to the SEC by a party being
investigated or charted, during an investigation or proceeding under the SRC, in order
that such investigation or proceeding against the said party could be terminated or
dismissed. Upon receipt of such offer of settlement, the SEC may consider the offer
based on timing, the nature of the investigation or proceeding, and the public interest.
The SEC may only agree to a settlement offer based on its findings that such settlement is
in the public interest. 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 the
person making the offer.
Who may sue on account of a false registration statement? (Sec. 56.1)

Any person (i) acquiring a security, the registration statement of which or any
part thereof contains on its effectivity an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make such statement
not misleading,(ii) who suffers damage, and (iii) who did not know of such untrue
statement or omission at the time of such acquisition, may sue and recover damages.

Who may be sued on account of a false registration statement? (Sec. 56.1)

(a) The issuer and every person who signed the registration statement;
(b) Every person who was a director of, or any other person performing similar
functions, or a partner in, the issuer at the time of the filing of the registration statement
or any part, supplement or amendment thereof with respect to which his liability is
asserted;
(c) Every person who is named in the registration statement as being or about to
become a director of, or a person performing similar functions, or a partner in, the issuer
and whose written consent thereto is filed with the registration statement;
(d) Every auditor or auditing firm named as having certified any financial
statements used in connection with the registration statement or prospectus;
(e) Every person who, with his written consent, which shall be filed with the
registration statement, has been named as having prepared or certified any part of the
registration statement, or as having prepared or certified any report or valuation which is
used in connection with the registration statement, with respect to the statement, report,
or evaluation, which purports to have been prepared or certified, by him;
(f) Every selling shareholder who contributed to and certified as to the accuracy of a
portion of the registration statement, with respect to that portion of the registration
statement which purports to have been contributed by him;
(g) Every underwriter with respect to such security.

What is the prescriptive period for the enforcement of actions under
Sections 56 (re civil liabilities on account of false registration statement) and
57 (re civil liabilities arising in connection with prospectus, communications
and reports? (Sec. 62)

No action shall be maintained to enforce any liability created under Sections 56 or 57
of the SRC unless brought within 2 years after the discovery of the untrue statement or
the omission, or, if the action is to enforce a liability created under Sections 57.1(a) (re
offering to sell or selling an unregistered security), unless brought within 2 years after the
violation upon which it is based. In no event shall any such action be brought to enforce
a liability created under Section 56 or Section 57.1 (a) more than 5 years after the
security was bonafide offered to the public, or under Section 57.1(b) (re offering to sell or
selling a security by means of a prospectus, etc. containing an untrue statement, etc.)
more than 5 years after the sale.
What are the damages that may be awarded in suits to recover damages
under Sections 56-60 ? (Sec. 63)

(a) Actual damages;
(b) Treble damages, i.e., damages in an amount not exceeding triple the amount of
the transaction;
(c) Exemplary damages in cases of bad faith, fraud, malevolence or wantonness in
the violation of the SRC or the SRC Rules;
(d) Attorneys fees not exceeding 30% of the award.