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REPUBLIC ACT NO. 8799


SECURITIES REGULATION CODE

CHAPTER I
Title and Definitions

SEC. 1. Title. This shall be known as The


Securities Regulation Code.

stock market for less costly sources of


capital.
Thus, the essential contribution of the whole
capital market to the economy.
The legislators believed that the legal
framework that will provide for the
development of a capital market needs to
keep pace with the fast changing domestic
and international economic developments.

A. Historical Background
C. Features of the SRC

In reaction to the 1999 stock scam at the PSE


(known as the BW Resources scandal), the
PH Congress FAST-TRACKED the passage
of the SRC.
The SEC was stripped of all quasi-judicial
powers to allow it to concentrate on its main
role to administer and monitor the PH capital
market.
The SRC was approved by Pres. Joseph
Estrada on July 19, 2000, published in 2
newspapers of general circulation on July 24,
2000, and became effective 15 days
thereafter, i.e. on August 8, 2000.
The SRC repealed the Revised Securities Act
(BP 178) in its entirety and Sec. 2, 4, and 8 of
PD 902-A.
The SRC incorporated and modified certain
provisions of the Revised Securities Act of
1982 and the earlier Securities Act of 1937.
The SRC was patterned after the:

1933 US Securities Act; and

1934 US Securities Exchange Act.

The 13 chapters of the SRC are:


1. Title and Definitions
2. Securities and Exchange Commission
3. Registration of Securities
4. Regulation of Pre-need Plans
5. Reportorial Requirements
6. Protection of Shareholder Interest
7. Prohibitions on Fraud, Manipulation,
and Insider Trading
8. Regulation of Securities Market
Professionals
9. Exchanges and Other Securities Trading
Market
10. Registration,
Responsibilities,
and
Oversight
of
Self-Regulatory
Organizations
11. Acquisition and Transfer of Securities
and Settlement of Transactions in
Securities
12. Margin and Credit
13. General Provisions

The SRC is supplemented by the Amended


Implementing Rules and Regulations of the
SRC (Amended SRC Rules).

The reforms advanced by the SRC are:


1. Securities are defined to include those
securities which the market may develop
in the future
2. Shift from merit regulation to full
disclosure
3. A definite time frame was established
for the SEC to render decision on
application
4. Expanding the coverage of insider to
include a person who receives tip
from an insider
5. Allowing investors to recover from
insiders who trade or tip information in
violation of the insider trading
provisions
6. Transfer of the SECs jurisdiction over
all cases under Sec. 5 of PD 902-A to
the RTC.

B. Necessity to Amend the Law on Securities

The RSA focused on investor protection by:

Requiring adequate disclosure of


information to prospective investors

Empowering the government to look


into the merit of the securities to be sold
to the public.
The increasing awareness of the Filipino
people and the growing interest of foreign
investors on the emerging stock market in the
PH have contributed enormously to the
growth of the capital market.
With more information and educational
campaigns, more Filipinos take cognizance
of securities as investment instruments.
While investor base is increasing, the no. of
companies wanting to go public also
increased.

INITIAL PUBLIC OFFERINGS (IPOs)


have been on the rise since 1987 as
more companies see the potential of the

SEC. 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
Regulation Code is hereby enacted.

Shift from merit regulation to full disclosure


i.
Requiring issuers and underwriters
to fully disclose all material facts
about the issue or nature of the
offering
ii.
Mandatory
distribution
of
prospectus and regular filing of
financial and operational reports
iii.
Simplified registration process
iv.
Standards for rejection have been
made clear and more specific
v.
Definite time frame established for
SEC to render decision on
application
vi.
Scope of exempt securities is
clarified

2.

Strengthen anti-fraud provisions


i.
Strengthening
provisions
on
insider trading
ii.
Expanding the coverage of
insider to include a person who
receives tip from an insider
iii.
Allowing investors to recover from
insiders who trade or tip
information in violation of the
insider trading provisions

3.

Strengthen self-regulation
i.
Empowering the various market
players, including the exchanges,
the
clearing
agencies,
the
stockbrokers and dealers, to
develop their capability to operate
as self-regulatory organizations
ii.
SROs will have the primary
responsibility
to
maintain
professionalism in its internal
affairs and to regulate and
discipline its member

Authorizing the SEC to review the


regulatory programs of the SRO

4.

Keeping up with contemporary market


practices
i.
Securities are defined to include
those securities which the market
may develop in the future
ii.
Provisions recognizing the need to
improve
the
efficiency
of
transactions in the securities market
iii.
Allowing for sufficient flexibility
to adopt modern practices and
trading technologies

5.

Strengthen
SEC
rule-making
and
reorganization powers
i.
Institutionalizing the character of
the SEC as a collegial body giving
it the flexibility to effect
organizational changes to cope
with the complexities and demands
of a modern securities market
ii.
Empowering SEC to make rules
and allow it to adjust to a very
dynamic sector which it has to
regulate
iii.
Giving the SEC the power to
regulate trading options and
derivatives

Securities

A. Key provisions of the SRC


1.

iii.

B. Protection
Businesses

of

Investors

and

Legitimate

Purpose of Securities Law:

To give adequate and effective


protection to the investing public against
fraudulent representations, or false
promises, and the imposition of
worthless ventures.

To provide investors with adequate


information to base their decision to buy
and sell securities.

To protect legitimate business seeking to


obtain
capital
through
honest
representation against competition from
crooked promoters and prevent fraud in
the sale of securities.

Intended Effects:

Prevention of excesses and fraudulent


transactions, merely by requirement that
their details be revealed

Placing the market during the early


stages of offering of security a body of
information, which operating indirectly
through investment services and expert

investors, will intend to produce a more


accurate appraisal of a security
SEC. 3. Definition of Terms. 3.1.
Securities are shares, participation or
interests in a corporation or in a
commercial enterprise or profitmaking venture and evidenced by a
certificate,
contract,
instrument,
whether written or electronic in
character. It includes:
a)
Shares of stock, bonds,
debentures, notes, evidences
of
indebtedness,
assetbacked securities;
b)
Investment
contracts,
certificates of interest or
participation in a profit
sharing
agreement,
certificates 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
non
proprietary
membership
certificates in corporations;
and
g)
Other instruments as may in
the future be determined by
the Commission.
3.2
Issuer is the originator, maker,
obligor, or creator of the security.
3.3
Broker is a person engaged in the
business of buying and selling
securities for the account of others.
3.4
Dealer means any person who buys
and sells securities for his/her own
account in the ordinary course of
business.
3.5. Associated person of a broker or dealer
is an employee thereof who, directly
exercises control of supervisory
authority, but does not include a
salesman, or an agent or a person
whose functions are solely clerical or
ministerial.
3.6.
Clearing Agency is any person who
acts as intermediary in making
deliveries upon payment to effect
settlement in securities transactions.

3.7.

3.8.

3.9.

3.10.

3.11.

3.12.

3.13.

3.14.
3.15.

Exchange is an organized marketplace


or facility that brings together buyers
and sellers and executes trades of
securities and/or commodities.
Insider means: (a) the issuer; (b) a
director or officer (or person
performing similar functions) of, or a
person controlling the issuer; (c) 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;
(d) 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 (e) a person
who learns such information by a
communication from any of the
foregoing insiders.
Pre-Need Plans 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 planholders
pay in cash or installment at stated
prices, with or without interest or
insurance coverage and includes life,
pension, education, interment, and
other plans which the Commission
may from time to time approve.
Promoter is a person who, acting
alone or with others, takes initiative in
founding and organizing the business
or enterprise of the issuer and
receives consideration therefore.
Prospectus 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
Commission.
Registration statement is the
application for the registration of
securities required to be filed with the
Commission.
Salesman is a natural person,
employed as such or as an agent, by a
dealer, issuer or broker to buy and
sell securities.
Uncertificated security is a security
evidenced by electronic or similar
records.
Underwriter is 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.

A. Shares of Stock
STOCK

A type of security that signifies ownership in


a corporation and represents a claim on part
of the corporations assets and earnings.

Has two main types:

COMMON STOCK
o Usually entitles the owner to vote
at SHs meetings and to receive
dividends

PREFERRED STOCK
o Generally does not have voting
rights, but has a higher claim on
assets and earnings than the
common shares.

A SHAREHOLDER is an owner of a
company.
Ownership is determined by the number of
shares a person owns relative to the number
of outstanding shares.
A security includes stock and other listed
types of instruments. Although the fact that
instruments bear the label stock is not of
itself sufficient to invoke the security laws
coverage, when an instrument is both called
stock
and
bears
stocks
usual
characteristics, a purchaser justifiably may
assume that the securities laws apply.
When an instrument is labeled stock and
possesses all of the traditional characteristics
of stock, one is not required to look to the
economic substance of the transaction to
determine WON the stock is a security
within the meaning of security laws.
Security laws are not intended to cover only
passive investors and not privately
negotiated transactions involving the transfer
of control to entrepreneurs.

B. Bonds, Debentures, Notes, and Evidence of


Indebtedness
BOND

A debt investment in which an investor loans


money to an entity (corporate or
governmental) that borrows the funds for a
defined period of time at a fixed interest rate.

A formal unconditional promise, made under


seal, to pay a specified sum of money at a
determinable future date, and to make

periodic interest payments at a stated rate


until the principal sum is paid.
A contract of debt whereby one party called
the BORROWER or ISSUER borrows funds
from another party called the INVESTOR.

Types of BONDS:
1.

TERM BONDS

Bonds with a single date of


maturity.
2. SERIAL BONDS

Bonds with a series of maturity


dates; OR

Bonds that mature by installments.


3. MORTGAGE BONDS

Bonds secured by mortgage of real


properties.
4. COLLATERAL TRUST BONDS

Bonds secured by investments in


stocks and bonds.
5. DEBENTURE BONDS

Bonds without collateral security.


6. REGISTERED BONDS

Require the registration of the


name of the bondholder on the
books of the corporation.

Consequently,
when
the
bondholder sells a bond, the old
bond certificate is surrendered and
a new bond certificate is issued to
the buyer.

Interest is periodically paid to the


bondholder of record.
7. COUPON or BEARER BONDS

The name of the bondholder is not


registered.

Accordingly, interest is paid


periodically to the bearer of the
bond or the person submitting a
detachable coupon.
8. CONVERTIBLE BONDS

Bonds that can be exchanged for


shares of capital stock of the
issuing company.
9. CALLABLE BONDS

Bonds that can be called in for


payment before the date of
maturity.
10. GUARANTEED BONDS

Bonds issued whereby another


party promises to make payment if
the borrower fails to do so.
11. JUNK BONDS

High risk and high yield bonds


issued by entities that are heavily

indebted or otherwise in weak


financial position.
12. COMMODITY-ACKED BONDS

Bonds which are redeemable in


terms of commodities e.g. oil or
precious metal.
DEBENTURE

A debt secured only by the debtors earning


power, not by a lien on any specific asset.

Also termed as a DEBENTURE BOND,


UNSECURED
BOND,
NAKED
DEBENTURE, or PLAIN BOND.

A type of debt instrument that is not secured


by physical asset or collateral, backed only
by the general creditworthiness and
reputation of the issuer.

Frequently used by both corporations and


governments in order to secure capital.

Example of government debenture:

Government-issued Treasury bond (Tbond) or Treasury bill (T-bill)


o These are generally considered risk
free because governments, at worst,
can print off more money or raise
more taxes to pay these type of
debts.
o ATTY. YEBRA: The government
never goes bankrupt.
NOTE

A writing representing a promise by a maker


to pay a specified amount of money to a
payee or to the bearer, on demand or by a
specified date.

Not securities per se.

May be used in a variety of settings, not


all of which involve investments.

Must be defined using the FAMILY


RESEMBLANCE TEST.

A note is presumed to be a security


unless it bears a strong resemblance,
determined by examining four specified
factors, to one of a judicially crafted list
of categories instrument that are not
securities.

If the instruments is not sufficiently


similar to a listed item, a court must
decide whether another category should
be added examining the same factors.
EVIDENCE OF INDEBTEDNESS

A writing which acknowledges a debt or


obligation and which is executed by the party
obligated thereby.

Has reference to any printed or written


instrument, signed or otherwise executed by

the obligor(s), which evidences on its face a


legally enforceable obligation to pay money.
C. Investment Contract
INVESTMENT CONTRACT

A contract, transaction, or scheme whereby a


person invests his money in a common
enterprise and is led to expect profits
primarily from the efforts of others, it being
immaterial whether:
i.
the shares in the enterprise are
evidenced by formal certificates or by
nominal interests in the physical assets
employed in the enterprise;
ii.
the enterprise is speculative or nonspeculative; OR
iii.
there is a sale of property with or
without intrinsic value.

A catch-all term intended to cover a wide


range of investment transactions.
HOWEY TEST

Test to determine whether a transaction falls


within the scope of an investment contract.

If the test is satisfied, the security is subject


to regulation by the SEC.

Requires a transaction, contract, or scheme


whereby a person:
i.
Makes an investment of money;
ii.
In a common enterprise;
iii.
With the expectation of profits;
iv.
To be derived solely from the effort of
others.
o This
is
given
a
flexible
interpretation, in that it need not be
derived solely but only primarily.
D. Asset-Backed Security
ASSET-BACKED SECURITY

A financial security backed by a loan, lease,


or receivables against assets other than real
estate and mortgaged-backed securities.

Essentially the same thing as a mortgagedbacked security, except that the securities
backing it are assets e.g. loans, leases, credit
card debt, a companys receivables, royalties,
etc., and not mortgage-based securities.

An alternative to investing in corporate debt


for investors.
E. Derivatives
DERIVATIVE

A financial instrument whose value changes


in response to the change in a specified
interest rate, security price, commodity price,

foreign exchange rate, index of prices or


rates, a credit rating or credit index, or
similar variable or underlying factor.
Requires no initial or little net investment
relative to other types of contracts that have
similar responses to changes in market
conditions.
Settled at a future date.
Includes, but not limited to, the ff:
1.

Options
o Contracts that give the buyer the
right, but not the obligation, to buy
or sell an underlying security at a
predetermined price, called the
exercise or strike price, on or
before a predetermined date, called
the expiry date, which can only be
extended by the Commission upon
SHs approval.

2.

Call options
o Rights to buy.

3.

Put options
o
Rights to sell.

Guidelines in considering registration of


Stock Options:
a. Stocks granted to SHs proportionately
with their shareholdings may be
allowed.
b. Stock Options may be granted to
employees or officials who are not
members of the board subject, however,
to a review of the scheme by the board
and subject to approval by the SHs,
pursuant to the policy of the government
to widen corporate base and to distribute
corporate profits wider and more
equitably.
c. Stock Options are granted to persons
who are not SHs may be granted only
upon showing that the Board has been
duly authorized to grant the same by its
charter or by a resolution of the SHs
owning at least 2/3 of the all the
outstanding capital stock (OCS), voting
or non-voting, excluding treasury stock.
d. Stock Options granted to directors of
managing groups an its officers must be
approved in a meeting of SHs owning at
least 2/3 of all the OCS, voting or nonvoting, excluding the treasury stock.
Certification by the corporate secretary
as to the no. of shares represented in
said meeting and the no. of votes cast
for or against the grant of optional rights

e.

4.

to the directors or managing groups and


its officers shall be submitted.
Exercise of Options must be done within
the period set by the company and
disclosed in its registration statement.
Warrants
o Rights to subscribe or purchase
new shares or existing shares in a
company on or before a
predetermined date, called the
expiry date, which can only be
extended in accordance with the
SEC rules and regulations and/or
the Exchange rules.
o Generally have a longer exercise
period than options and are
evidenced
by
WARRANT
CERTIFICATES.
a. WARRANT CERTIFICATE
o The certificate representing the
right to a Warrant which may be
detachable or not, duly issued by
the
ISSUER
to
the
WARRANTHOLDER.
b. WARRANT INSTRUMENT
o The written document or deed
containing the terms and conditions
of the issue and exercise of a
Warrant,
which
terms
and
conditions shall include:
1. The
maximum
underlying shares that
can be purchased upon
exercise;
2. The exercise period; and
3. Such other terms and
conditions as the SEC
may require.
c. DETACHABLE WARRANT
o A Warrant that may be sold,
transferred, or assigned to any
person
by
the
WARRANTHOLDER
separate
from, and independent of, the
corresponding
BENEFICIARY
SECURITIES.
d. NON-DETACHABLE WARRANT
o A Warrant that may not be sold,
transferred, or assigned to any
persons
by
the
WARRANTHOLDER
separate
from, and independent of, the
BENEFICIARY SECURITIES.

e. BENEFICIARY SECURITIES
o The shares of stock and other
securities of the ISSUER which
form the basis of the entitlement in
a Warrant.
f. UNDERLYING SHARES
o The unissued shares of a
corporation
which
may
be
purchased
by
the
WARRANTHOLDER upon the
exercise of the right granted under
the Warrant.

4.

Vacation Ownership

While not strictly considered


investment contracts, as there is no
expectation of profitable return,
they are essentially contracts
involving money outlay on the
assumption and anticipation of
future enjoyment of privilege and
thus qualify them as securities.

MUST be registered with the SEC.


o Exception: It must be
shown that the offering
of the vacation ownership
contract is of limited
character and the amount
involved is small such
that registration is not
necessary in the public
interest and for the
protection of the offerees.

5.

Unit Investment Trust Fund (UITF)

An exempt security under Sec. 9 of


the SRC.

Registration to the SEC is not


necessary.

BUT it does not preclude the issuer


from complying with pertinent
anti-fraud provisions under PH
laws.

F. Flexible Principle

The term SECURITIES embodies a flexible


rather than static principle, one that is
capable of adaptation to meet the countless
and variable schemed devised by those who
seek to use the money of others on the
promise of profits.

1.

Sale of Leasehold Rights

The term SECURITIES includes


contracts and investments even
where there is no tangible return on
investments but an appreciation of
capital as well as the enjoyment of
particular privileges and services
e.g. the investment scheme of
selling leasehold rights.
o However, this is an
exempt security under
Sec. 9 of the SRC.

2.

3.

Prepaid Medical and Preventive Health Care


Services

This falls within the meaning of the


term SECURITES although such
sale is done without any securities
attached to it, no long term
liabilities as t covering contracts of
the transaction automatically expire
after a year, and the corporation
engaged in such business has its
own clinic where it provides and
conducts medical services.

The definition of SECURITIES is


designed to embrace speculative
schemes and includes contracts for
delivery of future services of every
kind, character, and description as
can be construed from the phrase
and similar contracts.
Time Share Contracts

While not strictly considered


investment contracts, as there is no
expectation of profitable return,
they are essentially contracts
involving money outlay on the
assumption and anticipation of
future enjoyment of privilege and
thus qualify them as securities.
MUST be registered with the SEC.

CHAPTER II
Securities and Exchange Commission
SEC. 4. Administrative Agency.
4.1. This Code shall be administered by the
Securities
and
Exchange
Commission
(hereafter the Commission) as a collegial
body, composed of a Chairperson and four (4)
Commissioners, appointed by the President for
a term of seven (7) years each and who shall
serve as such until their successor shall have
been appointed and qualified. A Commissioner
appointed to fill a vacancy occurring prior to
the expiration of the term for which his/her
predecessor was appointed, shall serve only for
the unexpired portion of such term. The
incumbent Chairperson and Commissioners at
the effectivity of this Code, shall serve the
unexpired portion of their terms under
Presidential Decree No. 902-A. Unless the
context indicates otherwise, the term
Commissioner includes the Chairperson.
4.2. The Commissioners must be natural-born
citizens of the Philippines, at least forty (40)
years of age for the Chairperson and at least
thirty-five (35) years of age for the
Commissioners, of good moral character, of
unquestionable integrity, of known probity and
patriotism, and with recognized competence in
social and economic disciplines: Provided, That
the majority of Commissioners, including the
Chairperson, shall be members of the
Philippine Bar.
4.3. The Chairperson is chief executive officer
of the Commission. The Chairperson shall
execute and administer the policies, decisions,
orders and resolutions approved by the
Commission and shall have the general
executive direction and supervision of the work
and operation of the Commission and of its
members, bodies, boards, offices, personnel
and all its administrative business.
4.4. The salary of the Chairperson and the
Commissioners shall be fixed by the President
of the Philippines based on an objective
classification system, at a sum comparable to
the members of the Monetary Board and
commensurate to the importance and
responsibilities attached to the position.

Commissioners. The notice of the meeting shall


be given to all Commissioners and the presence
of three (3) Commissioners shall constitute a
quorum. In the absence of the Chairperson, the
most senior Commissioner shall act as
presiding officer of the meeting.
4.6. The Commission may, for purposes of
efficiency, delegate any of its functions to any
department or office of the Commission, an
individual Commissioner or staff member of
the Commission except its review or appellate
authority and its power to adopt, alter and
supplement any rule or regulation.
The Commission may review upon its own
initiative or upon the petition of any interested
party any action of any department or office,
individual Commissioner, or staff member of
the Commission.
SRC Rule 4
Securities and Exchange Commission
5 PRINCIPAL DEPARTMENT OF THE
COMMISSION:
1. MARKET
REGULATION
DEPARTMENT
2. CORPORATION
FINANCE
DEPARTMENT
3. NON-TRADITIONAL SECURITIES
AND
INSTRUMENTS
DEPARTMENT
4. The COMPANY REGISTRATION
AND MONITORING DEPARTMENT
5. COMPLIANCE
AND
ENFORCEMENT DEPARTMENT
COMMISSIONS SUPPORT DEPARTMENT:
1.
2.
3.

SPECIAL COMMISSION
1.
2.

4.5. The Commission shall hold meetings at


least once a week for the conduct of business or
as often as may be necessary upon call of the
Chairperson or upon the request of three (3)

HUMAN
RESOURCE
AND
ADMINISTRATIVE DEPARTMENT
ECONOMIC
RESEARCH
AND
INFORMATION
MANAGEMENT
DEPARTMENT
FINANCIAL
MANAGEMENT
DEPARTMENT

OFFICE
OF
COUNSEL
OFFICE
OF
ACCOUNTANT

THE

GENERAL

THE

GENERAL

The Commission may, for purposes of


efficiency, delegate any of its functions

to any department or office of the


Commission,
an
individual
Commissioner or staff member of the
Commission except its review or
appellate authority and its power to
adopt, alter and supplement any rule or
regulation.
The Commission, motu proprio or upon
a petition filed by an interested party,
may review any order, resolution,
decision or action of any of its
departments,
offices,
individual
Commissioner, or staff member of the
Commission.
Petition for review shall be filed with
the Office of the General Counsel within
fifteen (15) days from receipt of the
order, resolution, decision or any
document evidencing the action taken
which is the subject of the review.

SEC. 5. Powers
Commission.

and

Functions

of

(i)
(j)

(k)

(l)

the

5.1.
The Commission shall act with
transparency and shall have the powers and
functions provided by this Code, Presidential
Decree No. 902-A, the Corporation Code, the
Investment Houses Law, the Financing
Company Act and other existing laws.
Pursuant thereto the Commission shall have,
among others, the following powers and
functions:
(a) Have jurisdiction and supervision over all
corporations, partnerships or associations
who are the grantees of primary franchises
and/or a license or permit issued by the
Government;
(b) Formulate policies and recommendations
on issues concerning the securities market,
advise Congress and other government
agencies on all aspects of the securities
market and propose legislation and
amendments thereto;
(c) Approve, reject, suspend, revoke or
require amendments to registration
statements, and registration and licensing
applications;
(d) Regulate, investigate or supervise the
activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over
the activities of exchanges, clearing
agencies and other SROs;
(f) Impose sanctions for the violation of laws
and the rules, regulations and orders
issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions

(h)

(m)

(n)

and provide guidance on and supervise


compliance with such rules, regulations
and orders;
Enlist the aid and support of and/or
deputize any and all enforcement agencies
of the Government, civil or military as well
as any private institution, corporation,
firm, association or person in the
implementation of its powers and
functions under this Code;
Issue cease and desist orders to prevent
fraud or injury to the investing public;
Punish for contempt of the Commission,
both direct and indirect, in accordance
with the pertinent provisions of and
penalties prescribed by the Rules of Court;
Compel the officers of any registered
corporation or association to call meetings
of stockholders or members thereof under
its supervision;
Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of
the Commission and in appropriate cases,
order the examination, search and seizure
of all documents, papers, files and records,
tax returns, and books of accounts of any
entity or person under investigation as
may be necessary for the proper
disposition of the cases before it, subject to
the provisions of existing laws;
Suspend, or revoke, after proper notice
and hearing the franchise or certificate of
registration of corporations, partnerships
or associations, upon any of the grounds
provided by law; and
Exercise such other powers as may be
provided by law as well as those which
may be implied from, or which are
necessary or incidental to the carrying out
of, the express powers granted the
Commission to achieve the objectives and
purposes of these laws.

5.2. The Commissions jurisdiction over all


cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby
transferred to the Courts of general
jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the
exercise of its authority may designate the
Regional Trial Court branches that shall
exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over
pending cases involving intra-corporate
disputes submitted for final resolution which
should be resolved within one (1) year from the
enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of

10

payments/rehabilitation cases filed as of 30


June 2000 until finally disposed.

extent of the Commissions supervisory


powers over such corporations shall be
limited to those mentioned in Item No. 2
hereof, except if it is a reporting company
under Sec. 17.2 of the Code.

A. Supervision over Registered Corporations

Supervision under SRC Rule 5.1(a), the


Commission has:
Direct Supervision over:
1. Business operations of grantees of
secondary
licenses
or
franchises(financing
companies,
investment houses, ore-need companies,
broker/dealers and exchanges, as well as
public
companies)
except
unregistered/unlisted public companies.
2. For corporations with registered/listed
issues, compliance with registration
requirements and the conditions
imposed by the Commission for their
registration
Limited Supervision over:
1. All other business operations of
companies
with
certificates
of
registration with the Commission as
corporations but not requiring a
secondary
license
from
the
Commission, the extent of its
supervision and monitoring shall be
limited to their compliance with
the Corporation Code,
a. submission of financial statements;
b. submission of General Information
Sheets (GIS);
c. compliance with provisions in their bylaws on:
d. number of directors
e. qualifications,
compensation
of
directors
f. holding of meetings, etc.
g. declaration of dividends;
h. inspection of books;
i. other provisions of the Code requiring
submission of documents to effect
compliance.
2. The business operations of corporations
which are grantees of secondary licenses of
franchises of other government agencies
(banking and quasi-banking institutions,
building and loan associations, trust
companies and other financial intermediaries,
insurance companies, public utilities,
educational
institutions,
and
other
corporations) governed by special laws, The

Notwithstanding the foregoing, the


Commission shall have the power to do
any and all acts to carry out the effective
implementation of the laws it is
mandated to enforce, i.e., constitute a
Management
Committee;
appoint
receivers; issue Cease and Desist Orders
to prevent fraud or injury to the public;
and such other measures necessary to
carry out its role as a regulator.
All complaints regarding the operations
of a company shall be directed to its
primary regulator. However, in cases
where the Commission and another
agency are both primary regulators, e.g.
investment houses with quasi-banking
function, any complaint can be lodged
with either agency. Both regulators shall
coordinate their action.

B. General, Administrative, and Regulatory


Powers
1. Powers over Stock Exchanges

The powers of the SEC over stock exchanges


are more limited as compared to its authority
over ordinary corporations. The powers of
the SEC over stock exchanges under the
Revised Securities Act are specifically
enumerated, and these do not include the
power to reverse the decisions of the stock
exchange. Authorities are in abundance even
in the United States, from which the
countrys security policies are patterned, to
the effect of giving the Securities
Commission less control over stock
exchanges, which in turn are given more
leeway in making the decision whether or not
to allow corporations to offer their stock to
the public through the stock exchange. This
is in accord with the business judgment
rule whereby the SEC and the courts are
barred from intruding into business
judgments of corporations, when the same
are made in good faith.

PSE v. CA (G.R. No. 125469. October 27,


1997):

The PSEs management prerogatives are


NOT under the absolute control of the SEC.
The PSE is, after all, a corporation authorized

11

by its corporate franchise to engage in its


proposed and duly approved business. One
of the PSEs main concerns, as such, is still
the
generation
of
profit
for
its
stockholders. Moreover, the PSE has all the
rights pertaining to corporations, including
the right to sue and be sued, to hold property
in its own name, to enter (or not to enter) into
contracts with third persons, and to perform
all other legal acts within its allocated
express or implied powers.
As to its corporate and management
decisions, therefore, the state will generally
not interfere with the same. Questions of
policy and of management are left to the
honest decision of the officers and directors
of a corporation, and the courts are without
authority to substitute their judgment for the
judgment of the board of directors. The
board is the business manager of the
corporation, and so long as it acts in good
faith, its orders are not reviewable by the
courts.

condition, practice or matter which it


may deem necessary or proper
o Provided, however, That any
person
requested
or
subpoenaed
shall
simultaneously be notified in
writing of the purpose of such
investigation:
o
Provided, further, That all
criminal
complaints
for
violations of this Code, and
the implementing rules and
regulations
enforced
or
administered
by
the
Commission shall be referred
to the Department of Justice
for preliminary investigation
and prosecution before the
proper court:
o Provided, furthermore, That in
instances where the law
allows independent civil or
criminal
proceedings
of
violations arising from the
same act, the Commission
shall take appropriate action
to implement the same

2. Power to Conduct Hearings and Render


Decision

As a regulatory agency, it has the incidental


power to conduct hearings and render
decisions fixing the rights and obligations of
the parties. In fact, to deprive the SEC of this
power would render the agency inutile,
because it would become powerless to
regulate and implement the law.

Commission or any officer designated


by it is empowered to administer oaths
and affirmations, subpoena witnesses,
compel attendance, take evidence,
require the production of any book,
paper, correspondence, memorandum,
or other record which the Commission
deems relevant or material to the
inquiry, and to perform such other acts
necessary in the conduct of such
investigation or proceedings.

After finding that such person has


engaged in any such act or practice and
that there is a reasonable likelihood of
continuing, further or future violations
by such person, the Commission may
issue ex-parte a cease and desist order
for a maximum period of ten (10) days,
enjoining the violation and compelling
compliance with such provision.
o Provided, however, That the
Commission shall not charge
any person with violation of
the rules of an Exchange or
other
self
regulatory
organization unless it appears
to the Commission that such
Exchange or other selfregulatory organization is

Investigations, Injunctions and Prosecution of


Offenses. (Sec. 53, SRC)

The Commission may, in its discretion,


make such investigations as it deems
necessary to determine whether any
person has violated or is about to
violate any provision of this Code, any
rule, regulation or order thereunder, or
any rule of an Exchange, registered
securities association, clearing agency,
other self-regulatory organization, and
may require or permit any person to file
with it a statement in writing, under
oath or otherwise, as the Commission
shall determine, as to all facts and
circumstances concerning the matter to
be investigated.
The
Commission
may
publish
information concerning any such
violations, and to investigate any fact,

12

unable or unwilling to take


action against such person.
The Commission may transmit
such evidence as may be
available concerning any
violation of any provision of
this Code, or any rule,
regulation
or
order
thereunder, to the Department
of Justice, which may institute
the
appropriate
criminal
proceedings under this Code.

Any person who, within his power but


without cause, fails or refuses to comply
with any lawful order, decision or
subpoena issued by the Commission
shall after due notice and hearing, be
guilty of contempt and shall be fined in
such reasonable amount as the
Commission may determine, or when
such failure or refusal is a clear and
open defiance of the Commissions
order, decision or subpoena, shall be
detained under an arrest order issued by
the Commission, until such order,
decision or subpoena is complied with.

3 Distinct Bases for the Issuance of a CDO:


1. The necessity to prevent fraud or injury
to the investing public (Sec. 5.1(i), SRC)
2. The determination by the SEC that any
person has engaged or is about to
engage in any act or practice
constituting a violation of any provision
of this Code, any rule, regulation, or
order thereunder, or any rule of an
Exchange,
registered
securities
association, clearing agency, or other
self-regulatory organization with the
finding that there is reasonable
likelihood of continuing or engaging in
further or future violations by such
person (Sec. 53.3, SRC).
o Maximum duration of CDO: 10
days
3. The determination by the SEC of an act
or practice, which unless restrained,
will operate as a fraud on investors or
is otherwise likely to cause grave or
irreparable injury or prejudice to the
investing public (Sec. 634, SRC).

It is essential that the SEC, in issuing such


injunctive relief, identify the exact provision
of the SRC on which the CDO is founded, as
required by due process.

If there shall be violation of this Rule by


pursuing a purchase of equity shares of a
public company at threshold amounts without
the required tender offer, the Commission,
upon complaint, may nullify the said
purchase and direct the holding of a tender
offer. This shall be without prejudice to the
imposition of other sanctions under the Code.
(Sec. 19[3], Amended SEC Rules)
The investigatory power of the SEC is central
to its regulatory authority, most crucial to
public interest especially as it may pertain to
corporations with publicly traded shares.

Motive alone is not sufficient to deprive


the SEC of its investigatory and
regulatory powers, esp. since such are
exercisable on a motu proprio basis.

3. Power to Enjoin Acts or Practices


Cease and Desist Order (Section 64)

The
Commission,
after
proper
investigation
or
verification, motu
proprio, or upon verified complaint by
any aggrieved party, may issue a cease
and desist order without the necessity of
a prior hearing if in its judgment the act
or practice, unless restrained, will

operate as a fraud on investors or is


otherwise likely to cause grave or
irreparable injury or prejudice to the
investing public.
Until issuance a cease and desist order,
the fact that an investigation has been
initiated or that a complaint has been
filed, including the contents of the
complaint, shall be confidential.
Any person against whom a cease and
desist order was issued may, within five
(5) days from receipt of the order, file a
formal request for a lifting thereof.
Said request shall be set for hearing by
the Commission not later than fifteen
(15) days from its filing and the
resolution thereof shall be made not
later than ten (10) days from the
termination of the hearing.
If the Commission fails to resolve the
request within the time herein
prescribed, the cease and desist order
shall automatically be lifted.

C. Cases under Sec. 5 of PD 902-A transferred


to the RTC

Jurisdiction is ORIGINAL & EXCLUSIVE.

13

Administrative agencies, e.g. the SEC, are


tribunals of limited jurisdiction and could
wield only such powers as are specifically
granted to them by their enabling statutes.

Cases under Sec. 5 of PD 902-A transferred


to RTC:
1. Devices or Schemes Amounting to Fraud
2. Intra-Corporate Controversies

Removal

of

This does not extend to every potential


subject that may be voted on by SHs.

ELECTION CONTEST
a. Encompasses all plausible incidents arising
from the election of corporate directors.
b. Any controversy or dispute involving title or
claim to any elective office in a stock or nonstock corporation, the validation of proxies,
the manner and validity of elections, and the
qualifications of candidates, including the
proclamation of winners, to the office of
director, trustee or other officer directly
elected by the stockholders in a close
corporation or by members of a non-stock
corporation where the article of incorporation

Since Sec. 6 is tied to its abrogated


jurisdiction powers, the powers enumerated
therein
have
effectively
been
WITHDRAWN.

SEC. 6. Indemnification and Responsibilities of


Commissioners.

Elements:
a) The status or relationship of the
parties; and
o The controversy must arise out or
intra-corporate
or
partnership
relations:
- between any or all of the
parties and the corporation,
partnership, or association of
which they are SHs, members,
or associates; and
- between such corporation,
partnership, or association and
the State insofar as it concerns
their individual franchises.
b) The nature of the question that is
subject of their controversy.
o The dispute among the parties must
be intrinsically connected with the
regulation of the corporation.
- If
the
nature
of
the
controversy involves matters
that are purely civil in
character, the case does not
involve an intra-corporate
controversy.

3. Election, Appointment,
Corporate Officers

or by-laws so provide (Sec. 2, Rule 6, Interim


Rules).

6.1. The Commission shall indemnify each


Commissioner and other officials of the
Commission, including personnel performing
supervision and examination functions for all
costs and expenses reasonably incurred by such
persons in connection with any civil or criminal
actions, suits or proceedings to which they may
be or made a party by reason of the
performance of their functions or duties, unless
they are finally adjudged in such actions or
proceedings to be liable for gross negligence or
misconduct.
In the event of settlement or compromise,
indemnification shall be provided only in
connection with such matters covered by the
settlement as to which the Commission is
advised by external counsel that the persons to
be indemnified did not commit any gross
negligence or misconduct.
The costs and expenses incurred in defending
the aforementioned action, suit or proceeding
may be paid by the Commission in advance of
the final disposition of such action, suit or
proceeding upon receipt of an undertaking by
or on behalf of the Commissioner, officer or
employee to repay the amount advanced should
it ultimately be determined by the Commission
that he/she is not entitled to be indemnified as
provided in this subsection.
6.2. The Commissioners, officers and
employees of the Commission who willfully
violate this Code or who are guilty of
negligence, abuse or acts of malfeasance or fail
to exercise extraordinary diligence in the
performance of their duties shall be held liable
for any loss or injury suffered by the
Commission or other institutions as a result of
such violation, negligence, abuse, malfeasance,
or failure to exercise extraordinary diligence.
Similar responsibility shall apply to the
Commissioners, officers and employees of the
Commission for (1) the disclosure of any

14

information, discussion or resolution of the


Commission of a confidential nature, or about
the confidential operations of the Commission,
unless the disclosure is in connection with the
performance of official functions with the
Commission or with prior authorization of the
Commissioners; or (2) the use of such
information for personal gain or to the
detriment of the government, the Commission
or third parties: Provided, however, That any
data or information required to be submitted to
the President and/or Congress or its
appropriate committee, or to be published
under the provisions of this Code shall not be
considered confidential.

SEC. 7. Reorganization.

7.1.
To achieve the goals of this Code,
consistent with Civil Service laws, the
Commission is hereby authorized to provide
for its reorganization, to streamline its
structure and operations, upgrade its human
resource component and enable it to more
efficiently and effectively perform its functions
and exercise its powers under this Code.

7.2.
All positions of the Commission shall be
governed by a compensation and position
classification
systems
and
qualification
standards approved by the Commission based
on a comprehensive job analysis and audit of
actual duties and responsibilities. The
compensation plan shall be comparable with
the prevailing compensation plan in the Bangko
Sentral ng Pilipinas and other government
financial institutions and shall be subject to
periodic review by the Commission no more
than once every two (2) years without prejudice
to yearly merit reviews or increases based on
productivity and efficiency. The Commission
shall, therefore, be exempt from laws, rules,
and regulations on compensation, position
classification and qualification standards. The
Commission shall, however, endeavor to make
its system conform as closely as possible with
the principles under the Compensation and
Position Classification Act of 1989 (Republic
Act No. 6758, as amended).

15

can prove that there was incomplete or


inaccurate
disclosure
of
important
information.

CHAPTER III
Registration of Securities
SEC. 8. Requirement
Securities.

of

Registration

of

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.
8.2. The Commission may conditionally
approve the registration statement under such
terms as it may deem necessary.
8.3. The Commission may specify the terms and
conditions
under
which
any
written
communication, including any summary
prospectus, shall be deemed not to constitute an
offer for sale under this Section.
8.4. A record of the registration of securities
shall be kept in a Register of Securities in
which shall be recorded orders entered by the
Commission with respect to such securities.
Such register and all documents or information
with respect to the securities registered therein
shall be open to public inspection at reasonable
hours on business days.
8.5 The Commission may audit the financial
statements, assets and other information of a
firm applying for registration of its securities
whenever it deems the same necessary to insure
full disclosure or to protect the interest of the
investors and the public in general.
A. Disclosure Requirement

A primary means of protecting the investing


public is the disclosure of important
financial
information
through
the
registration of securities.
This enables investors to make informed
judgments about whether to purchase a
corporations securities.
Nonetheless, while the SEC requires that the
information provided be accurate, it does not
guarantee it.
Investors who purchase securities and suffer
losses have important recovery rights if they

No security, unless exempt by law, shall be


issued, endorsed, sold, transferred, or in
any manner conveyed to the public, unless
registered in accordance with the rules
and regulations that shall be promulgated
in the public interest and for the
protection of investors by the SEC.

PSE v. CA (GR No. 125469, October 27, 1997)

Presidential Decree No. 902-A, on the other


hand, provides that the SEC, as regulatory
agency, has supervision and control over all
corporations and over the securities market
as a whole, and as such, is given ample
authority in determining appropriate
policies. Pursuant to this regulatory
authority, the SEC has manifested that it has
adopted the policy of full material
disclosure where all companies, listed or
applying for listing, are required to divulge
truthfully and accurately, all material
information about themselves and the
securities they sell, for the protection of the
investing public, and under pain of
administrative,
criminal
and
civil
sanctions. In connection with this, a fact is
deemed material if it tends to induce or
otherwise effect the sale or purchase of its
securities. While the employment of this
policy is recognized and sanctioned by laws,
nonetheless, the Revised Securities Act sets
substantial and procedural standards which
a proposed issuer of securities must satisfy.
Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds
for the Rejection of the registration of a
security:
The Commission may reject a registration
statement and refuse to issue a permit to sell
the securities included in such registration
statement if it finds that:
(1) 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 facts required to be
stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant
(1) is not solvent or not is sound
financial condition;

16

(2) has violated or has not complied


with the provisions of this Act, or
the rules promulgated pursuant
thereto, or any order of the
Commission;
(3) has failed to comply with any of the
applicable
requirements
and
conditions that the Commission
may, in the public interest and for
the protection of investors, impose
before the security can be
registered;
(4) had been engaged or is engaged or
is about to engaged in fraudulent
transactions;
(5) is in any was dishonest of is not of
good repute; or
(6) does not conduct its business in
accordance with law or is engaged
in a business that is illegal or
contrary or government rules and
regulations.
(3) The enterprise or the business of the
issuer is not shown to be sound or to be
based on sound business principles;
(4) An officer, member of the board of
directors, or principal stockholder of the
issuer is disqualified to such officer,
director or principal stockholder; or
(5) The issuer or registrant has not shown
to the satisfaction of the Commission
that the sale of its security would not
work to the prejudice to the public
interest or as a fraud upon the
purchaser or investors.

A reading of the foregoing grounds reveals


the intention of the lawmakers to make the
registration and issuance of securities
dependent, to a certain extent, on the merits
of the securities themselves, and of the issuer,
to be determined by the Securities and
Exchange Commission. This measure was
meant to protect the interest of the investing
public against fraudulent and worthless
securities, and the SEC is mandated by law to
safeguard these interests, following the
policies and rules therefore provided. The
absolute reliance on the full disclosure
method in the registration of securities is,
therefore, untenable. At it is, the Court finds
that the private respondent PALI, on at least
two points (nos. 1 and 5) has failed to
support the propriety of the issue of its shares
with unfailing clarity, thereby lending
support to the conclusion that the PSE acted
correctly in refusing the listing of PALI in its
stock exchange. This does not discount the

effectivity of whatever method the SEC, in the


exercise of its vested authority, chooses in
setting the standard for public offerings of
corporations wishing to do so. However, the
SEC must recognize and implement the
mandate of the law, particularly the Revised
Securities Act, the provisions of which cannot
be amended or supplanted my mere
administrative issuance.
B. Fraud or Deceit, Not Mere Negligence

To constitute a violation of the securities law,


fraud or deceit, not mere negligence, on the
part of the offender must be established.
Proof of the existence of fraud is necessary in
order for one to be held liable under the penal
provisions of the securities law.
Fraud here is akin to bad faith which implies
a conscious and intentional design to do a
wrongful act for a dishonest purpose.

SEC. 9. Exempt Securities.


9.1. The requirement of registration under
Subsection 8.1 shall not as a general rule apply
to any of the following classes of 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.
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.

17

9.2. The Commission may, by rule or


regulation after public hearing, add to the
foregoing any class of securities if it finds that
the enforcement of this Code with respect to
such securities is not necessary in the public
interest and for the protection of investors.
SRC Rule 9.2
Exempt Securities
1. Any evidence of indebtedness issued by a
financial institution itself that has been duly
licensed by the Bangko Sentral ng Pilipinas to
engage in banking/quasi-banking activity shall be
exempt from registration under Section 8.1 of the
Code; provided that the purchase and sale of such
security shall not be considered exempt from the
coverage of the provisions of the Code on
antifraud, civil liability or others.
2. The registration requirements shall not likewise
apply to any of the following:
A. Evidence of indebtedness issued to the Bangko
Sentral ng Pilipinas (BSP) under its open market
and/or rediscounting operations;
B. Evidence of indebtedness issued to the
following primary institutional lenders: banks,
including their trust accounts wherein the banktrustee is granted discretionary powers in the
investment disposition of the trust funds,
investment houses including their trust accounts
wherein the investment house-trustee is granted
discretionary powers in the investment disposition
of the trust funds, trust companies, financing
companies, investment companies, pre-need
companies, non-stock savings and loan
associations, building and loan associations,
venture
capital
corporations,
insurance
companies, government financial institutions,
pawnshops, pension and retirement funds
approved by the BIR, educational assistance funds
established by the national government, and other
entities that may be classified as primary
institutional lenders by the BSP, in consultation
with the SEC; provided all such evidence of
indebtedness shall only be negotiated or assigned
to any of the aforementioned primary institutional
lenders or the Development Bank of the
Philippines with respect to private development
banks in relation with their rediscounting
privileges; provided further that in case of nonbanks without underwriting licenses, such
negotiation or assignment shall be through banks
or non-banks licensed to be an underwriter or a
securities dealer; provided finally, that in no case

shall said instrument be negotiated or assigned to


non-qualified investors;
C. Bills of exchange arising from a bona fide sale
of goods and services which are distributed and/or
traded by banks or investment houses duly
licensed by SEC and BSP through an organized
market properly conventioned and governed by
rules approved by the appropriate regulatory
body;
D. Evidence of indebtedness e.g. short or longterm commercial papers, meeting the following
conditions:
i.
Issued to not more than nineteen (19)
non-institutional lenders;
ii.
Payable to a specific person;
iii.
Neither negotiable nor assignable and
shall be held on to maturity; and
iv.
In an amount not exceeding Fifty
Million Pesos (P50,000,000.00) or such
higher amount as the Commission may
prescribe by resolution.

An exemption granted from registration


requirement under the law and granted by the
SEC to a transaction which involves a
specific disposition of shares shall not be
construed to cover subsequent transfers of
said shares in the course of repeated and
successive transactions.

Registration is essential because by not


registering with the SEC, any liability could
later be disclaimed by claiming that the
corporation has a separate and distinct
personality from its officers and SHs.

Union Bank v. SEC (GR No. 138949. June 6,


2001)

The mere fact that in regard to its banking


functions, a BANK is already subject to the
supervision of the BSP does not exempt the
former
from
reasonable
disclosure
regulations issued by the SEC. These
regulations are meant to assure full, fair and
accurate disclosure of information for the
protection of investors in the stock
market. Imposing such regulations is a
function within the jurisdiction of the
SEC. Since it opted to trade its shares in the
exchange, then it must abide by the
reasonable rules imposed by the SEC.
The provision exempts from registration
the securities issued by banking or financial
institutions mentioned in the law. Nowhere
does it state or even imply that petitioner, as

18

a listed corporation, is exempt from


complying with the reports required by the
Implementing Rules.
The exemption from the registration
requirement enjoyed by petitioner does not
necessarily connote that it is exempted from
the other reportorial requirements. Having
confined the exemption enjoyed by petitioner
merely to the initial requirement of
registration of securities for public offering,
and not [to] the subsequent filing of various
periodic reports, respondent Commission, as
the regulatory agency, is able to exercise its
power of supervision and control over
corporations and over the securities market
as a whole. Otherwise, the objectives of the
`Full Material Disclosure policy would be
defeated since petitioner corporation and its
dealings would be totally beyond the reach of
respondent Commission and the investing
public.

f)

g)

SEC. 10. Exempt Transactions.


10.1. The requirement of registration under
Subsection 8.1 shall not apply to the sale of any
security in any of the following transactions:
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 lien
holder selling or offering for sale or
delivery in the ordinary course of business
and not for the purpose of avoiding the
provisions of this Code, to liquidate a bona
fide 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
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

h)
i)

j)

k)

no commission or other remuneration is


paid or given directly or indirectly in
connection with the sale of such capital
stock.
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.
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 provisions 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.
Brokers transactions, executed upon
customers orders, on any registered
Exchange or other trading market.
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.
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.
The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines
during any twelve-month period.

19

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.

10.2. The Commission may exempt other


transactions, if it finds that the requirements of
registration under this Code 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.
10.3. Any person applying for an exemption
under this Section, shall file with the
Commission a notice identifying the exemption
relied upon on such form and at such time as
the Commission by rule may prescribe and
with such notice shall pay to the Commission a
fee equivalent to one-tenth (1/10) of one percent
(1%) of the maximum aggregate price or issued
value of the securities.
SRC Rule 10.1 Exempt Transactions
[formerly, SRC Rule 10-1]
1. Disclosure to Investors
Any person claiming exemption under Section
10.1 of the Code shall provide to any person to
whom it offers for sale or sells securities in
reliance on such exemption a written disclosure
containing the following information:
i.
The provision of Section 10.1 of the
Code under which exemption from
registration is claimed;

ii.

iii.

Whether the Commissions confirmation


that such offer or sale qualifies as an
exempt transaction has been obtained;
and
The following statement in bold face,
prominent type:
THE
SECURITIES
BEING
OFFERED OR SOLD HEREIN
HAVE NOT BEEN REGISTERED
WITH THE SECURITIES AND
EXCHANGE
COMMISSION
UNDER
THE SECURITIES
REGULATION
CODE.
ANY
FUTURE
OFFER
OR
SALE
THEREOF
IS
SUBJECT
TO
REGISTRATION REQUIREMENTS
UNDER THE CODE UNLESS SUCH
OFFER OR SALE QUALIFIES AS
AN EXEMPT TRANSACTION.

2. Exempt Transactions Not Requiring Notice


No notice of exemption or fee shall be required for
any transaction covered by Section 10.1 of the
Code except those covered by subparagraphs (k)
and (l) or sale to not more than nineteen (19)
persons and to qualified buyers, respectively.
3. Exempt Transactions Requiring Notice
A. Notice of exemption on SEC Form 10-1 shall
be required in an offering or distribution of
securities under Section 10.1(k) and (l) of the
Code.
B. The issuer shall file with the Commission a
notice of exemption from the registration
requirements under Section 8 of the Code on SEC
Form 10-1, including, as an exhibit thereto, all
pertinent information required to be furnished to
the investors pursuant to this paragraph, within ten
(10) days after the sale of the securities which are
subject thereto. No filing fee shall be required for
the said notice.
C. Private Placements under Section 10.1(k) of the
Code
i.
A prima facie presumption of circumvention
of Sections 8 and 12 of the Code shall arise
when the number of non-qualified investors
shall exceed nineteen (19) within one (1)
year. The issuer shall be liable for penalty in
accordance with the Scale of Fines of the
Commission, without prejudice to other
actions which may be taken against the
issuer.
ii.
If the initial purchaser/s shall resell said
securities to more than nineteen (19) non-

20

qualified investors, Sections 8 and 12 of the


SRC shall apply, notwithstanding the
exemption of their issuances, unless such
succeeding sale shall qualify as an exempt
transaction.
Exemptive relief under Section 10.1(k)
(Private Placement) shall be subject to the
following terms and conditions:
a. The issuer claiming such relief shall not
engage in any form of general
solicitation or advertising in connection
therewith;
b. Securities sold in any such transaction
may only be sold to persons purchasing
for their own account;
c. Sale may be made to no more than
nineteen (19) non-qualified buyers. A
corporation, partnership or other entity
shall be counted as one buyer; provided,
however, that if the entity is organized
for the specific purpose of acquiring the
securities offered and is not a qualified
buyer under Section 10.1(l) of the Code,
then each beneficial owner of equity
securities in the entity shall count as a
separate buyer under this Rule;
d. The issuer provides any person to whom
they offer for sale or sell securities
pursuant thereto with the following
information:
1) exact name of the issuer and its
predecessor, if any;
2) address of its principal executive
office;
3) place of incorporation;
4) exact title and class of the security;
5) par or issue value of the security;
6) number of shares or total amount of
securities outstanding as of the end
of the issuers most recent fiscal
year;
7) name and address of the transfer
agent;
8) nature of the issuers business;
9) nature of products or services
offered;
10) nature and extent of the issuers
facilities;
11) name of the chief executive officers
and members of the board of
directors;
12) issuers most recent financial
statements for each of the two
preceding fiscal years or such
shorter period as the issuer
(including its predecessor) has been
in existence;

iii.

13) whether the person offering or


selling the securities is affiliated,
directly or indirectly, with the
issuer;
14) whether the offering is being made
directly or indirectly on behalf of
the issuer, or any director, officer
or person who owns directly or
indirectly more than ten percent
(10%) of the outstanding shares of
any equity security of the issuer
and, if so, the name of such person;
and
15) information
required
under
paragraph 1 of this Rule.
Provided, however, that where the issuer is a
reporting company under Section 17 of the Code,
a copy of its most recent annual report (SEC Form
17-A) may be used to provide any of the required
information.
D.
Offer or Sale of Securities to Qualified
Buyers under Section 10.1(l) of the Code
If the initial qualified buyer/s shall resell their
securities to more than nineteen (19) non-qualified
buyers/investors, Sections 8 and 12 of the Code
shall apply.
4. Application for Confirmation or Declaration of
Exemption
A. If a confirmation of exemption shall be
obtained from the Commission, a duly
accomplished SEC Form 10-1 shall be filed with
the corresponding filing fee.
B. In cases which involve distribution of securities
by way of stock dividend, the Commission shall
determine the sufficiency of the retained earnings
of the issuer company prior to issuing a
confirmation thereto.
C. Where the consideration for the offered
securities is other than actual cash, a request for
confirmation of exemption from registration under
Section 10 of the Code shall deem to include an
application for approval of valuation required
under Section 62 of the Corporation Code of the
Philippines, or vice versa.
5. Exempt Commercial Paper Transactions
An issuer of commercial papers under an exempt
transaction shall:

21

A. File a Notice or Application for Confirmation


of Exemption (SEC Form 10-1) prior to issuance
thereof. Said application shall be accompanied by
the prescribed filing fees and include a disclosure
of the following financial ratios:
=

!"##$%& !""#$
!"##$%& !"#$"%"&"'(

!"#!,!"#"$%&'(",!"# !"#$%&"'(% !"#$%&'&"(


!"##$%& !"#$"%"&"'(

!"# !"#$%& !"#$% !"#$%& !"#


!"# !"#$% !" !"#"$%"&

!"# !"#$%& !"#$% !"#$%& !"#


!"#$% !! ! ! !"#$%&

=
!"# !"#$%& !"#$%" !"#$%$&# !"#$%&$

!"#$%$&# !"#$%&$

!"#$% !"#$"%"&"'(
!! ! ! !"#$%&

B. Indicate in bold letters on the face of the


instrument
the
words:
NONNEGOTIABLE/NON-ASSIGNABLE
C. That any issuer with outstanding long term
commercial papers shall likewise file the
prescribed disclosure statement and quarterly
reports on such borrowings.

Section 10 has the burden, if challenged, to


establish that the exemption is available. The
Commission may challenge such exemption at any
time.
B. A presumption that an exemption is not
available may arise from the failure to file a notice
as required by paragraph 3 of this Rule. Failure to
file such notice shall also subject a person
claiming an exemption under Section 10 to
sanctions under the Code.
8. The sale or offer for sale of a security in any
transaction exempt under Section 10 shall not be
exempt from antifraud, civil liability or other
provisions of the Code.
9. In view of the objective of full and fair
disclosure under the Code, exemptive relief under
Section 10 of the Code shall not be available to
any issuer or other persons for any transaction or
chain of transactions that, although in technical
compliance with the Code and this Rule, shall be a
part of a plan or scheme to evade the registration
provisions of the Code. In such cases, registration
under the Code shall be required.
B. Subscription of Shares of Capital Stock

6. Other Requirements and Limitations


A. Exemptive relief under Section 10.1(c)
(Isolated Transaction) of the Code shall not be
available to an issuer of securities which shall not
be considered as an owner thereof.
B. In connection with a transaction under Section
10.1(i) of the Code, any fee paid pursuant to the
requirements of the Corporation Code may be
applied in satisfaction of fees owed in relation to
an application for confirmation of exemption.

C. The Commission shall not be precluded from


taking whatever action it may deem appropriate on
any application for confirmation even if filed after
the offer or sale of the securities without prejudice
to the imposition of penalties when warranted by
the situation.

7. Burden of Proof that Such Exemption is


Available

A. Unless confirmation of the availability of such


exemption is applied for under paragraph 4 of this
Rule, any person claiming an exemption under

A corporation is not required to secure prior


approval of the SEC for the transfer of shares
of its stocks.

The question of WON such transfer


should be recorded in its books is one
that only the corporation itself can
resolve.
Even if the shares to be transferred are not
registered, the transfer, notwithstanding that
the transferees will be more than 20, may be
considered exempt transaction under the
SRC, such being an isolated one and not
made in the course of repeated and
successive transactions.
Issuance of shares of stocks by a debtor
corporation to its creditor in settlement of a
legitimate obligation is an exempt transaction
under securities law.
However, before such can be made, the SHs
of the debtor corporation should first approve
the conversion of debt of the corporation into
equity in favor of its creditor.
The issuance of shares of stock out of the
proposed increase of capital stock to its
existing SH for cash where no commission is
paid for such sale is an exempt transaction.

22

However, if shares of the corporation had


been previously registered with the SEC, any
shares to be issued subsequently should
likewise be registered with the SEC.

C. Additional Capital Stock


ADDITIONAL CAPITAL STOCK

An increase in capital stock

NOT the issuance of additional shares from


the unissued but authorized capital stock of
the corporation.

Issuance of additional shares from the


unissued authorized capital stock of the
corporation is not an exempt transaction.
The corporation that issues its unissued
capital stock without exemption therefrom
secured from the SEC violates the SRC.
If the corporations original issues were
registered, prior registration of the
subsequent increase capital stock must
likewise be effected since such transaction is
a new offering of securities.
Pending approval of registration, the stock
certificates covering fully paid subscriptions
on the additional capital stock can be issued
to the subscribers thereof, provided that the
shares may not be sold or transferred in the
course of repeated and successive
transactions or in any manner offered for sale
to the public.
This restriction shall be clearly indicated in
the corresponding stock certificates issued by
the corporation.

E. Power to Declare Dividends

CW: Sec. 43, CC.

GR:

Prior approval of the SEC is not


necessary for purposes of stock dividend
declaration.
o Issuance of stock dividend is an
exempt transaction.
o Request for exemption is not
necessary.

HOWEVER, pursuant to the Rules


Governing the Distribution of Excess Profits
of Corporations (August 13, 1973), pursuant
to PD 270, any declaration of dividend
whether cash or stock, shall be reported to the
SEC within 15 days from date of declaration.

Penalty if not complied with:


o SUSPENSION or REVOCATION
of license or permit to sell
securities; OR
o FINE under RAA 1143.

D. Sale of Securities

GR:

Selling or offering for sale or


distribution of securities within the PH
is subject to registration.
o Mere attempt to offer shares is
also subject to registration.
- This is to prevent evasion
from registration requirements
by promoters who may adopt
ingenious investment schemes
to escape regulation.
- EXAMPLE:
accepting
subscription deposits from the
public for an intended IPO.

F. Treasury Shares

EXEMPT:

Small amount or limited character of the


offering.

If it can be shown that the offering


will be limited only to not more
than 20 investors who are in the
position to know the present affairs
of the issuer and the risks of
investing therein such that the
registration of the securities to be
offered is not necessary for the
protection of the investors, the
transaction may be exempted from
the registration requirements under
the SRC.
Stock option plans granted by foreign
companies in favor of qualified
employees of their PH subsidiaries.
o

These are still issued shares and are not


new issues once re-issued but is still
subject to SRC since this constitute
distribution of securities to the public, and,
consequently, new or additional SHs may
come in.
Thus, while not exempt per se, this may be
exempted if the transaction is of limited
character as the corporation does not
normally acquire its own shares of stock and
the no. of shares to be disposed of is only
minimal.
EXEMPTION IS NOT AUTOMATIC.

23

Corporation must secure exemption


from SEC prior the re-issuance.

G. Certificate of Participation

If issued under a scheme not related to


banking business, NOT EXEMPT.
If the BSP recognizes the fact that the
investment scheme is not regulated by it,
NOT EXEMPT.
In a condo pie program, if it uses the phrase
subject to the supervision and regulation of
the Ministry of Human Settlements or any of
its agencies, EXEMPT.
Otherwise, it is NOT EXEMPT.

H. Cooperative

Under the SRC, NOT EXEMPT.

SEC Memorandum Circular No. 3, S. 2008


(Rules Governing Registrars of Qualified Buyers)

SEC MC No. 6, S. 2007


(Definition of Qualified Buyers)

24

SEC. 11. Commodity Futures Contracts.


No person shall offer, sell or enter into
commodity futures contracts except in
accordance with rules, regulations and orders
the Commission may prescribe in the public
interest. The Commission shall promulgate
rules and regulations involving commodity
futures contracts to protect investors to ensure
the development of a fair and transparent
commodities market.

12.2.

COMMODITY FUTURES CONTRACT

A contract providing for the making or taking


delivery at a prescribed time in the future of a
specific quality of a commodity or the cash
value thereof, which is customarily offset
prior to the delivery date, and includes
standardized contracts having the indicia of
commodities futures, commodity options,
and commodity leverage, or margin
contracts.
COMMODITY

Any goods, articles, services, rights and


interests, including any group of any of the
foregoing, in which commodity interests
contracts are presently or in the future dealt
in.
FORWARD

A contract between a buyer and a seller


whereby the buyer is obligated to take
delivery and the seller is obliged to deliver a
fixed amount of an underlying commodity at
a predetermined price and date.

Payment in full is due at the time of delivery.

Without prejudice to applicable BSP rules


and circulars, the public trading of CFCs and
SEC pertinent rules remain SUSPENDED
until further ordered otherwise by the SEC
(SRC Rule 11, Amended IRR of the SRC).

SEC. 12. Procedure


Securities.

for

Registration

of

12.1. All securities required to be registered


under Subsection 8.1 shall be
registered through the filing by the
issuer in the main office of the

12.3.

12.4.

Commission, of a sworn registration


statement with respect to such
securities, in such form and
containing such information and
documents as the Commission shall
prescribe. The registration statement
shall include any prospectus required
or permitted to be delivered under
Subsections 8.2, 8.3 and 8.4.
In promulgating rules governing the
content of any registration statement
(including any prospectus made a
part thereof or annexed thereto), the
Commission
may
require
the
registration statement to contain such
information or documents as it may,
by rule, prescribe. It may dispense
with any such requirement, or may
require additional information or
documents,
including
written
information
from
an
expert,
depending on the necessity thereof or
their applicability to the class of
securities sought to be registered.
The information required for the
registration of any kind, and all
securities, shall include, among
others, the effect of the securities issue
on ownership, on the mix of
ownership, especially foreign and
local ownership.
The registration statement shall be
signed by the issuers executive
officer, its principal operating officer,
its principal financial officer, its
comptroller, principal accounting
officer, its corporate secretary or
persons performing similar functions
accompanied by a duly verified
resolution of the board of directors of
the issuer corporation. The written
consent of the expert named as having
certified any part of the registration
statement or any document used in
connection therewith shall also be
filed.
Where
the
registration
statement includes shares to be sold
by selling shareholders, a written
certification
by
such
selling
shareholders as to the accuracy of any
part of the registration statement

25

12.5.

12.6.

contributed to by such selling


shareholders shall also be filed.
a)
Upon filing of the registration
statement, the issuer shall
pay to the Commission a fee
of not more than one-tenth
(1/10)
of
one per
centum (1%)
of
the
maximum aggregate price at
which such securities are
proposed to be offered. The
Commission shall prescribe
by rule diminishing fees in
inverse proportion to the
value of the aggregate price
of the offering.
b)
Notice of the filing of the
registration statement shall
be immediately published by
the issuer, at its own
expense,
in
two
(2)
newspapers
of
general
circulation
in
the
Philippines, once a week for
two (2) consecutive weeks, or
in such other manner as the
Commission by rule shall
prescribe, reciting that a
registration statement for
the sale of such security has
been filed, and that the
aforesaid
registration
statement, as well as the
papers attached thereto are
open to inspection at the
Commission during business
hours, and copies thereof,
photostatic or otherwise,
shall be furnished to
interested parties at such
reasonable charge as the
Commission may prescribe.
Within forty-five (45) days after the date
of filing of the registration statement,
or by such later date to which the
issuer has consented, the Commission
shall
declare
the
registration
statement effective or rejected, unless
the applicant is allowed to amend the
registration statement as provided in
Section 14 hereof. The Commission

12.7.

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 Commission may
impose such terms and conditions as
may be necessary or appropriate for
the protection of the investors.
Upon effectivity of the registration
statement, the issuer shall state under
oath in every prospectus that all
registration requirements have been
met and that all information are true
and correct as represented by the
issuer or the one making the
statement. Any untrue statement of
fact or omission to state a material
fact required to be stated therein or
necessary to make the statement
therein not misleading shall constitute
fraud.

SRC Rule 8.1 Requirement to File Registration


Statement (RS)
[formerly, SRC Rule 8]
1. Filing of Registration Statement and Effectivity
of Offering
A.

B.

No securities, except of a class exempt under


Section 9 of the Code or unless sold in any
transaction exempt under Section 10 thereof
and the rules thereunder, shall be sold or
distributed by any person or entity within the
Philippines unless such securities are duly
registered with the Commission on SEC
Form 12-1 and the registration statement has
been
declared
effective
by
the
Commission. No information relating to an
offering of securities shall be disseminated
unless a registration statement has been filed
with the Commission and the written
communication proposed to be released
contains the required information under SRC
Rule 8.3, Paragraph 1.
If the securities which are the subject of the
RS are intended to be listed in an Exchange,
a copy of the RS and all other pertinent
documents including all amendments thereto
shall be filed with that Exchange. Two (2)

26

C.

D.

copies of the application for listing shall also


be filed with the Commission.
The sale of the securities subject of the RS
shall be commenced within two (2) business
days from the date of the effectivity of the RS
and shall be continued until the end of the
offering period or until the sale has been
terminated by action of the issuer. The
registrant may be granted exemption from
this requirement upon sufficient justification
that compliance therewith will defeat its
offering objective.
A written notification of completion or
termination of the offering shall be filed with
the Commission within three (3) business
days from such completion or termination,
indicating therein the number of securities
sold.

D.

A preliminary prospectus, which has been


filed with the registration statement required
by Sections 8 and 12 of the Code, may be
circulated to potential investors prior to the
effectiveness of the registration statement if
the following requirements have been met:
i.
ii.
iii.

2. Shelf Registration
If the remaining registered but unsold securities
shall be offered after the completion or
termination mentioned under paragraph (1)(D)
above, an updated RS shall be filed with the
Commission prior to said offering or sale.
3. Prospectus Delivery Requirements
A.

B.

C.

A preliminary prospectus is submitted by a


registrant to the Commission as part of a
registration statement that is not yet rendered
effective under the Securities Regulation
Code. A final prospectus is submitted to the
Commission as part of a registration
statement that has been rendered effective or
that has been recommended to be rendered
effective under the Code.
Securities required to be registered pursuant
to Sections 8 and 12 of the Code shall not be
offered for sale or sold unless a prospectus or
any information material, which has been
filed with the registration statement in the
form and containing the information
hereinafter described, is widely disseminated
and sufficient copies thereof have been made
available so that all who desire to have a
copy may obtain one.
In addition to the requirements of this Rule, a
prospectus,
including
a
preliminary
prospectus, shall contain information as
required by SRC Rule 12.1 and SEC Form
121 and shall be prepared in accordance with
the requirements of SRC Rule 72.1. The
information contained therein shall be
worded in plain language which is
understandable by an ordinary person.

iv.

v.
vi.

it meets all the requirements for a


prospectus contained in paragraph
B hereof above;
it contains the following statement
in bold face print, at least 12 point
type prominently displayed:
A
REGISTRATION
STATEMENT RELATING TO
THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES
AND
EXCHANGE
COMMISSION, BUT HAS NOT
YET
BEEN
DECLARED
EFFECTIVE. NO OFFER TO
BUY THE SECURITIES CAN BE
ACCEPTED AND NO PART OF
THE PURCHASE PRICE CAN
BE RECEIVED UNTIL THE
REGISTRATION STATEMENT
HAS BECOME EFFECTIVE
THEREBY, AND ANY SUCH
OFFER MAY BE WITHDRAWN
OR
REVOKED,
WITHOUT
OBLIGATION
OR
COMMITMENT OF ANY KIND,
AT ANY TIME PRIOR TO THE
NOTICE OF ITS ACCEPTANCE.
AN INDICATION OF INTEREST
IN
RESPONSE
HERETO
INVOLVES NO OBLIGATION
OR COMMITMENT OF ANY
KIND.
THIS PROSPECTUS
SHALL NOT CONSTITUTE AN
OFFER TO SELL OR BE
CONSIDERED
A
SOLICITATION OF AN OFFER
TO BUY.
it is the only selling document
utilized in the pre-offering period,
with the exception that the
information contained in SRC Rule
8.3 may be disseminated in whole
or in part to summarize the
offering;
its use is such that wide
dissemination is assured;
sufficient copies are made available
so that all who desire to have a
copy may obtain one; and
it contains a statement whether the
security is being offered in

27

connection with a distribution by


the issuer or by a security holder,
or both, and whether the issue
represents new financing or
refinancing, or both.
E. A preliminary or final prospectus shall be
presumed to have been widely disseminated
if copies have been distributed initially and
additional copies have been furnished
promptly, upon request, to at least the
following:
i.
each participant in the distribution
(e.g., underwriters and brokers);
ii.
the main and extension offices of
the Commission;
iii.
an Exchange, if the securities will
be listed thereon;
iv.
twenty (20) or more persons who
are not qualified buyers under
Section 10.1(l) of the Code.
F. Notice of Availability of Prospectus and
Preliminary Prospectus
i.
All participants in the distribution of an
offering of securities to the public shall,
when inquiries are made as to the
offering, inform interested persons of
the
availability
of
preliminary
prospectuses and final prospectuses and
provide them with copies if requested.
ii.
A notice shall be placed on the front of
the subscription agreement distributed in
connection with the offering informing
interested persons that they are entitled
to receive a copy of a preliminary and/or
final prospectus if they so desire and
how and where one can be obtained.
iii.
Information required in paragraphs (i)
and (ii) above concerning where the
preliminary and final prospectuses may
be obtained shall include at least the
following: addresses of extension and
main offices of the Commission, any
Exchange wherein the securities may be
listed, the issuer company, the telephone
number and the address of the contact
person. A statement shall also be made
that preliminary and final prospectuses
are available from all underwriters and
brokers participating in the distribution.

are up to date and accurately reflect the terms


of the offering and the condition of the
company. Thus, until such time as
appropriate amendments are made thereto
and have been filed with the Commission
under SRC Rule 14, the use of a preliminary
or final prospectus and the right to sell and
offer for sale may be suspended under
Section 15 of the Code when any of the
following events occurs:
i.
there is a material change in any
information contained therein (including
but not limited to, the occurrence of a
material event which would be required
to be reported on SEC Form 17-C);
ii.
the financial statements contained
therein are over two hundred twenty five
(225) days old.
I. Format of Prospectus
i.

ii.

iii.

iv.
G.

H.

The use of selling documents other than the


final prospectus during the offering period is
prohibited, except that the information
contained in SRC Rule 8.3 may be
disseminated in whole or in part to
summarize the offering.
A preliminary or final prospectus shall not be
used unless all information contained therein

The information required in the prospectus


need not follow the order of the items or
other requirements in Part I of SEC Form 121 with the exception of Items 1 and 2.
However, the information shall be complete
and shall not be presented in a manner that
may mislead the reader thereof or render the
required information incomprehensible.
All information included in the prospectus
must be properly captioned or headed in
order to reasonably indicate covered subject
matter. The information shall be divided into
reasonably short paragraphs or sections (with
the exception of financial statements and
tabular data).
Except as to information required in tabular
form and financial statements, the
information included in the prospectus shall
not be expressed in condensed or
summarized form. Reference may be made to
information in other parts of the prospectus
instead of repeating the same information in
the prospectus.
Each prospectus used after the effective date
of the registration statement shall be dated as
of the effectivity of the prospectus. An
amended or revised prospectus used
thereafter shall bear the date of its issuance.
All information that is required to be
included in the prospectus shall be clearly
understandable without the need to refer to
SEC Form 12-1 or to the general rules and
regulations. The goal of registration
(disclosure for the benefit of investors)
involves, among other things, the use of
language that can be understood by the
persons to whom it is addressed. Failure to

28

use language that is clear and understandable


to the investor may defeat the purpose of the
prospectus.

A.

SRC Rule 8.3 Written Communication Not


Deemed an Offer for Sale
1.
A notice, circular, advertisement, letter, or
other communication does not constitute an offer
for sale in violation of Section 8 of the Code if it
is published or transmitted to any person after a
registration statement has been filed and contains
any or all of the following information:
A. the name of the issuer of the security;
B. the full title of the security and the amount
being offered;
C. a brief indication of the general type of
business of the issuer;
D. the price of the security or, if the price is not
known, the method of its determination or the
probable price range as specified by the
issuer or the managing underwriter;
E. in the case of a debt security with a fixed
(non contingent) interest provision, the yield
or, if the yield is not known, the probable
yield range, as specified by the issuer or the
managing underwriter;
F. the name and address of the sender of the
communication and the fact that he is
participating, or expects to participate, in the
distribution of the security;
G. the names of the underwriters;
H. the approximate date upon which the
proposed sale to the public is anticipated to
commence;
I. whether the security is being offered through
rights issued to existing security holders, and,
if so, the class of securities the holders of
which will be entitled to subscribe, the
subscription ratio, the actual or proposed
record date, the date upon which the rights
were issued or are expected to be issued, the
actual or anticipated date upon which they
will expire, and the approximate subscription
price, or any of the foregoing;
J. with respect to any class of debt securities,
any class of convertible debt securities or any
class of preferred stock, the security rating or
ratings assigned to the class of securities by
any credit rating agency recognized or
accredited by the Commission and the name
of such rating agency/ies which assigned
such rating/s.
2.
Every communication used pursuant to this
Rule shall contain the following:

B.

C.

If a registration statement has not yet become


effective, the following statement in bold
face prominent type:
A
REGISTRATION
STATEMENT
RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, BUT
HAS NOT YET BECOME EFFECTIVE.
THESE SECURITIES MAY NOT BE SOLD
NOR OFFERS TO BUY THE SAME BE
ACCEPTED PRIOR TO THE TIME THE
REGISTRATION
STATEMENT
BECOMES
EFFECTIVE.
THIS
COMMUNICATION
SHALL
NOT
CONSTITUTE AN OFFER TO SELL OR
BE CONSIDERED A SOLICITATION OF
AN OFFER TO BUY.
A statement whether the security is being
offered in connection with a distribution by
the issuer or by a security holder, or both, and
whether the issue represents new financing or
refinancing or both;
The name/s and addresses of a person/s from
whom a written prospectus, which
accordingly meets the requirements of
Section 12 of the Code, may be obtained.

SRC Rule 14 Amendments to the Registration


Statement and Prospectus
1. For purposes of this Rule, material information
shall include, but not limited to, the following:
A. Any event or transaction which increases or
creates a risk on the investments or on the
securities covered by the registration;
B. Increase/decrease in the volume of the
securities being offered at an issue price
higher/lower than the range set and disclosed
in the registration statement and which
results to a derogation of the rights of
existing security holders, as may be
determined by the Commission;
C. Major change in the primary business of the
registrant;
D. Reorganization of the company;
E. Change in the work program or use of
proceeds;
F. Loss, deterioration or substitution of the
property underlying the securities;
G. Significant or ten percent (10%) or more
change in the financial condition or results of
operation of the registrant unless a report to
that effect is filed with the Commission and
furnished the prospective purchaser;
H. Classification, de-classification or reclassification of securities which results to
derogation of rights of existing security

29

holders, as may be determined by the


Commission.

such amount as the Commission may


determine.

2. If a registration statement or a prospectus on


file with the Commission under the Code becomes
incomplete or inaccurate in any material respect or
if the issuer wants to change any material
information therein, the issuer shall:
A. file an amendment to the registration
statement with the Commission explaining all
proposed changes which shall be reviewed by
the Commission in accordance with Section
14 of the Code;
B. where the registration statement has been
declared effective by the Commission,
publish a notice of the proposed
amendment/s, including the reasons therefor,
in two (2) newspapers of general circulation
in the Philippines stating that the offering in
its current form has been cancelled;
C. if the changes shall result to a derogation of
rights of existing security holders or
purchasers of subject securities who have
paid a portion of the selling price thereof, the
issuer shall include in the above-mentioned
publication an offer to rescind all transactions
that have been completed for sale to date,
without making any deduction pursuant to
paragraph (D) below and wait for thirty (30)
days for purchasers to respond to the
rescission offer before initiation of the
amended offering; and
D. where the conditions under paragraph (C) are
present, purchasers may, within thirty (30)
days from the date of such notification,
renounce their purchase of securities.
Whereupon the issuer, or any person acting
on behalf of the issuer in connection with the
distribution of said securities, shall, within
ten (10) days from receipt of notification of
such election, return the contributions paid by
such purchasers without making any
deduction. Purchasers who decide not to
renounce their purchase of securities shall be
subject to the terms of the amended offering.
E. In case of an increase in the volume or
offering price of securities to a level higher
than the range previously disclosed by the
company, the amended registration statement
or prospectus shall be accompanied by a
filing fee based on the difference between the
highest aggregate amount per old range and
the total amount based on new volume or
price. For amendments other than the
offering price, the minimum filing fee for the
amended registration statement or prospectus
shall be Ten Thousand Pesos (P10,000.00) or

3. If after commencement of a public offering, the


Commission becomes aware that the prospectus is
on its face incomplete or inaccurate in any
material respect, or there is a material omission
therefrom, the Commission may require an issuer
to comply with paragraph 2 above or suspend or
revoke its registration under Section 13 or 15 of
the Code and SRC Rule 13.

4. If, during a public offering, an information


other than material information in the prospectus
changes, the issuer shall file a report on SEC Form
17-C of the new information/changes with the
Commission prior to making such changes in the
registration statement, explaining all proposed
changes thereto. Unless, within twenty (20) days
from receipt of such changes, the Commission
provides a written response to the issuer regarding
such disclosure, the proposed changes shall be
deemed to be part of the original disclosure.
5. Every amendment to a registration statement
shall be signed by the persons specified in Section
12.4 of the Code or by any executive officer duly
authorized by the Board of Directors. The final
registration statement and the final prospectus
shall, however, be signed by all required
signatories under Section 12.4 of the Code.
6. There shall be filed with the Commission one
(1) complete, unmarked copy of every
amendment, including exhibits and other papers
and documents filed as part of the amendment and
one (1) additional copy, marked to indicate clearly
and precisely, by underlining or in some other
appropriate manner, the changes effected in the
registration statement by the amendment. Four (4)
copies of the final prospectus and final amended
registration statement shall be duly signed by
required signatories and filed with the
Commission.
7. A copy of every amendment relating to a
certified financial statement shall include the
consent of the certifying accountant to the use of
his certificate in connection with the amended
financial statement in the registration statement or
prospectus and to being named as having certified
such financial statement.
8. The date on which amendments are actually
received by the Commission shall be the date of
filing thereof if all of the requirements of the
Code, and rules adopted thereunder with respect to
such filing, have been complied with.

30

SEC. 13. Rejection and


Registration of Securities.
13.1.

Revocation

of

The Commission 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
this Code, the rules
promulgated
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;
(iv)
Has made any false
or
misleading
representation of
material facts in
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

13.2.

13.3.

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.
For
purposes
of
this
subsection,
the
term
competent
judicial
or
administrative body shall
include a foreign court of
competent jurisdiction as
provided for under the
Rules of Court.
The Commission may compel the
production of all the books and
papers of such issuer, and may
administer oaths to, and examine the
officers of such issuer or any other
person connected therewith as to its
business and affairs.
If any issuer shall refuse to permit an
examination to be made by the
Commission, its refusal shall be

31

13.4.

13.5.

13.6.

ground for the refusal or revocation


of the registration of its securities.
If the Commission deems it necessary, it
may issue an order suspending the
offer and sale of the securities
pending any investigation. The order
shall state the grounds for taking such
action, but such order of suspension
although binding upon the persons
notified thereof, shall be deemed
confidential, and shall not be
published. Upon the issuance of the
suspension order, no further offer or
sale of such security shall be made
until the same is lifted or set aside by
the Commission. Otherwise, such sale
shall be void.
Notice of issuance of such order shall be
given to the issuer and every dealer
and broker who shall have notified
the Commission of an intention to sell
such security.
A registration statement may be
withdrawn by the issuer only with the
consent of the Commission.

SEC. 14. Amendments


Statement.
14.1.

14.2.

14.3.

to

the

14.4.

14.5.

Registration

If a registration statement is on its face


incomplete or inaccurate in any
material respect, the Commission
shall issue an order directing the
amendment of the registration
statement. Upon compliance with
such order, the amended registration
statement shall become effective in
accordance with the procedure
mentioned in Subsection 12.6 hereof.
An amendment filed prior to the
effective date of the registration
statement shall recommence the fortyfive (45) day period within which the
Commission shall act on a registration
statement. An amendment filed after
the effective date of the registration
statement shall become effective only
upon such date as determined by the
Commission.
If any change occurs in the facts set
forth in a registration statement, the

issuer shall file an amendment thereto


setting forth the change.
If, at any time, the Commission finds
that a registration statement contains
any false statement or omits to state
any fact required to be stated therein
or necessary to make the statements
therein
not
misleading,
the
Commission
may
conduct
an
examination, and, after due notice
and hearing, issue an Order
suspending the effectivity of the
registration
statement.
If
the
statement is duly amended, the
suspension order may be lifted.
In making such examination the
Commission or any officer or officers
designated by it may administer oaths
and affirmations and shall have
access to, and may demand the
production of, any books, records or
documents
relevant
to
the
examination. Failure of the issuer,
underwriter, or any other person to
cooperate, or his obstruction or
refusal to undergo an examination,
shall be a ground for the issuance of a
suspension order.

SEC. 15. Suspension of Registration.


15.1.

If, at any time, the information


contained
in
the
registration
statement filed is or has become
misleading, incorrect, inadequate or
incomplete in any material respect, or
the sale or offering for sale of the
security registered thereunder may
work or tend to work a fraud, the
Commission may require from the
issuer such further information as
may in its judgment be necessary to
enable the Commission to ascertain
whether the registration of such
security should be revoked on any
ground specified in this Code. The
Commission may also suspend the
right to sell and offer for sale such
security
pending
further
investigation, by entering an order
specifying the grounds for such

32

action, and by notifying the issuer,


underwriter, dealer or broker known
as participating in such offering.
15.2. The refusal to furnish information
required by the Commission may be a
ground for the issuance of an order of
suspension pursuant to Subsection
15.1. Upon the issuance of any such
order and notification to the issuer,
underwriter, dealer or broker known
as participating in such offering, no
further offer or sale of any such
security shall be made until the same
is lifted or set aside by the
Commission. Otherwise, such sale
shall be void.
15.3. Upon issuance of an order of suspension,
the Commission shall conduct a
hearing.
If
the
Commission
determines that the sale of any
security should be revoked, it shall
issue an order prohibiting sale of such
security.
Until the issuance of a final order, the
suspension of the right to sell, though
binding upon the persons notified
thereof, shall be deemed confidential,
and shall not be published, unless it
shall appear that the order of
suspension has been violated after
notice. If, however, the Commission
finds that the sale of the security will
neither be fraudulent nor result in
fraud, it shall forthwith issue an order
revoking the order of suspension, and
such security shall be restored to its
status as a registered security as of the
date of such order of suspension.

51.2.

51.3.

51.4.

51.5.

person to whom such controlled person


is liable, unless the controlling person
proves that, despite the exercise of due
diligence on his part, he has no
knowledge of the existence of the facts
by reason of which the liability of the
controlled person is alleged to exist.
It shall be unlawful for any person, directly
or indirectly, to do any act or thing
which it would be unlawful for such
person to do under the provisions of this
Code or any rule or regulation
thereunder.
It shall be unlawful for any director or
officer of, or any owner of any securities
issued by, any issuer required to file any
document, report or other information
under this Code or any rule or regulation
of the Commission thereunder, without
just cause, to hinder, delay or obstruct
the making or filing of any such
document, report, or information.
It shall be unlawful for any person to aid,
abet, counsel, command, induce or
procure any violation of this Code, or
any rule, regulation or order of the
Commission thereunder.
Every person who substantially assists the
act or omission of any person primarily
liable under Sections 57, 58, 59 and 60
of this Code, with knowledge or in
reckless disregard that such act or
omission is wrongful, shall be jointly
and severally liable as an aider and
abettor for damages resulting from the
conduct of the person primarily
liable: Provided, however, That an aider
and abettor shall be liable only to the
extent of his relative contribution in
causing such damages in comparison to
that of the person primarily liable, or the
extent to which the aider and abettor
was
unjustly
enriched
thereby,
whichever is greater.

SEC. 51. Liabilities of Controlling Persons, Aider


and Abettor and Other Secondary Liability. -

SEC. 56. Civil Liabilities on Account of False


Registration Statement. -

51.1.

56.1.

Every person who, by or through stock


ownership, agency, or otherwise, or in
connection with an agreement or
understanding with one or more other
persons, controls any person liable
under this Code or the rules or
regulations
of
the
Commission
thereunder, shall also be liable jointly
and severally with and to the same
extent as such controlled persons to any

Any person 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 statements not misleading, and
who suffers damage, may sue and
recover damages from the following
enumerated persons, unless it is proved

33

56.2.

that at the time of such acquisition he


knew of such untrue statement or
omission:
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 valuation, 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.
If the person who acquired the security did
so after the issuer has made generally

available to its security holders an


income statement covering a period of at
least twelve months beginning from the
effective date of the registration
statement, then the right of recovery
under this subsection shall be
conditioned on proof that such person
acquired the security relying upon such
untrue statement in the registration
statement or relying upon the
registration statement and not knowing
of such income statement, but such
reliance may be established without
proof of the reading of the registration
statement by such person.
SEC. 57.Civil Liabilities Arising in Connection
With Prospectus, Communications and Reports. 57.1. Any person who:
a)
Offers to sell or sells a security in
violation of Chapter III, or
b)
Offers to sell or sells a security,
whether or not exempted by
the provisions of this Code, by
the use of any means or
instruments of transportation
or communication, by means
of a prospectus or other
written
or
oral
communication,
which
includes an untrue statement
of a material fact or omits to
state a material fact necessary
in order to make the
statements, in the light of the
circumstances under which
they
were
made,
not
misleading (the purchaser not
knowing of such untruth or
omission), and who shall fail
in the burden of proof that he
did not know, and in the
exercise of reasonable care
could not have known, of such
untruth or omission, shall be
liable to the person purchasing
such security from him, who
may sue to recover the
consideration paid for such
security with interest thereon,
less the amount of any income
received thereon, upon the
tender of such security, or for
damages if he no longer owns
the security.
57.2. Any person who shall make or cause to be
made any statement in any report, or

34

document filed pursuant to this Code or


any rule or regulation thereunder, which
statement was at the time and in the
light of the circumstances under which it
was made false or misleading with
respect to any material fact, shall be
liable to any person who, not knowing
that such statement was false or
misleading, and relying upon such
statements shall have purchased or sold
a security at a price which was affected
by such statement, for damages caused
by such reliance, unless the person sued
shall prove that he acted in good faith
and had no knowledge that such
statement was false or misleading.

63.2.

63.3.
SEC. 62. Limitation of Actions. 62.1.

62.2.

No action shall 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 enforce a liability created
under Subsection 57.1(a), unless
brought within two (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 Subsection 57.1 (a) more than five
(5) years after the security was bona fide
offered to the public, or under
Subsection 57.1 (b) more than five (5)
years after the sale.
No action shall be maintained to enforce
any liability created under any other
provision of this Code unless brought
within two (2) years after the discovery
of the facts constituting the cause of
action and within five (5) years after
such cause of action accrued.

SEC. 63. Amount of Damages to be Awarded. 63.1.

All suits to recover damages pursuant to


Sections 56, 57, 58, 59, 60 and 61 shall
be brought before the Regional Trial
Court, which shall have exclusive
jurisdiction to hear and decide such
suits. The Court is hereby authorized to
award damages in an amount not
exceeding triple the amount of the
transaction plus actual damages.
Exemplary damages may also be
awarded in cases of bad faith, fraud,
malevolence or wantonness in the

violation of this Code or the rules and


regulations promulgated thereunder.
The Court is also authorized to award
attorneys fees not exceeding thirty
percentum (30%) of the award.
The persons specified in Sections 56, 57,
58, 59, 60 and 61 hereof shall be jointly
and severally liable for the payment of
damages. However, any person who
becomes liable for the payment of such
damages may recover contribution from
any other person who, if sued
separately, would have been liable to
make the same payment, unless the
former was guilty of fraudulent
representation and the latter was not.
Notwithstanding any provision of law to
the contrary, all persons, including the
issuer, held liable under the provisions
of Sections 56, 57, 58, 59, 60 and 61
shall contribute equally to the total
liability adjudged herein. In no case
shall the principal stockholders,
directors and other officers of the issuer
or persons occupying similar positions
therein, recover their contribution to the
liability from the issuer. However, the
right of the issuer to recover from the
guilty parties the amount it has
contributed under this Section shall not
be prejudiced.

SEC. 71. Validity of Contracts. 71.1.

71.2.

Any condition, stipulation, provision


binding any person to waive compliance
with any provision of this Code or of
any rule or regulation thereunder, or of
any rule of an Exchange required
thereby, as well as the waiver itself,
shall be void.
Every contract made in violation of any
provision of this Code or of any rule or
regulation thereunder, and every
contract, including any contract for
listing a security on an Exchange
heretofore or hereafter made, the
performance of which involves the
violation of, or the continuance of any
relationship or practice in violation of,
any provision of this Code, or any rule
or regulation thereunder, shall be void:
a)
As regards the rights of any
person who, in violation of
any such provision, rule or
regulation, shall have made or
engaged in the performance of
any such contract, and

35

b)

71.3.

As regards the rights of any


person who, not being a party
to such contract, shall have
acquired any right thereunder
with actual knowledge of the
facts by reason of which the
making or performance of
such contract was in violation
of any such provision, rule or
regulation.
Nothing in this Code shall be construed:
a)
To affect the validity of any loan
or extension of credit made or
of any lien created prior or
subsequent to the effectivity
of this Code, unless at the time
of the making of such loan or
extension of credit or the
creating of such lien, the
person making such loan or
extension
of
credit
or
acquiring such lien shall have
actual knowledge of the facts
by reason of which the making
of such loan or extension of
credit or the acquisition of
such lien is a violation of the
provisions of this Code or any
rules
or
regulations
thereunder; or
b)
To afford a defense to the
collection of any debt,
obligation or the enforcement
of any lien by any person who
shall have acquired such debt,
obligation or lien in good
faith, for value and without
actual knowledge of the
violation of any provision of
this Code or any rule or
regulation
thereunder
affecting the legality of such
debt, obligation or lien.

36

CHAPTER IV
Regulation of Pre-Need Plans

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 preneed plans, licensing persons involved in the
sale of pre-need plans, requiring disclosures to
prospective
plan
holders,
prescribing
advertising guidelines, providing for uniform
accounting system, reports and record keeping
with respect to such plans, imposing capital,
bonding and other financial responsibility, and
establishing trust funds for the payment of
benefits under such plans.
REPUBLIC ACT NO. 9829
PRE-NEED CODE OF THE PHILIPPINES
1. Purpose of the law

to regulate the establishment of pre-need


companies;

to place operation of pre-need companies on


sound, efficient and stable basis;

to derive the optimum advantage from preneed companies in the mobilization of


savings;

to prevent and mitigate, as far as practicable,


practices prejudicial to public interest and the
protection of planholders;

to promote soundness, stability and


sustainable growth of the pre-need industry.
2. Definition of Terms

Pre-need plans are contracts, agreements,


deeds or plans for the benefit of the
planholders which provide for the
performance of future service/s, payment of
monetary considerations or delivery of other
benefits at the time of actual need or agreed
maturity date, as specified therein, in
exchange for cash or installment amounts
with or without interest or insurance
coverage and includes life, pension,
education, interment and other plans,
instruments, contracts or deeds as may in the
future be determined by the Commission.

Pre-need company refers to any


corporation registered with the Insurance
Commission and authorized/licensed to sell
or offer to sell pre-need plans, as well as
schools, memorial chapels, banks, nonbank
financial institutions and other entities which
have also been authorized/licensed to sell or
offer to sell pre-need plans insofar as their
pre-need activities or business are concerned.
Benefits refers to the payment of monetary
considerations and/or performance of future
services which the pre-need company
undertakes to deliver either to the planholder
or his beneficiary at the time of actual need
or agreed maturity date, as specified in the
pre-need plan.
Sales counselors refers to natural persons
who are engaged in the sale of, or offer to
sell, or counsel of prospective planholders for
the purpose of selling, whether or not on
commission basis, pre-need plans upon the
authority of the pre-need company.

3. Authority of the Insurance Commission (IC)

All pre-need companies, shall be under the


primary and exclusive supervision and
regulation of the IC.

There must be a favorable recommendation


of the IC before the SEC may accept or
approve any of the following:
a) Articles of incorporation and by-laws
and amendments thereof;
b) Merger or consolidation;
c) Dissolution

A foreign corporation may be allowed to


engage in a pre-need business in the
Philippines if it complies with the pertinent
laws, rules and regulations.

A pre-need company must secure a license


from the IC to operate or engage in the
business of a pre-need company

The license shall expire one (1) year from


the time of the registration and renewable
upon compliance with the prescribed
requirements of the IC. Renewal shall be
deemed approved if not acted upon within
thirty (30) days from the time of filing of
the application for renewal.

The IC may disqualify, suspend or remove


any director or officer who commits or
omits an act which renders him unfit for the
position.

Pre-need contracts or certificates may be


issued or delivered within the Philippines
only in the form previously approved by the
IC.

37

4. Persons Unfit to be an Officer, Employee,


Director, Consultant or Sales Counselor of a preneed company

Those determined by the IC to be unfit;

Convicted of any crime involving any preneed plan, security or financial product;

Convicted of an offense involving moral


turpitude
or
involving
fraud
or
embezzlement, theft, estafa or other
fraudulent acts or transactions;

Enjoined by order, judgment or decree by


any court, quasi-judicial body or
administrative agency of competent
jurisdiction from acting as a director,
officer, employee, consultant, agent or
occupying any fiduciary position by reason
of any misconduct;

Found by the IC to have willfully violated


or willfully aided, abetted, counseled,
commanded, induced or procured the
violation of this Code, the Insurance Code,
the Securities Regulation Code or any
related laws and any rules or orders
thereunder;

Judicially declared to be insolvent or


incapacitated to contract; and

Found guilty by a foreign court, regulatory


authority or government agency of the acts
or violations similar to any of the acts or
misconduct enumerated in the foregoing.
5. Independent Directors

Pre-need companies shall have at least two


(2) independent directors or twenty percent
(20%) of the members of the board,
whichever is higher.
Independent director refers to a person
other than an officer, employee or
any person having a fiduciary relation to the
pre-need
company,
its
parent
or
subsidiaries, or any other individual having
a relationship therewith, which may
interfere with the exercise of independent
judgment in carrying out the responsibilities
of a director.

6. Investment Restrictions of Directors and


Officers

Any ncumbent director or officer of any


pre-need company cannot, directly or
indirectly, have an investment in excess of
Five million pesos (P5,000,000.00) in any
corporation or business undertaking in
which the pre-need companys trust fund
has an investment in or has a financial
interest with.

Same rule applies to relatives of such


director or officer of the pre-need company
within the fourth degree of consanguinity or
affinity during the incumbency or term of
the director or officer involved.

7. Registration of Pre-need Contracts/Plans

The pre-need company shall file with the IC


a registration statement for the sale of preneed plans, within forty-five (45) days after
the grant of license and for every pre-need
plan which the pre-need company intends to
offer for sale to the public,
8. Unlawful Acts

advertising by the pre-need company of


itself or its pre-need plans unless the IC has
approved such advertising material.
to sell or offer to sell any pre-need plan or
contract by any means or instruments of
communication in violation of the Pre-Need
Code

9. Disclosures to Prospective Planholders

No registered pre-need plan shall be sold to


prospective
planholders
unless
an
information brochure, which has been filed
with the IC, has been provided to the
purchaser.

The information brochure shall contain the


following:
a) an explanation of the principal features
of the pre-need plan, a statement that
the planholder may avail of a default
or reinstatement period within which
to reinstate his lapsed plan,
b) the conditions of the same and the
rates of return for scheduled benefit
plans and illustrative yields for
contingent benefit plans, and
c) such other information that the IC shall
require by rule.
10. Licensing of Sales Counselors

No sales counselor shall be allowed to


solicit, sell or offer to sell pre-need plans
under this Code without being licensed as
such by the IC.
No license shall be issued unless the
following
qualifications
have
been
complied with:
a) The applicant must be of good moral
character and must not have been
convicted of any crime involving
moral turpitude;

38

b)

The applicant has undergone a training


program approved by the IC and such
fact has been certified under oath by a
duly authorized representative of a preneed company; and
c) The applicant has passed a written
examination administered by the
IC: Provided, That the administration
of the examination may be delegated
to an independent organization under
the supervision of the IC.
The license shall automatically expire every
thirtieth (30th) day of June or such date of
every year as may be fixed by the IC and
may be accordingly renewed.

11. Termination of Pre-Need Plans

A planholder may terminate his pre-need


plan at any time by giving written notice to
the issuer.
A pre-need plan shall contain a schedule of
termination values to which the planholder
is entitled to upon termination.
The termination value of the pre-need plan
shall be pre-determined by the actuary of
the pre-need company upon application for
registration of the pre-need plans with the
Commission and shall be disclosed in the
contract.

12. Suspension and Revocation Certificate of


Authority of a Pre-Need Company, its Officers
and Agents.

There must be due notice or hearing.

Grounds: if the IC is of the opinion, upon


examination or other evidence, that any preneed company
a) is in an unsound condition, or
b) has failed to comply with the
provisions of law or regulations,
c) is in a condition or method of business
as to render its proceedings hazardous
to the public or to its planholders, or
d) has an impaired or deficient paid-up
capital stock.

The Commission may not lift the order of


suspension or revocation of the said
authority until the concerned pre-need
company shall have submitted a viable
business plan showing the companys
estimated receipts and disbursements, as
well as the basis therefor for the next
succeeding three (3) years.

39


CHAPTER V
Reportorial Requirements
SEC. 17. Periodic and Other Reports of Issuers.
17.1.

17.2.

Every issuer satisfying the requirements


in Subsection 17.2 hereof shall file
with the Commission:
a) Within one hundred thirty-five
(135) days, after the end of
the issuers fiscal year, or
such other time as the
Commission may prescribe,
an annual report which shall
include, among others, a
balance sheet, profit and loss
statement and statement of
cash flows, for such last
fiscal year, certified by an
independent certified public
accountant,
and
a
management discussion and
analysis
of
results
of
operations; and
b)
Such other periodical reports
for interim fiscal periods
and current reports on
significant developments of
the issuer as the Commission
may prescribe as necessary
to keep current information
on the operation of the
business
and
financial
condition of the issuer.
The reportorial requirements of
Subsection 17.1 shall apply to the
following:
a)
An issuer which has sold a
class
of
its
securities
pursuant to a registration
under
Section
12
hereof: Provided, however,
That the obligation of such
issuer to file reports shall be
suspended for any fiscal
year after the year such
registration became effective
if such issuer, as of the first
day of any such fiscal year,

has less than one hundred


(100) holders of such class of
securities or such other
number as the Commission
shall prescribe and it notifies
the Commission of such;
b)
An issuer with a class of
securities listed for trading
on an Exchange; and
c)
An issuer with assets of at least
Fifty
million
pesos
(P50,000,000.00) or such
other
amount
as
the
Commission shall prescribe,
and having Two hundred
(200) or more holders each
holding
at
least
One
hundred (100) shares of a
class
of
its
equity
securities: Provided,
however, That the obligation
of such issuer to file reports
shall be terminated ninety
(90) days after notification
to the Commission by the
issuer that the number of its
holders holding at least one
hundred (100) shares is
reduced to less than One
hundred (100).
17.3. Every issuer of a security listed for
trading on an Exchange shall file with
the Exchange a copy of any report
filed with the Commission under
Subsection 17.1 hereof.
17.4.
All reports (including financial
statements) required to be filed with
the
Commission
pursuant
to
Subsection 17.1 hereof shall be in
such form, contain such information
and be filed at such times as the
Commission shall prescribe, and shall
be in lieu of any periodical or current
reports or financial statements
otherwise required to be filed under
the Corporation Code.
17.5. Every issuer which has a class of equity
securities satisfying any of the
requirements in Subsection 17.2 shall
furnish to each holder of such equity
security an annual report in such

40

form and containing such information


as the Commission shall prescribe.
17.6. Within such period as the Commission
may prescribe preceding the annual
meeting of the holders of any equity
security of a class entitled to vote at
such meeting, the issuer shall transmit
to such holders an annual report in
conformity with Subsection 17.5.
SEC. 18. Reports by Five per centum (5%)
Holders of Equity Securities.
18.1.

In every case in which an issuer satisfies


the requirements of Subsection 17.2
hereof, any person who acquires
directly or indirectly the beneficial
ownership of more than five per
centum (5%) of such class or in excess
of such lesser per centum as the
Commission by rule may prescribe,
shall, within ten (10) days after such
acquisition or such reasonable time as
fixed by the Commission, submit to
the issuer of the security, to the
Exchange where the security is
traded, and to the Commission a
sworn statement containing the
following information and such other
information as the Commission may
require in the public interest or for
the protection of investors:
a)
The personal background,
identity,
residence,
and
citizenship of, and the
nature of such beneficial
ownership by, such person
and all other persons by
whom or on whose behalf
the purchases are effected;
in the event the beneficial
owner is a juridical person,
the lines of business of the
beneficial owner shall also
be reported;
b)
If the purpose of the purchases
or prospective purchases is
to acquire control of the
business of the issuer of the
securities, any plans or
proposals
which
such

18.2.

18.3.

persons may have that will


effect a major change in its
business
or
corporate
structure;
c)
The number of shares of such
security
which
are
beneficially owned, and the
number
of
shares
concerning which there is a
right to acquire, directly or
indirectly, by: (i) such
person,
and
(ii)
each
associate of such person,
giving
the
background,
identity,
residence,
and
citizenship of each such
associate; and
d)
Information as to any
contracts, arrangements, or
understanding with any
person with respect to any
securities of the issuer
including but not limited to
transfer, joint ventures, loan
or option arrangements,
puts or calls, guarantees or
division of losses or profits,
or proxies naming the
persons with whom such
contracts, arrangements, or
understanding have been
entered into, and giving the
details thereof.
If any change occurs in the facts set
forth
in
the
statements,
an
amendment shall be transmitted to
the issuer, the Exchange and the
Commission.
The Commission, may permit any
person to file in lieu of the statement
required by Subsection 17.1 hereof, a
notice stating the name of such
person, the shares of any equity
securities subject to Subsection 17.1
which are owned by him, the date of
their acquisition and such other
information as the Commission may
specify, if it appears to the
Commission that such securities were
acquired by such person in the
ordinary course of his business and

41

were not acquired for the purpose of


and do not have the effect of changing
or influencing the control of the issuer
nor
in
connection
with
any
transaction having such purpose or
effect.

Annual reports shall be filed within one


hundred five (105) calendar days after the
end of the fiscal year covered by the report.
Three (3) complete copies of the report,
including any financial statements, exhibits
or other papers or documents filed as a part
thereof, shall be filed with the SEC.
At least one complete copy of the report,
including any financial statements, exhibits
or other papers or documents filed as a part
thereof, shall, if any class of the issuers
securities is listed in a Stock Exchange,
simultaneously be filed with that Exchange.
The report filed with the SEC and the
Exchange, if applicable, shall be manually
signed on the issuer's behalf by its principal
executive officer, its principal operating
officer, its principal financial officer, its
comptroller, its principal accounting officer,
its corporate secretary or persons performing
similar functions. Any person who occupies
more than one of the specified positions shall
indicate the capacity in which he signs the
report. Copies not manually signed shall
bear typed or printed signatures. If the issuer
is a foreign person, the report shall also be
signed by its resident agent in the
Philippines.

42


CHAPTER VI
Protection of Shareholder Interests
SEC. 19. Tender Offers.
19.1. a)

b)

Any person or group of persons


acting in concert who
intends to acquire at least
fifteen per cent (15%) of any
class of any equity security
of a listed corporation or of
any class of any equity
security of a corporation
with assets of at least Fifty
Million
Pesos
(P50,000,000.00) and having
two hundred (200) or more
stockholders with at least
one hundred (100) shares
each or who intends to
acquire at least thirty per
cent (30%) of such equity
over a period of twelve (12)
months shall make a tender
offer to stockholders by
filing with the Commission a
declaration to that effect;
and furnish the issuer, a
statement containing such of
the information required in
Section 17 of this Code as
the
Commission
may
prescribe. Such person or
group of persons shall
publish all requests or
invitations for tender, or
materials making a tender
offer or requesting or
inviting letters of such a
security. Copies of any
additional material soliciting
or requesting such tender
offers subsequent to the
initial solicitation or request
shall
contain
such
information
as
the
Commission may prescribe,
and shall be filed with the
Commission and sent to the
issuer not later than the time
copies of such materials are
first published or sent or
given to security holders.
Any
solicitation
or
recommendation
to
the
holders of such a security to

c)

d)

e)

accept or reject a tender


offer or request or invitation
for tenders shall be made in
accordance with such rules
and regulations as the
Commission may prescribe.
Securities deposited pursuant
to a tender offer or request
or invitation for tenders may
be withdrawn by or on
behalf of the depositor at
any time throughout the
period that the tender offer
remains open and if the
securities deposited have not
been previously accepted for
payment, and at any time
after sixty (60) days from the
date of the original tender
offer
or
request
or
invitation, except as the
Commission may otherwise
prescribe.
Where the securities offered
exceed that which a person
or group of persons is bound
or willing to take up and pay
for, the securities that are
subject of the tender offer
shall be taken up as nearly
as may be pro rata,
disregarding
fractions,
according to the number of
securities deposited by each
depositor. The provisions of
this subsection shall also
apply to securities deposited
within ten (10) days after
notice of an increase in the
consideration offered to
security
holders,
as
described in paragraph (e)
of this subsection, is first
published or sent or given to
security holders.
Where any person varies the
terms of a tender offer or
request or invitation for
tenders before the expiration
thereof by increasing the
consideration offered to
holders of such securities,
such person shall pay the
increased consideration to
each security holder whose
securities are taken up and
paid for whether or not such
securities have been taken

43

up by such person before the


variation of the tender offer
or request or invitation.
19.2. It shall be unlawful for any person to
make any untrue statement of a
material fact or omit to state any
material fact necessary in order to
make the statements made, in the
light of the circumstances under
which they are made, not misleading,
or to engage in any fraudulent,
deceptive, or manipulative acts or
practices, in connection with any
tender offer or request or invitation
for tenders, or any solicitation of
security holders in opposition to or in
favor of any such offer, request, or
invitation. The Commission shall, for
the purposes of this subsection, define
and prescribe means reasonably
designed to prevent, such acts and
practices as are fraudulent, deceptive,
or manipulative.
A. Protecting Shareholders Interests
TENDER OFFERS

Publicly announced intention by a person


acting alone or in concert with other persons
to acquire equity securities of a public
company (SRC Rule 19.1[I])

Includes a request or invitation for tenders


and a means of one or more offers to
purchase or solicitation of offers to sell
securities of a single class, whether or not all
or any portion of the securities sought are
purchased.

An offer by the acquiring person to SHs of a


public company for them to tender their
shares therein on the terms specified in the
offer.

Gives the minority SHs the chance to exit the


company under reasonable terms, giving
them the opportunity to sell their shares at the
same price as those of the majority SHs.
PRIMARY PURPOSE:
1. To protect investors by placing controls on
acquisitions of corporations by obtaining
majority of a corporations stock.
2. To protect minority SHs against any scheme
that dilutes the share value of their
investments.
3. To regulate activities relating to acquisition
of control of the listed company and for the
protection of the minority SHs of a listed
corporation.

It covers both direct and indirect acquisition.


The type of activity intended to be regulated
is the acquisition of control of a corporation
by outsiders through the purchase of its
shares.

SHAREHOLDER IMPACT PRINCIPLE

It will be considered a tender offer if in all


circumstances the effects on the mind of a
SH of the actions of a bidder are similar to
the effects of a controversial(????) tender
offer.
MINI TENDER OFFER

A type of third-party offer made to a


companys SHs as an attempt to purchase the
underlying shares.

Unlike conventional tenders, usually involve


less than 5% of a companys outstanding
shares and typically represent a discount
compared to the stocks current market price.

Typically frowned upon by the investment


community because many of the procedures
and regulations associated with tenders do
not apply to them.

SHs who are approached with a minitender should be extremely diligent in


evaluating the offer, as the terms of the
mini-tender may not necessarily be
beneficial to the investor.
SRC Rule 19 Tender Offers
[formerly, SRC Rule 19.1]
Definitions

Issuer Tender Offer means a publicly


announced intention by an issuer to reacquire
any of its own class of equity securities, or by
an affiliate of such issuer to acquire such
securities.
Security holders mean holders of record and
beneficial owners of securities that are the
subject of a tender offer.
Target company means any issuer of
securities that are sought by a bidder pursuant
to tender offer.

Mandatory Tender Offers


A. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) or more of equity shares in a
public company shall:
a) Disclose such intention and

44

b)

B.

Contemporaneously make a tender


offer to all holders of such class,
subject to paragraph (9)(E) of this
Rule.

In the event that the tender offer is


oversubscribed, the aggregate amount of
securities to be acquired at the close of
such
tender
offer
shall
be
proportionately distributed across both
selling shareholder with whom the
acquirer may have been in private
negotiations and minority shareholders.

Any person or group of persons acting in


concert, who intends to acquire thirty five
percent (35%) or more of equity shares in a
public company in one or more transactions
within a period of twelve (12) months:

shall be required to make a tender offer


to all holders of such class for the
number of shares so acquired within the
said period.

Last sale meeting the threshold shall not


be consummated until the closing and
completion of the tender offer.

A.

Any purchase of shares from the unissued


capital stock provided that the acquisition
will not result to a fifty percent (50%) or
more ownership of shares by the purchaser;
B. any purchase of shares from an increase in
authorized capital stock;
C. Purchase in connection with foreclosure
proceedings involving a duly constituted
pledge or security arrangement where the
acquisition is made by the debtor or creditor;
D. purchases in connection with privatization
undertaken by the government of the
Philippines;
E. Purchases in connection with corporate
rehabilitation under court supervision;
F. Purchases through an open market at the
prevailing market price;
G. Merger or consolidation

Purchasers of shares in the foregoing


transactions shall, however, comply
with the disclosure and other obligations
under SRC Rule 18.1 and SRC Rule 23.

Tender Offer by an Issuer/Buy Back


C.

D.

If any acquisition of even less than thirty five


percent (35%) would result in ownership of
over fifty one percent (51%) of the total
outstanding equity securities of a public
company, the acquirer shall be required:

to make a tender offer for all the


outstanding equity securities to all
remaining stockholders of the said
company at a price supported by a
fairness opinion provided by an
independent financial advisor or
equivalent third party.

The acquirer in such a tender offer shall


be required to accept any and all
securities thus tendered.

A. A reacquisition or repurchase by an issuer of its


own securities shall only be made if such issuer
has unrestricted retained earnings in its books to
cover the amount of shares to be purchased, and
the same is pursuant to any of the following
purposes:
i. to implement a stock option or stock
purchase plan;
ii. to meet short-term obligations which
can be settled by the re-issuance of the
repurchased shares;
iii. to pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the Corporation
Code;
iv.
such
other
legitimate
corporate purpose/s.

In any transaction covered by this Rule:


Sale of the shares pursuant to the private
transaction shall not be completed prior to the
closing and completion of the tender offer.
Transactions with any of the seller/s of
significant blocks of shares with whom the
acquirers may have been in private
negotiations shall close at the same time and
upon the same terms as the tender offer made
to the public under this Rule.

Exempt from
Requirement

Mandatory

Tender

Offer

Thresholds of 15% (single acquisition)


or 30% (creeping acquisition) under
Sec. 19, SRC increased to 35%,
pending the passage of the proposed
amendments to the SRC.

In case of acquisition pursuant to


subparagraph (i) or (ii) above, the same
may be accounted for as Investment in
Marketable Securities, in accordance

45

with
International
Standards.

Accounting

B. Any issuer or any of its affiliates which intend


to reacquire its own securities through active and
widespread solicitation from the stockholders in
general and in substantial amount of its shares,
shall comply with disclosure and procedural
requirements set forth under subparagraphs (C)
and (D) below, and the preceding provisions of
this Rule.
C. If an issuer or an affiliate publishes, sends or
disseminates its tender offer to security holders by
means of a summary publication in the manner
prescribed in this Rule, the summary publication
shall disclose only the following information:

fractional interest in a share of stock or


similar security.
Announcement of intention to make a tender
offer:

shall be made in a newspaper of general


circulation, prior to the commencement
of the offer

announcement shall not be made until


the bidder has the resources to
implement the offer in full.

A copy of said notice shall be submitted


to the Commission on the date of
publication thereof.
Period of Making Tender Offer

i. The identity of the issuer or affiliate


making the tender offer;
ii. The amount and class of securities
being sought and the price being
offered;
iii. The information required by
paragraph
8
of
this
Rule;
iv. A statement of the purpose of the
issuer tender offer; and
v. The appropriate instruction for
security holders on how to obtain
promptly, at the expense of the issuer or
affiliate making the issuer tender offer,
the information required by paragraph 7
of the Rule.
D. Until the expiration of at least ten (10)
business days after the date of termination of the
issuer tender offer, neither the issuer nor any
affiliate shall make any repurchase, otherwise than
pursuant to the tender offer of:
i. Any security which is the subject of
the issuer tender offer, or any security of
the same class and series, or any right to
repurchase such securities; and
ii. In the case of an issuer tender offer
which is an exchange offer, any security
being offered pursuant to the exchange
offer, or any security of the same class
and series, or any right to repurchase
any such security.
E. This rule shall not apply to:
i. Calls or redemption of any security in
accordance with the terms and
conditions of its governing instruments;
ii. Offers to repurchase securities
evidenced by a certificate, order form or
similar document which represents a

The tender offer, unless withdrawn,


shall remain open until the expiration of:
i. At least 20 business days from its
commencement; provided, however, that
an offer should generally be completed
within 60 days from the date the
intention to acquire is publicly
announced; or
ii. At least ten (10) business days from
the date the notice of a change in the
percentage of the class of securities
being sought or in the consideration
offered is first published, sent or given
to security holders.

Where a mandatory tender offer is required,

Bidder is compelled to offer the highest


price paid by him for such shares during
the past six (6) months.

Where the offer involves payment by


transfer or allotment of securities, such
securities must be valued on an
equitable basis.
In case of a tender offer other than by an issuer
General Rule: a target company shall not engage
in any of the following transactions DURING the
course of a tender offer, or BEFORE the
commencement thereof if its board has reason to
believe that an offer might be imminent:
a) Issue any authorized but unissued
shares;
b) Issue or grant options in respect to any
unissued shares;

46

c)

d)

e)

Create or issue, or permit the creation or


issue of, any securities carrying rights
of conversion into, or subscription for,
shares;
Sell, dispose of or acquire, or agree to
acquire, any asset, the value of which
amounts to five percent (5%) or more of
the total value of assets prior to
acquisition; or
Enter into contracts otherwise done in
the ordinary course of business.

Exceptions:
a) if such transaction is in pursuance of a
contract entered into earlier, or
b) transactions with the approval of
shareholders in a general meeting or,
c) where special circumstances exist,
Commission approval has been obtained
When bidder in a tender offer shall permit
securities tendered to be withdrawn:
a) At any time during the period such
tender offer remains open; and
b) If not yet accepted for payment, after the
expiration of sixty (60) business days
from the commencement of the tender
offer.
If the tender offer is for less than the total
outstanding securities of a class but a greater
number of securities is tendered:

Bidder shall be bound to take up and


pay for the securities on a pro rata basis,
disregarding fractions, according to the
number of securities tendered by each
security holder during the period such
offer remains open.
In the event the bidder in a tender offer shall
increase the consideration offered after the
tender offer has commenced:

He
shall
pay
such
increased
consideration to all security holders
whose tendered securities are accepted
for payment by such bidder, whether or
not the securities were tendered prior to
the variation of the tender offers terms.
When bidder shall pay the consideration
offered or return the tendered securities:
Not later than ten (10) business days after the
termination or the withdrawal of the tender offer.

a)
b)

The tender offer shall be open to all security


holders of the class of securities subject to
the tender offer; and
The consideration paid to any security holder
pursuant to the tender offer shall be the
highest consideration paid to any other
security holder during such tender offer.

Bidder shall not extend the length of a tender


offer

The bidder in a tender offer shall not


extend the length of a tender offer
without prior clearance from the
Commission and without issuing a
notice of such extension by press release
or other public announcement, which
notice shall include disclosure of the
appropriate number of securities
deposited to date and shall be issued no
later than the scheduled original
expiration date of the offer.
Transactions on the Basis of Material, NonPublic Information

If a person shall become aware of a


potential tender offer before the tender
offer has been publicly announced, such
person shall not buy or sell, directly or
indirectly, the securities of the target
company until the tender offer shall
have been publicly announced.
Such buying or selling shall constitute
insider trading under Section 27.4 of the
Code.

Withdrawal/Lapse of Tender Offer

Except with the consent of the


Commission, where an offer has been
announced but has not become
unconditional in all respects and has
been withdrawn or lapsed, neither the
bidder nor any person who acted in
concert with it in the course of the offer
may, within six (6) months from the
date on which such offer has been
withdrawn or lapsed, announce an offer
for the target company nor acquire
any securities of the target company
which would require such person to
make a mandatory tender offer under
this Rule and Section 19.1 of the Code.
Prohibited practices (fraudulent, deceptive or
manipulative act or practice)

No tender offer may be made UNLESS:

47

A. Employ any device, scheme or artifice to


defraud any person;
B. Make any untrue statement of a material fact or
to omit to state a material fact necessary in order
to make the statements made not misleading; or
C. Engage in any act, practice or course of
business which operates or would operate as a
fraud or deceit upon any person.

Proxy Voting

Purchase at threshold amounts without tender


offer

Purchase of equity shares of a public


company at threshold amounts without
the required
tender offer, the
Commission, upon complaint, may
nullify the said purchase and direct the
holding of a tender offer. This shall be
without prejudice to the imposition of
other sanctions under the Code.

SEC. 20. Proxy Solicitations.


20.1.

20.2.

20.3.

20.4.

20.5.

Proxies must be issued and proxy


solicitation must be made in
accordance with rules and regulations
to be issued by the Commission;
Proxies must be in writing, signed by the
stockholder or his duly authorized
representative and filed before the
scheduled meeting with the corporate
secretary.
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.
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.
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.

Proxy voting cannot be denied in case of


stock corporations. Proxy voting may be
denied only in case of non-stock
corporations.
By-laws of the corporation shall govern the
rule on proxies.
Restrictions on the right to vote by proxy
shall be void only where they operate
unjustly, unreasonably, and oppressively so
as to work the disenfranchisement of a
majority of legal voters.
In the absence of a provision in the AOI or
BL requiring a particular form of proxy, the
BOD cannot prescribe the form of proxies
other than as provided for under Sec. 58, CC.

Rulings on Proxy Voting:

A proxy to vote at the annual or a regular


meeting - authority to vote on any matter
which can properly come before it.

Proxy to vote in the ordinary concerns - no


authority to vote for the reorganization of the
corporation.

General proxy - given only with reference to


matters which could be submitted to the SHs
under the existing statutes articles and bylaws. However, a SH is ordinarily bound by
the action of a meeting in which he is
represented by proxy provided that it is not
forbidden by the charter or some general law.

Proxies cannot be appointed to take the place


of disqualified SHs/members to do business.

Death of the designated proxy results in the


extinguishment of the agency.

Another agency is established between the


SH and the alternate proxy in view of the
non-attendance of the designated proxy.
holder.

As a general rule, one who has given a proxy


to vote the stock owned by him may revoke
the same at any time unless said proxy is
coupled with an interest even though it may
in terms be irrevocable. Revocation of a
proxy need not be made by formal notice to
the corporation unless the statute prescribes
otherwise.

In the absence of a provision in the BL, the


corporation cannot prescribe any restriction
in the execution and voting of proxy.
However, for purposes of determining a
quorum and entitlement to vote or participate
in SHs meeting, the same must be
filed/registered with the corporate secretary
prior to the SHs meeting.

48

In the absence of provision in the BL, the


imposition of time limitation on proxy voting
which will result in the disenfranchisement of
some of the members is void for being
unreasonable and unjust, and therefore not
conducive to a fair election process.
The appointment of proxy is purely personal.

ii.

The terms SOLICIT and SOLICITATION


shall include:
a. any request for a proxy or
authorization;
b. any request to execute or not to
execute, or to revoke, a proxy or
authorization; or
c. the furnishing of a form of proxy or
other communication to security
holders under a circumstance
reasonably calculated to result in
the procurement, withholding or
revocation of a proxy.
The terms shall not apply to:
a. the performance by any person of
ministerial acts on behalf of a
person soliciting a proxy; or
b. any solicitation made otherwise
than on behalf of the registrant
where the total number of persons
solicited is not more than nineteen
(19).

iii.

to vote with respect to more than one


meeting, unless a specific statement is
made in the information statement and
form of proxy that the proxy is valid for
more than one meeting. Provided,
however, that no proxy shall be valid
and effective for a period longer than
five (5) years from the date of the proxy;
or
to consent to or authorize any action
other than the action proposed to be
taken in the information statement or
matters referred to above.

No person making a solicitation which is subject


to this Rule shall solicit:
i.
any undated or post-dated proxy; or
ii.
any proxy which provides that it shall be
deemed to be dated as of any date
subsequent to the date on which it is
signed by the security holder.

SEC. 21. Fees for Tender Offers and Certain


Proxy Solicitations.

PROXY SOLICITATION

a procedure that antecedes proxy validation.

involves the securing and submission of


proxies.

At the time of filing with the Commission of


any statement required under Section 19 for
any tender offer or Section 72.2 for issuer
repurchases, or Section 20 for proxy or consent
solicitation, the Commission may require that
the person making such filing pay a fee of not
more than one-tenth (1/10) of one percentum
(1%) of:

PROXY VALIDATION

concerns the validation of such secured and


submitted proxies.

21.1. The proposed aggregate purchase price


in the case of a transaction under
Sections 20 or 72.2; or

21.2. The proposed payment in cash, and the


value of any securities or property to
be transferred in the acquisition,
merger or consolidation, or the cash
and value of any securities proposed
to be received upon the sale or
disposition of such assets in the case
of a solicitation under Section 20. The
Commission shall prescribe by rule
diminishing fees in inverse proportion
to the value of the aggregate price of
the offering.

Sec. 6 of PD 902-A conferred on the SEC


(now RTC) the power to adjudicate
controversies relating not only to proxy
solicitation but also to proxy validation.

HOLD-OVER

A situation that arises when no successor is


elected in which case the incumbent holds
over and continue to function until another
officer is chosen and qualified.
No proxy shall confer authority:
i.
to vote for any person to any office for
which a bona fide nominee is not named
in the information statement or in any
material attached thereto;

SEC. 22. Internal Record


Accounting Controls.

Keeping

and

49

Every issuer which has a class of securities that


satisfies the requirements of Subsection 17.2
shall:
22.1.

22.2.

23.2.

Make and keep books, records, and


accounts which, in reasonable detail
accurately and fairly reflect the
transactions and dispositions of assets
of the issuer;
Devise and maintain a system of internal
accounting controls sufficient to
provide reasonable assurances that:
(a) Transactions and access to assets
are
pursuant
to
management
authorization;
(b)
Financial
statements
are
prepared
in
conformity with generally accepted
accounting principles that are
adopted by the Accounting Standards
Council and the rules promulgated by
the Commission with regard to the
preparation of financial statements;
and (c) Recorded assets are compared
with existing assets at reasonable
intervals
and
differences
are
reconciled.

SEC. 23. Transactions of Directors, Officers and


Principal Stockholders.
23.1.

Every person who is directly or


indirectly the beneficial owner of
more than ten per centum (10%) of
any class of any equity security which
satisfies
the
requirements
of
Subsection 17.2, or who is a director
or an officer of the issuer of such
security, shall file, at the time either
such requirement is first satisfied or
within ten days after he becomes such
a beneficial owner, director, or
officer, a statement with the
Commission and, if such security is
listed for trading on an Exchange,
also with the Exchange, of the amount
of all equity securities of such issuer
of which he is the beneficial owner,
and within ten (10) days after the
close of each calendar month
thereafter, if there has been a change
in such ownership during such month,
shall file with the Commission, and if
such security is listed for trading on
an Exchange, shall also file with the
Exchange, a statement indicating his
ownership at the close of the calendar
month and such changes in his

23.3.

ownership as have occurred during


such calendar month.
For the purpose of preventing the unfair
use of information which may have
been obtained by such beneficial
owner, director, or officer 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 six (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 six (6) months. 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 sixty (60) days after
request or shall fail diligently to
prosecute the same thereafter, but no
such suit shall be brought more than
two (2) years after the date such profit
was realized. This subsection shall not
be construed to cover any transaction
where such beneficial owner was not
such both at the time of the purchase
and sale, or the sale and purchase, of
the security involved, or any
transaction or transactions which the
Commission by rules and regulations
may exempt as not comprehended
within the purpose of this subsection.
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

50

delivery or deposit within such time,


or that to do so would cause undue
inconvenience or expense.
23.4. The provisions of Subsection 23.2 shall
not apply to any purchase and sale, or
sale and purchase, and the provisions
of Subsection 23.3 shall not apply to
any sale, of an equity security not
then or thereafter held by him in an
investment account, by a dealer in the
ordinary course of his business and
incident to the establishment or
maintenance by him of a primary or
secondary market, otherwise than on
an Exchange, for such security. The
Commission may, by such rules and
regulations as it deems necessary or
appropriate in the public interest,
define and prescribe terms and
conditions with respect to securities
held in an investment account and
transactions made in the ordinary
course of business and incident to the
establishment or maintenance of a
primary or secondary market.
SEC v. Intreport Resources (GR No. 135808,
October 6, 2008)

Beneficial owner has been defined in the


following manner:

to indicate the interest of a beneficiary


in trust property (also called equitable
ownership); and

to refer to the power of a corporate


shareholder to buy or sell the shares,
though the shareholder is not registered
in the corporations books as the owner.

Beneficial ownership is distinguished from


naked ownership, which is the enjoyment of
all the benefits and privileges of ownership,
as against possession of the bare title to
property.

51


CHAPTER VII
Prohibitions on Fraud, Manipulation and
Insider Trading
SEC. 24. Manipulation of Security Prices;
Devices and Practices. 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.
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

c)

d)

e)

commonly
controlled
company
by
others;
(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.
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.
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.
To effect, either alone or
others,
any
series
of
transactions
for
the
purchase and/or sale of any

52

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.
No person shall use or employ, in
connection with the purchase or sale
of any security any manipulative or
deceptive device or contrivance.
Neither shall any short sale be
effected nor any stop-loss order be
executed in connection with the
purchase or sale of any security
except in accordance with such rules
and regulations as the Commission
may prescribe as necessary or
appropriate in the public interest or
for the protection of investors.
The
foregoing
provisions
notwithstanding, the Commission,
having due regard to the public
interest and the protection of
investors, may, by rules and
regulations, allow certain acts or
transactions that may otherwise be
prohibited under this Section.

24.2.

24.3.

Manipulative Practices

Any person to make a bid or offer, or


deal in securities, with the intention, or
if that bid, offer or dealing, has the
effect or is likely to have the effect, of
creating a false or misleading
appearance of active trading in any
security or with respect to the market
for, or the price of, any security.
Any Broker Dealer, associated person or
salesman of a Broker or Dealer to make
a bid or offer for, or deal in securities,
on account of any other person where
the registered person intends to create,
or the registered person is aware that the
other person intends to create, or taking
into account the circumstances of the
order, the registered person reasonably
suspects that a person has placed the
order with the intention of creating, a
false or misleading appearance of active
trading in any security or with respect to
the market for, or the price of, any
security.

3. In considering whether an order violates


Section 24 of the Code, a Broker Dealer shall
consider:
i.
Whether the order or execution of the
order, would materially alter the market
for, and/or the price of, the securities;
The time the order is entered or any
instructions concerning the time of entry
of the order;
ii.
Whether the person on whose behalf the
order is placed, or another person who
the Broker Dealer knows to be a related
party of that person, may have an
interest in creating a false or misleading
appearance of active trading in any
security or with respect to the market
for, or the price of, any security;
iii.
Whether the order is accompanied by
settlement,
delivery
or
security
arrangements which are unusual;
iv.
Whether the order appears to be part of
a series of orders, which when put
together with the orders which appear to
make up the series, the order or the
series is unusual having regard to the
matters referred to in this paragraph 3;
and
v.
Whether there appears to be a legitimate
commercial reason or basis in placing
the order, unrelated to an intention to
create a false or misleading appearance
of active trading in or with respect to the
market for, or price of, any security.
Failure to consider these factors shall raise a
presumption that the transaction/s is/are
manipulative.
4. Examples of prohibited conduct.
i.
Engaging in a series of transactions in
securities that are reported publicly to
give the impression of activity or price
movement in a security (e.g. painting
the tape);
ii.
Buying and selling securities at the close
of the market in an effort to alter the
closing price of the security (marking
the close);
iii.
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 (improper matched orders);
iv.
Engaging in buying activity at
increasingly higher prices and then
selling securities in the market at the
higher prices (hype and dump) or vice

53

versa (i.e. selling activity at lower prices


and then buying at such lower prices);
Engaging in transactions in which there
is no genuine change in actual
ownership of a security (wash sales)
taking into consideration internal control
systems adopted by the firms to prevent
manipulative practices;
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
(squeezing the float);
Disseminating false or misleading
market information through media,
including the internet, or any other
means to move the price of a security in
a direction that is favorable to a position
held or a transaction; and
Other types of prohibited conduct
and/or manipulative practices which
include, among others, the creation of
temporary funds for the purpose of
engaging
in
other
manipulative
practices.

v.

vi.

vii.

viii.

C. Shall not contain promises of specific results,


exaggerated or unwarranted claims, or
unwarranted superlatives, unfounded opinions
for which there is no basis, or forecasts of
future events which are unwarranted, or which
are not clearly labeled as forecasts.
D. Factors should be considered if misleading,
including but not limited to:
i.
the overall context in which the
statement/s is/are made.

An essential test in this regard is the


balance of treatment of risks and
potential benefits;
ii.

the
audience
to
which
the
communication is directed. Different
levels of explanation or detail may be
necessary depending on the audience to
which a communication is directed and
the ability of the registered person given
the nature of the media used, to restrict
the audience appropriately.

iii.

the clarity of the communication.

Publication of Transactions and Quotations


Manipulation of Security Prices; Devices and
Practices
A. Advertisements and Communications with
the Public

shall be based on principles of fair


dealing and good faith and should
provide a sound basis for evaluating the
facts in regard to any particular security
or securities or type of security, industry
discussed, or service offered.

B. Exaggerated, unwarranted or misleading


statements or claims

are
prohibited
in
all
public
communications of registered persons.

it must be borne in mind by registered


persons that inherent in investment are
the risks of fluctuating prices and the
uncertainty of dividends, rates of return
and yield, and no registered person
shall, directly or indirectly, publish,
circulate or distribute any public
communication that he knows, or had
reason to know, contains any untrue
statement of a material fact or is
otherwise false or misleading.

No Broker Dealer, or associated person or


salesman, shall publish or circulate any notice,
circular, advertisement, or communication of any
kind that purports to report any transaction as a
purchase or sale of any security unless he believes
that such transaction was a bona fide purchase or
sale of such security; or that it purports to quote
the bid price or asked price for any security,
unless he believes that such quotation represents a
bona fide bid for, or offer of, such security.
Payment to Influence Market Prices
No Broker Dealer shall, directly or indirectly,
give, permit to be given, or offer to give, anything
of value to any person for the purpose of
influencing or rewarding the action of such person
in connection with the publication or circulation of
any matter which has effect upon the market price
of any security, provided that this rule shall not be
construed to apply to a matter which is clearly
identifiable as paid advertising.
Short Sales

Sale of a security which the seller does


not own or any sale which is
consummated by the delivery of a

54

security borrowed by, or for the account


of the seller.
Person 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 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.

kind and quantity on the next business


day after settlement date, unless such
purchase cannot be effected within said
period for justifiable reasons in which
case, notification in writing shall be
made with the Exchange and the
Commission

Determination of Good Delivery

No broker or dealer shall accept a long


sale order from a customer unless he has
made a determination that the customer
owns the security and will deliver in
good deliverable form within three (3)
business days of the execution of the
order.

Exempt Transaction

Execution of Short Sale

No broker or dealer shall use any facility


of a securities exchange to effect a short
sale of any security unless (1) at a price
higher than the last sale or (2) at the
price of the sale if and only if that price
is above the next preceding different
sale price on such day.

Failure to Deliver

Failure on the part of the seller to make


delivery within the period specified in
the contract will be taken by the
Commission as prima facie evidence of
the lack of intention on his part to make
such delivery.

Mandatory Close-Out

A contract involving a short sale which


has not resulted in a delivery by the
Broker Dealer within the settlement
period must be closed by the Broker
Dealer by purchasing for cash or
guaranteed delivery securities of like

No director, officer or principal


stockholder of a corporation shall make
a short sale in securities of the
corporation in which he is a director,
officer or principal stockholder.
Upon receiving an order to sell short,
the same 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 or dealer shall arrange to borrow
the securities to make delivery by
settlement date.

This rule notwithstanding, the Exchange


may prohibit short selling in the
Exchange indefinitely or for such period
of time as it may deem necessary or
advisable for the protection of investors,
or as an emergency measure or
whenever the same is necessary or
appropriate in the public interest or for
the protection of investors.

Prohibition on Guarantees against Loss

No Broker Dealer or salesman shall


guarantee a customer against loss in any
securities account of such customer
carried by the Broker Dealer or in any
securities transaction effected by the
Broker Dealer with or for the customer.

SEC. 25. Regulation of Option Trading.


No member of an Exchange shall, directly or
indirectly
endorse
or
guarantee
the
performance of any put, call, straddle, option
or privilege in relation to any security
registered on a securities exchange.
The terms put, call, straddle, option,
or privilege shall not include any registered
warrant, right or convertible security.

55

Put, Call and Option have the same


meanings as defined in SRC Rule
3.1(d).
Straddle involves the purchase of an
equal number of put options and call
options on the same underlying security
at the same strike price and maturity
date. Each option may be exercised
separately, although the combination of
options is usually bought and sold as a
unit.

SEC. 26. Fraudulent Transactions.


It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or
sale of any securities to:
26.1. Employ any device, scheme, or artifice
to defraud;
26.2. 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
26.3. Engage in any act, transaction, practice
or course of business which operates
or would operate as a fraud or deceit
upon any person.
SEC. 27. Insiders Duty to Disclose When
Trading. 27.1.

It shall be unlawful for an insider to sell


or buy a security of the issuer, while
in possession of material information
with respect to the issuer or the
security that is not generally available
to the public, unless: (a) The insider
proves 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 proves: (i) that
he disclosed the information to the
other party, or (ii) that he had reason
to believe that the other party
otherwise is also in possession of the
information. A purchase or sale of a
security of the issuer made by an
insider defined in Subsection 3.8, or
such insiders spouse or relatives by
affinity or consanguinity within the
second degree, legitimate or commonlaw, shall be presumed to have been

effected while in possession of


material non-public 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 non-public
information at the time of the
purchase or sale.
27.2. For purposes of this Section, information
is material non-public if: (a) It 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
(b) 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.
27.3. It shall be unlawful for any insider to
communicate material non-public
information about the issuer or the
security to any person who, by virtue
of the communication, becomes an
insider as defined in Subsection 3.8,
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.
27.4. a)
It shall be unlawful where a
tender offer has commenced
or is about to commence for:
(i)
Any person (other
than the tender
offeror) who is in
possession
of
material
nonpublic information
relating to such
tender offer, to buy
or
sell
the
securities of the
issuer that are
sought or to be
sought by such
tender offer if such
person knows or
has
reason
to

56

(b)

believe that the


information is nonpublic and has
been
acquired
directly
or
indirectly from the
tender
offeror,
those acting on its
behalf, the issuer of
the
securities
sought or to be
sought by such
tender offer, or any
insider of such
issuer; and
(ii)
Any tender offeror,
those acting on its
behalf, the issuer of
the
securities
sought or to be
sought by such
tender offer, and
any insider of such
issuer
to
communicate
material
nonpublic information
relating to the
tender offer to any
other person where
such
communication is
likely to result in a
violation
of
Subsection
27.4
(a)(i).
For purposes of this subsection
the term securities of the
issuer sought or to be sought
by such tender offer shall
include
any
securities
convertible or exchangeable
into such securities or any
options or rights in any of
the foregoing securities.

as to the ownership of securities, shall not make


use of such information for the purpose of
soliciting or making purchases, sales or exchanges
of securities or, except as provided in SRC Rule
30.2, paragraph 9, provide such information to any
person who does not need such information to
fulfill his responsibilities under the Code.
2. Prohibited Representations
A. That he has been registered as a
securities
intermediary
with
the
Commission unless such person is
registered under the Code. Registration
under the Corporation Code shall not be
deemed to be registration under the
Code;
B. Broker Dealer to represent that the
registration of the Broker Dealer under
the Code, or the failure of the
Commission to deny, suspend, or revoke
such registration, indicates in any way
that the Commission has passed upon or
approved the financial standing,
business, or conduct of such Broker
Dealer, or the merits of any security or
any transaction/s conducted thereby;
C. Represent that a security is a
particular type of security when such
representation is inconsistent with a
stated definition under the Code or rules
or regulations adopted thereunder, or
internationally accepted practice.
D. Represent that a security to be sold,
transferred,
pledged,
mortgaged,
encumbered, used for delivery, or any
other purpose to another entity or itself
has been legally authorized by the
recorded
owner
when
such
representation is not true and
documented in writing at the time and
date it was used.

Fraudulent Transactions

1. Use of Information Obtained in Fiduciary


Capacity
A Broker Dealer, associated person or salesman of
a Broker Dealer, a paying agent, transfer agent,
trustee, or any other person acting in a similar
fiduciary capacity, who has received information

There cannot be honest markets without


honest publicity.
To constitute, however, a violation of the
SRC, fraud, deceit, not mere negligence, on
the part of the offender must be established.

Insider Trading

The trading of a corporations stock or other


securities (e.g. bonds or stock options) by

57

individuals with potential access to nonpublic information about the company.


A practice in which an insider or a related
party trades based on material non-public
information obtained during the performance
of the insiders duties at the corporation, or
otherwise in breach of a fiduciary or other
relationship of trust and confidence or where
the
non-public
information
was
misappropriated from the company.

Concept of Materiality

This is relevant to both a material fact which


would affect the market price of a security to
a significant extent and/or a fact which a
reasonable person would consider in
determining his or her cause of action with
regard to the shares of stock.
Materiality "will depend at any given time
upon a balancing of both the indicated
probability that the event will occur and the
anticipated magnitude of the event in light of
the totality of the company activity (Basic,
Inc. v. Levinson, 485 US 224 [1988]).

General Availability

The SRC allows the insider the defense that


in a transaction of securities, where the
insider is in possession of facts of special
significance, such information is "generally
available" to the public. Whether information
found in a newspaper, a specialized
magazine, or any cyberspace media be
sufficient for the term "generally available" is
a matter which may be adjudged given the
particular circumstances of the case. The
standards cannot remain at a standstill. A
medium, which is widely used today was, at
some previous point in time, inaccessible to
most. Furthermore, it would be difficult to
approximate how the rules may be applied to
the instant case, where investigation has not
even been started. Respondents failed to
allege that the negotiations of their agreement
with GHB were made known to the public
through any form of media for there to be a
proper appreciation of the issue presented
(SEC vs. Interport Resources, GR No.
135808, October 6, 2008).

58


CHAPTER VIII
Regulation of Securities Market Professionals

28.5.

SEC. 28. Registration of Brokers, Dealers,


Salesmen and Associated Persons.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
Commission.
28.2. No registered broker or dealer shall
employ any salesman or any
associated person, and no issuer shall
employ any salesman, who is not
registered
as
such
with
the
Commission.
28.3. The Commission, by rule or order, may
conditionally
or
unconditionally
exempt from Subsections 28.1 and
28.2 any broker, dealer, salesman,
associated person of any broker or
dealer, or any class of the foregoing,
as it deems consistent with the public
interest and the protection of
investors.
28.4. The Commission shall promulgate rules
and regulations prescribing the
qualifications for registration of each
category of applicant, which shall,
among other things, require as a
condition for registration that:
a)
If a natural person, the
applicant satisfactorily pass
a written examination as to
his
proficiency
and
knowledge in the area of
activity
for
which
registration is sought;
b)
In the case of a broker or
dealer, the applicant satisfy
a minimum net capital as
prescribed
by
the
Commission, and provide a
bond or other security as the
Commission may prescribe
to secure compliance with
the provisions of this Code;
and
c)
If located outside of the
Philippines, the applicant
files a written consent to
service of process upon the

28.6.

28.7.

28.8.

28.9.

Commission pursuant to
Section 65 hereof.
A broker or dealer may apply for
registration by filing with the
Commission a written application in
such form and containing such
information
and
documents
concerning such broker or dealer as
the Commission by rule shall
prescribe.
Registration of a salesman or of an
associated person of a registered
broker or dealer may be made upon
written application filed with the
Commission by such salesman or
associated person. The application
shall be separately signed and
certified by the registered broker or
dealer to which such salesman or
associated person is to become
affiliated, or by the issuer in the case
of a salesman employed, appointed or
authorized solely by such issuer. The
application shall be in such form and
contain
such
information
and
documents concerning the salesman
or
associated
person
as
the
Commission by rule shall prescribe.
For purposes of this Section, a
salesman shall not include any
employee of an issuer whose
compensation is not determined
directly or indirectly on sales of
securities of the issuer.
Applications filed pursuant to
Subsections 28.5 and 28.6 shall be
accompanied by a registration fee in
such reasonable amount prescribed
by the Commission.
Within thirty (30) days after the filing of
any application under this Section,
the Commission shall by order: (a)
Grant registration if it determines
that the requirements of this Section
and the qualifications for registration
set forth in its rules and regulations
have been satisfied; or (b) Deny said
registration.
The names and addresses of all persons
approved for registration as brokers,
dealers,
associated
persons
or
salesmen and all orders of the
Commission with respect thereto shall
be recorded in a Register of Securities
Market Professionals kept in the
office of the Commission which shall
be open to public inspection.

59

28.10. Every person registered pursuant to this


Section
shall
file
with
the
Commission, in such form as the
Commission
shall
prescribe,
information necessary to keep the
application for registration current
and accurate, including in the case of
a broker or dealer changes in
salesmen, associated persons and
owners thereof.
28.11. Every person registered pursuant to this
Section shall pay to the Commission
an annual fee at such time and in such
reasonable
amount
as
the
Commission shall prescribe. Upon
notice by the Commission that such
annual fee has not been paid as
required, the registration of such
person shall be suspended until
payment has been made.
28.12. The registration of a salesman or
associated
person
shall
be
automatically terminated upon the
cessation of his affiliation with said
registered broker or dealer, or with
an issuer in the case of a salesman
employed, appointed or authorized by
such issuer. Promptly following any
such cessation of affiliation, the
registered broker or dealer, or issuer,
as the case may be, shall file with the
Commission a notice of separation of
such salesman or associated person.

b)

c)

d)

e)

SEC. 29. Revocation, Refusal or Suspension of


Registration of Brokers, Dealers, Salesmen and
Associated Persons.
29.1.

Registration under Section 28 of this


Code may be refused, or any
registration granted thereunder may
be revoked, suspended, or limitations
placed thereon, by the Commission if,
after due notice and hearing, the
Commission determines the applicant
or registrant:
a)
Has willfully violated any
provision of this Code, any
rule, regulation or order
made hereunder, or any
other law administered by
the Commission, or in the
case of a registered broker,
dealer or associated person
has failed to supervise, with
a view to preventing such
violation, another person
who commits such violation;

f)

g)

Has willfully made or caused to


be made a materially false or
misleading statement in any
application for registration
or report filed with the
Commission or a selfregulatory organization, or
has willfully omitted to state
any material fact that is
required to be stated
therein;
Has failed to satisfy the
qualifications
or
requirements
for
registration
prescribed
under Section 28 and the
rules and regulations of the
Commission
promulgated
thereunder;
Has been convicted, by a
competent
judicial
or
administrative body of an
offense involving moral
turpitude,
fraud,
embezzlement,
counterfeiting, theft, estafa,
misappropriation, forgery,
bribery, false oath, or
perjury, or of a violation of
securities,
commodities,
banking, real estate or
insurance laws;
Is enjoined or restrained by a
competent
judicial
or
administrative body from
engaging
in
securities,
commodities, banking, real
estate or insurance activities
or from willfully violating
laws
governing
such
activities;
Is subject to an order of a
competent
judicial
or
administrative
body
refusing,
revoking
or
suspending any registration,
license or other permit
under this Code, the rules
and
regulations
promulgated there under,
any other law administered
by the Commission;
Is subject to an order of a selfregulatory
organization
suspending or expelling him
from
membership
or
participation therein or
from association with a

60

member
or
participant
thereof;
h)
Has been found by a
competent
judicial
or
administrative body to have
willfully
violated
any
provisions of securities,
commodities, banking, real
estate or insurance laws, or
has willfully aided, abetted,
counseled,
commanded,
induced or procured such
violation; or
i)
Has been judicially declared
insolvent.
For
purposes
of
this
subsection,
the
term
competent
judicial
or
administrative body shall
include a foreign court of
competent jurisdiction and a
foreign financial regulator.
29.2. a)
In cases of charges against a
salesman
or
associated
person, notice thereof shall
also be given the broker,
dealer or issuer employing
such salesman or associated
person.
b)
Pending the hearing, the
Commission shall have the
power
to
order
the
suspension of such brokers,
dealers, associated persons
or salesmans registration:
Provided, That such order
shall state the cause for such
suspension. Until the entry
of a final order, the
suspension
of
such
registration, though binding
upon the persons notified
thereof, shall be deemed
confidential, and shall not be
published, unless it shall
appear that the order of
suspension has been violated
after notice.
29.3. The order of the Commission refusing,
revoking, suspending or placing
limitations on a registration as herein
above provided, together with its
findings, shall be entered in the
Register
of
Securities
Market
Professionals. The suspension or
revocation of the registration of a
dealer
or
broker
shall
also
automatically suspend the registration

29.4.

of all salesmen and associated persons


affiliated with such broker or dealer.
It shall be sufficient cause for refusal,
revocation or suspension of a broker's
or dealers registration, if any
associated person thereof or any
juridical entity controlled by such
associated person has committed any
act or omission or is subject to any
disability enumerated in paragraphs
(a) through (i) of Subsection 29.1
hereof.

SEC. 30. Transactions and Responsibility of


Brokers and Dealers.
30.1.

30.2.

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.
No broker or dealer shall effect any
transaction in securities or induce or
attempt to induce the purchase or sale
of any security except in compliance
with such rules and regulations as the
Commission shall prescribe to ensure
fair and honest dealings in securities
and provide financial safeguards and
other standards for the operation of
brokers and dealers, including the
establishment of minimum net capital
requirements, the acceptance of
custody and use of securities of
customers, and the carrying and use
of deposits and credit balances of
customers.

SEC. 31. Development of Securities Market


Professionals.
The Commission, in joint undertaking with self
regulatory organizations, organizations and
associations of finance professionals as well as
private educational and research institutions
shall
undertake
or
facilitate/organize

61

continuing training, conferences/ seminars,


updating programs, research and development
as well as technology transfer at the latest and
advanced trends in issuance and trading of
securities, derivatives, commodity trades and
other financial instruments, as well as securities
markets of other countries.
SRC Rule 28.1 Registration of Brokers and
Dealer

B. Registration of Salesmen and Associated


Persons of Broker Dealers


A. Registration of Broker Dealer

A person applying for registration as a


Broker Dealer under Section 28 shall indicate
in the application form for registration, or in
an amendment thereto:
i.
Whether he is an Exchange Trading
Participant or a Non-Exchange
Broker Dealer;
ii.
If an Exchange Trading Participant,
whether it is a clearing trading
participant or a non-clearing trading
participant;
iii.
If an Exchange Trading Participant,
whether he shall engage in market
making transactions;
iv.
If a non-Exchange Broker Dealer,
whether he is operating a seat for or is
using the trading rights of an
Exchange
member
Trading
Participant;
v.
For both non-Exchange member
Broker Dealer and Exchange Trading
Participant, whether they shall deal
only with proprietary shares, equity
securities, or fixed income/debt
securities,
or
they
are
registered/licensed as government
securities eligible dealers (GSED).
An applicant for registration as a Broker
Dealer shall be solely engaged in the business
of a Broker Dealer.
In the event that a Broker Dealer succeeds to
and continues the business of another Broker
Dealer, the registration of the predecessor
Broker Dealer shall be deemed to remain
effective for a period of forty five (45) days
from date of sale or succession as the
registration of the successor if the successor
within thirty (30) days after such succession,
(i) files an application for registration on SEC
Form 28-BD and the Commission, within an
equivalent period, approves such registration;
and simultaneously (ii) publishes a notice of
such application in any newspaper of general
circulation expenses of which shall be borne
by the successor broker.

A person may not be employed as a salesman


or associated person of a Broker Dealer
unless registered as a salesman or associated
person under this Rule.
The Broker Dealer may be allowed to employ
trainees for a one-time, non-extendible period
of six (6) months provided:
i.
The trainees are supervised by a
registered salesman;
ii.
The trainees are not soliciting clients
or dealing directly with clients;
iii.
The trainees are not receiving any
form of commission or salary from
the Broker Dealer other than a
reasonable allowance; and
iv.
The Broker Dealer immediately
informs the SEC in writing of the
hiring of such trainees.

SALESMAN

a natural person hired to buy and sell


securities on a salary or commission basis
properly endorsed to the Commission by the
employing Broker Dealer.

Any employee of an issuer company whose


compensation is determined directly or
indirectly on sales of the issuers securities.
ASSOCIATED PERSON

Any person employed full time by the Broker


Dealer whose responsibilities include internal
control supervision of other employees,
agents, salesmen, officers, directors, clerks,
and SHs, of such Broker Dealer for
compliance with the SRC and rules and
regulations adopted there under.

Cannot perform other duties without SEC


approval and subject to the condition that the
Broker Dealer will maintain appropriate
Chinese Wall between the functions of an
Associated Person and that of his other
duties.
C. Block Sale

A block sale is a matched trade that does not


go through the automated order matching
system of an Exchange trading system but
instead has been prearranged by and among
the Broker Dealers clients and is then
entered as a done deal directly into the
trading system.

62

A Broker Dealer may engage in block sales


on an Exchange, and an Exchange may
execute block sales, provided that:
a)
such transaction complies with
Exchange rules, which have been
approved by the SEC; and
b)
the
Exchange
notifies
the
Commission in writing, not later than
one business day after the date such
transaction has been executed, of the
price and volume thereof or in such
form
and
manner
that
the
Commission may prescribe.
Other transactions such as options, warrants
or those emanating from a tender offer, rights
offering, and conversion of a security with
convertibility features, shall be allowed to be
consummated within the Exchange trading
system using the block sale facility of an
Exchange, and in accordance with the
relevant rules of the Exchange as approved
by the Commission

NOTE: SEC MC No. 13, Series of 2004


(Amendments to Rules 34.1 and 3 of the IRR of the
SRC) and SEC MC No. 16, Series of 2004
(Adoption of Frisk Based Capital Adequacy
Requirement / Ratio for Brokers/Dealers)

63

of Exchanges in Section 33
of this Code.
CHAPTER IX
EXCHANGES AND OTHER SECURITIES
TRADING MARKETS

SEC. 33. Registration of Exchanges.33.1.

Any Exchange may be registered as


such with the Commission under the
terms and conditions hereinafter
provided in this Section and Section
40 hereof, by filing an application for
registration in such form and
containing such information and
supporting
documents
as
the
Commission by rule shall prescribe,
including the following:
a)
An undertaking to comply and
enforce compliance by its
members with the provisions
of
this
Code,
its
implementing
rules
or
regulations and the rules of
the Exchange;
b)
The organizational charts of
the Exchange, rules of
procedure, and a list of its
officers and members;
c)
Copies of the rules of the
Exchange; and
d)
An undertaking that in the
event a member firm
becomes insolvent or when
the Exchange shall have
found that the financial
condition of its member firm
has so deteriorated that it
cannot readily meet the
demands of its customers for
the delivery of securities
and/or payment of sales
proceeds, the Exchange
shall, upon order of the
Commission, take over the
operation of the insolvent
member
firm
and
immediately proceed to
settle the member firms
liabilities to its customers.

33.2.

Registration of an Exchange shall be


granted upon compliance with the
following provisions:
a)
That the applicant is organized
as
a
stock
corporation: Provided, That
any registered Exchange
existing
prior
to
the
effectivity of this Code shall
within
one
(1)
year

SEC. 32. Prohibition on Use of Unregistered


Exchange; Regulation of Over-the-Counter
Markets. 32.1.

No broker, dealer, salesman, associated


person of a broker or dealer, or
Exchange, directly or indirectly, shall
make use of any facility of an
Exchange in the Philippines to effect
any transaction in a security, or to
report such transaction, unless such
Exchange is registered as such under
Section 33 of this Code.

32.2. a)

b)

No broker, dealer, salesman or


associated person of a
broker or dealer, singly or in
concert with any other
person, shall make, create or
operate, or enable another to
make, create or operate, any
trading market, otherwise
than
on
a
registered
Exchange, for the buying
and selling of any security,
except in accordance with
rules and regulations the
Commission may prescribe.
The
Commission
may
promulgate
rules
and
regulations
governing
transactions by brokers,
dealers,
salesmen
or
associated persons of a
broker or dealer, over any
facilities of such trading
market and may require
such
market
to
be
administered by a selfregulatory
organization
determined
by
the
Commission as capable of
insuring the protection of
investors comparable to that
provided in the case of a
registered Exchange. Such
self-regulatory organization
must provide a centralized
marketplace for trading and
must satisfy requirements
comparable
to
those
prescribed for registration

64

b)

c)

d)

reorganize as a stock
corporation pursuant to a
demutualization
plan
approved
by
the
Commission;
That the applicant is engaged
solely in the business of
operating
an
exchange: Provided,
however, That
the
Commission may adopt
rules, regulations or issue an
order, upon application,
exempting an Exchange
organized
as
a
stock
corporation and owned and
controlled
by
another
juridical person from this
restriction.
Where the Exchange is
organized
as
a
stock
corporation, that no person
may beneficially own or
control,
directly
or
indirectly, more than five
percent (5%) of the voting
rights of the Exchange and
no industry or business
group may beneficially own
or control, directly or
indirectly, more than twenty
percent (20%) of the voting
rights of the Exchange:
Provided, however, That the
Commission may adopt
rules, regulations or issue an
order, upon application,
exempting an applicant from
this prohibition where it
finds that such ownership or
control will not negatively
impact on the exchanges
ability to effectively operate
in the public interest.
The expulsion, suspension, or
disciplining of a member
and persons associated with
a member for conduct or
proceeding inconsistent with
just and equitable principles
of fair trade, and for
violations of provisions of
this Code, or any other Act
administered
by
the
Commission,
the
rules,
regulations
and
orders
thereunder, or the rules of
the Exchange;

e)

f)

g)

A fair procedure for the


disciplining of members and
persons associated with
members, the denial of
membership to any person
seeking to be a member, the
barring of any person from
association with a member,
and the prohibition or
limitation of any person
from access to services
offered by the Exchange;
That the brokers in the board
of the Exchange shall
comprise of not more than
forty-nine percent (49%) of
such board and shall
proportionately
represent
the Exchange membership
in terms of volume/value of
trade and paid up capital,
and that any natural person
associated with a juridical
entity that is a member shall
himself be deemed to be a
member
for
this
purpose: Provided, That any
registered Exchange existing
prior to the effectivity of this
Code shall immediately
comply
with
this
requirement;
For the board of the Exchange
to include in its composition
(i) the president of the
Exchange, and (ii) no less
than fifty one percent (51%)
of the remaining members of
the board to be comprised of
three
(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 two (2) years prior to
his/her appointment. No
officer or employee of a
member, its subsidiaries or
affiliates or related interests
shall become an independent
director: Provided, however,
That the Commission may
by rule, regulation, or order
upon application, permit the
exchange organized as a

65

h)

i)
j)

k)

l)

stock corporation to use a


different
governance
structure: Provided,
further, That
the
Commission is satisfied that
the Exchange is acting in the
public interest and is able to
effectively operate as a selfregulatory
organization
under this Code: Provided,
finally, That any registered
exchange existing prior to
the effectivity of this Code
shall immediately comply
with this requirement.
The president and other
management
of
the
Exchange to consist only of
persons
who
are
not
members and are not
associated in any capacity,
directly or indirectly with
any broker or dealer or
member or listed company
of the Exchange: Provided,
That the Exchange may only
appoint, and a person may
only serve, as an officer of
the exchange if such person
has not been a member or
affiliated with any broker,
dealer, or member of the
Exchange for a period of at
least two (2) years prior to
such appointment;
The
transparency
of
transactions
on
the
Exchange;
The equitable allocation of
reasonable dues, fees, and
other
charges
among
members and issuers and
other persons using any
facility or system which the
Exchange
operates
or
controls;
Prevention of fraudulent and
manipulative
acts
and
practices, promotion of just
and equitable principles of
trade, and, in general,
protection of investors and
the public interest; and
The transparent, prompt and
accurate
clearance
and
settlement of transactions
effected on the Exchange.

33.3.

If the Commission finds that the


applicant Exchange is capable of
complying and enforcing compliance
by its members, and persons
associated with such members, with
the provisions of this Code, its rules
and regulations, and the rules of the
Exchange, and that the rules of the
Exchange are fair, just and adequate,
the Commission shall cause such
Exchange to be registered. If, after
notice due and hearing, the
Commission finds otherwise, the
application shall be denied.

33.4.

Within ninety (90) days after the filing


of the application the Commission
may issue an order either granting or
denying registration as an Exchange,
unless the Exchange applying for
registration shall withdraw its
application or shall consent to the
Commissions deferring action on its
application for a stated longer period
after the date of filing. The filing with
the Commission of an application for
registration by an Exchange shall be
deemed to have taken place upon the
receipt thereof. Amendments to an
application may be made upon such
terms as the Commission may
prescribe.

33.5.

Upon the registration of an Exchange, it


shall pay a fee in such amount and
within such period as the Commission
may fix.

33.6.

Upon appropriate application in


accordance with the rules and
regulations of the Commission and
upon such terms as the Commission
may deem necessary for the
protection of investors, an Exchange
may withdraw its registration or
suspend its operations or resume the
same.

Exchange

An organized marketplace or facility that


brings together buyers and sellers and
executes trades of securities and/or
commodities.
A voluntary association or corporation
organized for the purpose of furnishing to its
members a convenient and suitable place to

66

transact their business of promoting


uniformity in the customs and usages of
merchants, of inculcating principles of justice
and equity in trade, of facilitating the speedy
adjustment of business disputes, of acquiring
and disseminating valuable commercial and
economic information and generally of
securing to its members the benefits of
cooperation in the furtherance of their
legitimate pursuits.
Rules and Regulations of an Exchange

An exchange has the power to adopt its own


constitution, by-laws, rules and regulations so
far as they are not contrary to law or public
policy and which will secure to the members
exclusive rights and privileges which the
courts have fully recognized.
The constitution and by-laws derive a
binding force from the fact that they are
signed by all the members, and that they are
conclusive upon each of them in respect of
the regulations of the mode of transaction of
his business, and of his right to continue to be
a member.

Registration of an Exchange
1.

An application for registration as an


Exchange shall be filed on SEC Form 33
provided, however, an Exchange may also
apply for registration as a Self Regulatory
Organization under Section 40 of the Code at
the same time on SEC Form 33-SRO.

2.

Whenever the number of changes to be


reported in an amendment, or the number of
amendments filed, are so great that the
purpose or clarity of the disclosure will be
promoted by the filing of a new complete
statement and exhibits, an Exchange may, at
its election, or shall, upon request of the
Commission, file as an amendment a
completely new statement together with all
exhibits which are prescribed to be filed in
connection with SEC Form 33.

3.

Nothing in this Rule shall be construed as


precluding the Commission from requiring an
applicant for registration or a registered
Exchange to submit other requirements it
may deem reasonably necessary to
effectively regulate and supervise the
Exchange and/or to protect the interest of the
investing public.

The Exchange Controller - Ownership of an


Exchange

An Exchange organized as a stock


corporation may be owned and
controlled by another juridical person
(Exchange Controller), based on the
fterms and conditions as prescribed by
the rules, to ensure that such ownership
will not negatively impact the
Exchanges ability to effectively operate
in the public interest.

No shares of an Exchange or Exchange


Controller may be transferred without
prior Commission approval.

Where any ownership restrictions set


forth in this rule are exceeded and/or
violated, the Commission may order
divestment of such excess ownership.
Until such ownership is divested, a
person violating this restriction shall be
barred from exercising his voting rights
thereunder.
Protection of Customer Accounts in Case of
Business Failure of an Exchange Member or
Trading Participant
1.

2.

3.

When an Exchange Member Firm has filed or


is the subject of a petition for insolvency, or
when an Exchange determines that the
Member Firms financial condition has so
deteriorated that it cannot readily meet the
demands of its customers for the delivery of
securities and or payment of sales proceeds,
the Commission may issue ex parte an order
compelling the insolvent or failed member
firm to take the necessary action to protect
customer accounts. Said order shall remain in
effect until lifted by the Commission motu
proprio or upon petition of the Failed
Member Firm.
The Commission, after proper investigation
or verification, motu proprio or upon verified
complaint by any party, order an Exchange to
take over the operation of the Failed Member
Firm for the purpose of settling the member
firms liabilities to its customers.
Where the Commission has ordered an
Exchange to take over the operations of a
failed member firm, an Exchange shall:
A. Suspend such Failed Member
Firms membership, immediately
arrange for another Member to take
over the outstanding contracts
relating
to
securities,
and
simultaneously
notify
the

67

B.

C.

D.

E.

F.

Commission of such suspension


and take-over;
Promptly notify customers of the
Failed Member that their accounts
have been transferred to another
Member
and
provide
such
customers with the opportunity to
re-transfer their accounts to another
Member of their choice;
Settle the Failed Members (or
Trading Participants) liabilities to
customers through the sale of the
Members trading rights and other
trade-related assets as may be
prescribed by the Commission;
liquidation of paid up capital;
and/or overseeing the payment of
claims against the surety bond.
Simultaneously
inform
the
Accredited Trust Fund referred to
in Sec. 36.5 of the Code, where
such Failed Member (or Trading
Participant) is a Member or
Participant, of such takeover and
inform the customers that they may
also claim compensation for losses
from the Trust Fund, subject to the
validation of their claims by the
Exchange and the Trust Fund;
Where after such settlement and
liquidation of the Failed Member
Firms trade-related assets, there
are outstanding liabilities to
customers of the Failed Member
(or Trading Participant), refer the
same to the Accredited Trust Fund
and inform the customers of the
further steps necessary for claiming
compensation
for
unsatisfied
losses; and
The Accredited Trust Fund, based
on its rules and regulations or upon
order of the Commission, shall
release payments to the Failed
Members
(or
Trading
Participants)
customers
even
before the Exchange has finalized
the settlement of the Failed
Member Firms liabilities, subject
to the validation as provided in
subsection D herein; Provided,
however, that the Trust Fund shall
be subrogated to the customers
rights to claim before the Exchange
to the extent that it has paid the
customers claims before final

settlement of the Failed Members


liabilities by the Exchange.
SEC. 34. Segregation and Limitation of
Functions of Members, Brokers and Dealers.34.1.

It shall be unlawful for any memberbroker of an Exchange to effect any


transaction on such Exchange for its
own account, the account of an
associated person, or an account with
respect to which it or an associated
person thereof exercises investment
discretion: Provided,
however, That
this section shall not make unlawful a)
Any transaction by a memberbroker acting in the capacity
of a market maker;
b)
Any transaction reasonably
necessary to carry on an
odd-lot transactions;
c)
Any transaction to offset a
transaction made in error;
and
d)
Any other transaction of a
similar nature as may be
defined by the Commission.

34.2.

In all instances where the memberbroker effects a transaction on an


Exchange for its own account or the
account of an associated person or an
account with respect to which it
exercises investment discretion, it
shall disclose to such customer at or
before the completion of the
transaction it is acting for its own
account: Provided, further, That this
fact shall be reflected in the order
ticket and the confirmation slip.

34.3.

Any member-broker who violates the


provisions of this Section shall be
subject
to
the
administrative
sanctions provided in Section 54 of
this Code.

SEC. 35. Additional Fees of Exchanges.


In addition to the registration fee prescribed in
Section 33 of this Code, every Exchange shall
pay to the Commission, on a semestral basis on
or before the tenth day of the end of every
semester of the calendar year, a fee in such an
amount as the Commission shall prescribe, but
not more than one-hundredth of one per
centum (1%) of the aggregate amount of the
sales of securities transacted on such Exchange

68

during the preceding calendar year, for the


privilege of doing business, during the
preceding calendar year or any part thereof.

4.

The order ticket shall indicate that the


order is for the account of the MemberBroker.

Customer First Policy

A dealer or proprietary account when


traded though another Member-Broker
(hereinafter referred to as Executing
Member Broker) shall be treated by the
Executing Member Broker as another
customer.
Stockholders,
officers,
directors,
associated persons, or any other person
associated with the Member-Broker or
affiliated persons other than a Salesman
cannot trade outside the employing
Member-Broker unless they obtain the
permission of the Employing Member
Broker and inform such Broker that they
have opened such account with the
Executing
Member
Broker,
and
provided further that the Executing
Member Broker agrees to send duplicate
account statements to the Associated
Persons Executing Member Broker.
If the account of the Associated Person
of the Employing Member Broker is
with a non-Member Broker, such
Associated
Person
shall
receive
permission from that Non-Member
Broker for access to that account by the
Exchange and the Employing Member
Broker.
Salesmen
are
prohibited
from
transacting with Member-Brokers other
than their employing Member Broker.
Non-Exchange Broker Dealers shall
likewise observe the Customer First
Policy whenever applicable.
Affiliated person of a Member Broker
is any person who:
o
controls, is controlled by, or
is under common control with
the Member Broker,
o has officers, directors, or
associated persons who are
also officers, directors, or
associated persons of the
Member Broker,
o directly or indirectly controls
more than ten percent (10%)
of the equity interest in the
Member Broker, or
o
has more than ten percent
(10%) of its equity interest
owned by the Member Broker

A Member Broker of an Exchange (herein referred


to as Member Broker) shall not effect any
transaction on such Exchange for its own account,
the account of an associated person, salesmen, or
any other person associated with the Member
Broker, including affiliated persons, or an account
with respect to which an associated person
exercises investment discretion, unless it complies
with the Customer First Policy as prescribed
below:
1. The Member-Broker gives priority to
the execution of customer orders over its
orders at the same price according to the
following rules:
a. When the Member Brokers
Order is pre-existing (and has
priority in terms of time) and
thereupon the Member-Broker
receives a customers order
and/or holds a wholly or
partially
unexecuted
customers Order, then the
Member-Broker
shall
surrender priority and give
precedence to his clients
order;
b. When the Member-Broker
holds
an
unexecuted
customers Order with priority
(pre-existing order), then any
Brokers Order that intends to
improve the price shall do so
by at least three (3)
fluctuations better than the
pre-existing highest bid or
lowest offer from a customer.
2. The Procedures for executing the abovereferenced priority rule shall be
programmed into the Exchange trading
system
3. Orders of stockholders, officers,
directors, associated persons, and
salesmen, or any other person associated
with the Member-Broker, including
affiliated persons, traded within the
Member-Broker shall be treated as the
proprietary account of the Member
Brokers account, in which case, the
Customer First Policy shall apply.

69

and/or associated persons of


the Member Broker.
Affiliated company means a company
in which any director, president, vice
president,
manager,
treasurer,
comptroller, secretary, any other officer
of trust and responsibility, or other
control person is also a stockholder,
director, associated person, or salesman,
or a clerk of any Broker Dealer, or a
relative of any of the foregoing within
the fourth degree of consanguinity or
affinity.

Segregation of Functions (Chinese Walls)


Any Broker Dealer which assumes more than one
function whether as a dealer, adviser, or
underwriter, or which engages in market making
transactions, shall maintain proper segregation of
those functions within the firm to prevent
i. the flow of information between
the
different
parts
of
its
organization which perform each
function; and
ii. any conflict of interest which may
result.
Information means matter:
i. of a specific nature which has not
been made public;
ii. relating to one or more public
companies or securities of a public
company; and
iii. which, if it were made public,
would likely affect the market price
of the securities.
SEC. 36. Powers with Respect to Exchanges and
Other Trading Market.36.1.

The Commission 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 thirty (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
than thirty (30) but not exceeding
ninety
(90)
days:Provided,

however, That
the
Commission,
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.
36.2.

Wherever two or more Exchanges or


other trading markets exist, the
Commission may require and enforce
uniformity of trading regulations in
and/or between or among said
Exchanges or other trading markets.

36.3.

In addition to the existing Philippine


Stock Exchange, the Commission
shall have the authority 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.

36.4.

The Commission, having due regard to


the public interest, the protection of
investors,
the
safeguarding
of
securities and funds, and maintenance
of fair competition among brokers,
dealers, clearing agencies, and
transfer agents, shall promulgate
rules and regulations for the prompt
and accurate clearance and settlement
of securities transactions.

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

70

b)

Commission may from time


to time prescribe or approve
in the public interest.
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.

SRC Rule 36.4 Rules and Regulations for


Clearance and Settlement of Securities
Transactions Involving Exchanges and Other
Trading Markets
Registration of Transfer Agents

No person shall act as a transfer agent


for a security which is listed or traded
on an Exchange, over-the-counter, or
any other trading market without being
registered with the Commission

To apply for registration under this


Rule, a transfer agent shall:
i. be a corporation;
ii. have unimpaired paid-up capital of
at least One Million Pesos (P
1,000,000.00) or such amount as
the Commission may determine;
iii. have an officer who is a certified
public accountant; and
iv. submit an undertaking that it shall
comply with the rules and
regulations, orders, memorandum
circulars and policies promulgated
by the Commission, and of other
rules, procedures, standards and

policies set by other market


participants and duly approved by
the Commission, and its own
internal rules and procedures.
After reviewing an application for
registration as a transfer agent, or an
amendment thereto, the Commission
shall, by order,
i. grant registration or approve the
amendment; or
ii. deny
registration
or
the
amendment, place limitations on
the
activities,
functions
or
operations of, suspend or revoke
registration, if the Commission
finds, after notice and opportunity
for hearing,
a. that such order is in the public
interest;
b. that the registrant does not
meet
applicable
qualifications;
c. that
the
application
is
incomplete, inaccurate or
misleading; or
d. that the transfer agent has
been found to:
(1)
be insolvent or not
in sound financial
condition;
(2)
have violated or
have not complied
with the applicable
provisions of the
Code or the rules
and
regulations
adopted thereunder,
or any order of the
Commission;
(3)
have engaged in, or
be engaged in, or is
about to engage in
fraudulent
transactions;
(4)
be in any other way
dishonest or not of
good repute;
(5)
have not conducted
its
business
in
accordance with law
or be engaged in a
business that is
illegal or contrary to
government
rules
and regulations;

71

(6)

have an officer,
member of the board
of directors, or
principal
shareholder who is
disqualified to be
such an officer,
director or principal
shareholder;
(7)
have a backlog of
share
certificate
transfers
which
indicates an inability
of the registrant to
fulfill
its
responsibilities as a
transfer agent;
(8)
have repeatedly or
materially failed to
comply with its
procedures or those
of
a
registered
clearing agency; or
(9)
have
filed
an
application
for
registration or an
amendment thereto
which is incomplete
or inaccurate in any
material respect or
which 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
application
or
amendment
not
misleading.
A transfer agent cannot be the auditor of
an issuer for whom it acts as transfer
agent.
The procedures of a transfer agent are
binding on and enforceable against
issuers for which they act, registered
securities holders and transferees who
present securities for transfer.

SRC Rule 36.5 (a) Trust Funds for Broker


Dealer Customers

A trust fund established to compensate


customers for the extraordinary losses or

damage they may suffer due to the


business
failure
or
fraud
or
mismanagement of a Broker Dealer
shall be registered as an Accredited
Trust Fund under this Rule. For
purposes of this Rule, the term
extraordinary losses and damages
refers only to actual damages.
Business failure shall be established
upon a determination by the Exchange,
or the Commission, when the Exchange
fails or does not exercise such timely
determination, where the Broker Dealer
is an Exchange member; or the
Commission, or where the Broker
Dealer is not an Exchange member, that
the financial condition of the Broker
Dealer has so deteriorated that the
Broker Dealer can not readily meet the
demands of its customers for the
delivery of securities and/or the payment
of sales proceeds; provided, however,
that such determination shall not be
dependent upon a judicial declaration of
insolvency.
As a condition of their registration, all
Broker Dealers shall be a member of or
participant in an Accredited Trust Fund.

SEC. 37. Registration of Innovative and Other


Trading Markets.
The Commission, having due regard for
national
economic
development,
shall
encourage competitiveness in the market by
promulgating within six (6) months upon the
enactment of this Code, rules for the
registration and licensing of innovative and
other trading markets or Exchanges covering,
but not limited to, the issuance and trading of
innovative securities, securities of small,
medium, growth and venture enterprises, and
technology-based ventures pursuant to Section
33 of this Code.
SEC. 38. Independent Directors.
Any corporation with a class of equity
securities listed for trading on an Exchange or
with assets in excess of Fifty million pesos
(P50,000,000.00) and having two hundred (200)
or more holders, at least of two hundred (200)
of which are holding at least one hundred (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 hereof shall have
at least two (2) independent directors or such

72

independent directors shall constitute at least


twenty percent (20%) of the members of such
board, whichever is the lesser. For this
purpose, an independent director shall mean
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.

F.

G.

SRC Rule 38 Requirements on Nomination


and Election of Independent Directors

Independent director means 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 any covered
company and includes, among others, any
person who:
A. Is not a director or officer of the covered
company or of its related companies or
any of its substantial shareholders
except when the same shall be an
independent director of any of the
foregoing;
B. Does not own more than two percent
(2%) of the shares of the covered
company and/or its related companies or
any of its substantial shareholders;
C. Is not related to any director, officer or
substantial shareholder of the covered
company, any of its related companies
or any of its substantial shareholders.
For this purpose, relatives include
spouse, parent, child, brother, sister, and
the spouse of such child, brother or
sister;
D. Is not acting as a nominee or
representative of any director or
substantial shareholder of the covered
company, and/or any of its related
companies and/or any of its substantial
shareholders, pursuant to a Deed of
Trust or under any contract or
arrangement;
E. Has not been employed in any executive
capacity by the covered company, any
of its related companies and/or by any of
its substantial shareholders within the
last five (5) years;

Is not retained, either personally or


through his firm or any similar entity, as
professional adviser, by that covered
company, any of its related companies
and/or
any
of
its
substantial
shareholders, within the last five (5)
years; or
Has not engaged and does not engage in
any transaction with the covered
company and/or with any of its related
companies and/or with any of its
substantial shareholders, whether by
himself and/or with other persons and/or
through a firm of which he is a partner
and/or a company of which he is a
director or substantial shareholder, other
than transactions which are conducted at
arms length and are immaterial.

No person convicted by final judgment of an


offense punishable by imprisonment for a
period exceeding six (6) years, or a violation
of this Code, committed within five (5) years
prior to the date of his election, shall qualify
as an independent director. This is without
prejudice to other disqualifications which the
covered companys Manual on Corporate
Governance provides.
Any controversy or issue arising from the
selection, nomination or election of
independent directors shall be resolved by the
Commission by appointing independent
directors from the list of nominees submitted
by the stockholders.
When used in relation to a company subject
to the requirements of this Rule and Section
38 of the Code:
A. Related company means another
company which is: (a) its holding
company; (b) its subsidiary; or (c) a
subsidiary of its holding company; and
B. Substantial shareholder means any
person who is directly or indirectly the
beneficial owner of more than ten
percent (10%) of any class of its equity
security.
Qualifications and Disqualifications
A. An independent director shall have the
following qualifications:
i.
He shall have at least one (1)
share of stock of the
corporation;
ii. He shall be at least a college
graduate or he shall have been

73

B.

engaged or exposed to the


business of the corporation for
at least five (5) years;
iii. He
shall
possess
integrity/probity
iv. He shall be assiduous
No person enumerated under Section II
(5) of the Code of Corporate
Governance shall qualify as an
independent director. He shall likewise
be disqualified during his tenure under
the following instances or causes:
i. He becomes an officer or
employee of the corporation
where he is such member of
the board of directors/trustees,
or becomes any of the persons
enumerated under Section II
(5) of the Code on Corporate
Governance*;
ii. His
beneficial
security
ownership
exceeds
two
percent
(2%)
of
the
outstanding capital stock of
the company where he is such
director
iii. Fails, without any justifiable
cause, to attend at least 50%
of the total number of Board
meetings
during
his
incumbency
iv. Such other disqualifications
which the covered companys
Manual
on
Corporate
Governance provides.

Number of Independent Directors


A. All companies are encouraged to have
independent directors. However, issuers
of registered securities and public
companies are required to have at least
two (2) independent directors or at least
twenty percent (20%) of its board size,
whichever is the lesser. Provided further
that said companies may choose to have
more independent directors in their
boards than as above required.
B. The Exchange/s are required to have at
least three (3) independent directors. To
effectively carry out the provisions of
Section 33.2(g) of the Securities
Regulation Code, the Exchanges
independent director or a nominee for
such director shall not solicit votes for
himself.

Termination/Cessation
of
Independent
Directorship
In case of resignation, disqualification or
cessation of independent directorship and
only after notice has been made with the
Commission within five (5) days from such
resignation, disqualification or cessation, the
vacancy shall be filled by the vote of at least
a majority of the remaining directors, if still
constituting a quorum, upon the nomination
of the Committee otherwise, said vacancies
shall be filled by the stockholders in a regular
or special meeting called for that
purpose. An independent director so elected
to fill a vacancy shall serve only for the
unexpired term of his predecessor in office.

74

CHAPTER X
REGISTRATION, RESPONSIBILITIES AND
OVERSIGHT OF SELF-REGULATORY
ORGANIZATIONS

association pursuant to Subsection


39.3 by filing with the Commission an
application for registration in such
form as the Commission, by rule, may
prescribe containing the rules of the
association
and
such
other
information and documents as the
Commission, by rule, may prescribe
as necessary or appropriate in the
public interest or for the protection of
investors.

SEC. 39. Associations of Securities Brokers, and


Dealers, and Other Securities Related
Organizations.39.1.

39.2.

The Commission shall have the power to


register
as
a
self-regulatory
organization, or otherwise grant
licenses, and to regulate, supervise,
examine, suspend or otherwise
discontinue, as a condition for the
operation of organizations whose
operations are related to or connected
with the securities market such as but
not limited to associations of brokers
and
dealers,
transfer
agents,
custodians, fiscal and paying agents,
computer
services,
news
disseminating
services,
proxy
solicitors,
statistical
agencies,
securities rating agencies, and
securities information processors
which are engaged in the business of:
(a)
Collecting,
processing,
or
preparing
for
distribution
or
publication, or assisting, participating
in, or coordinating the distribution or
publication of, information with
respect to transactions in or
quotations for any security; or (b)
Distributing or publishing, whether
by means of a ticker tape, a
communications network, a terminal
display device, or otherwise, on a
current
and
continuing
basis,
information with respect to such
transactions or quotations. The
Commission may prescribe rules and
regulations which are necessary or
appropriate in the public interest or
for the protection of investors to
govern self-regulatory organizations
and other organizations licensed or
regulated pursuant to the authority
granted in Subsection 39.1 including
the requirement of cooperation within
and among, and electronic integration
of the records of, all participants in
the securities market to ensure
transparency and facilitate exchange
of information.
An association of brokers and dealers
may be registered as a securities

39.3.

An association of brokers and dealers


shall not be registered as a securities
association unless the Commission
determines that:
a)
The association is so organized
and has the capacity to be
able to carry out the
purposes of this Code and to
comply with, and to enforce
compliance by its members
and persons associated with
its members, with the
provisions of this Code, the
rules
and
regulations
thereunder, and the rules of
the association.
b)
The rules of the association,
notwithstanding anything in
the Corporation Code to the
contrary, provide that:
(i)
Any
registered
broker or dealer
may become a
member of the
association;
(ii)
There exist a fair
representation of
its members to
serve on the Board
of Directors of the
association and in
the administration
of its affairs, and
that any natural
person associated
with a juridical
entity that is a
member
shall
himself be deemed
to be a member for
this purpose;
(iii)
The
Board
of
Directors of the
association
includes
in
its
composition:
(a)

75

(iv)

(v)

(vi)

The president of
the association and
(b) Persons who
represent
the
interests of issuers
and
public
investors and are
not associated with
any broker or
dealer or member
of the association;
that the president
and
other
management of the
association not be a
member
or
associated with any
broker, dealer or
member of the
association;
For the equitable
allocation
of
reasonable
dues,
fees, and other
charges
among
members
and
issuers and other
persons using any
facility or system
which
the
association
operates
or
controls;
For the prevention of
fraudulent
and
manipulative acts
and practices, the
promotion of just
and
equitable
principles of trade,
and, in general, the
protection
of
investors and the
public interest;
That its members
and
persons
associated with its
members shall be
appropriately
disciplined
for
violation of any
provision of this
Code, the rules or
regulations
thereunder, or the
rules
of
the
association;

(vii)

39.4. a)

b)

c)

That a fair procedure


for the disciplining
of members and
persons associated
with members, the
denial
of
membership to any
person
seeking
membership
therein,
the
barring of any
person
from
becoming
associated with a
member
thereof,
and the prohibition
or limitation by the
association of any
person with respect
to access to services
offered by the
association or a
member thereof.

A registered securities association


shall deny membership to
any person who is not a
registered broker or dealer.
A
registered
securities
association
may
deny
membership to, or condition
the membership of, a
registered broker or dealer
if such broker or dealer:
(i)
Does not meet the
standards
of
financial
responsibility,
operational
capability,
training,
experience,
or
competence
that
are prescribed by
the rules of the
association; or
(ii)
Has engaged, and
there
is
a
reasonable
likelihood it will
again engage, in
acts or practices
inconsistent with
just and equitable
principles of fair
trade.
A
registered
securities
association
may
deny

76

d)

membership to a registered
broker or dealer not
engaged in a type of business
in which the rules of the
association require members
to be engaged: Provided,
however, That no registered
securities association may
deny membership to a
registered broker or dealer
by reason of the amount of
business done by the broker
or dealer.
A
registered
securities
association may examine
and verify the qualifications
of an applicant to become a
member in accordance with
procedures established by
the rules of the association.
A
registered
securities
association may bar a
salesman
or
person
associated with a broker or
dealer from being employed
by a member or set
conditions
for
the
employment of a salesman
or associated if such person:
(i)
Does not meet the
standards
of
training,
experience,
or
competence
that
are prescribed by
the rules of the
association; or
(ii)
Has engaged, and
there
is
a
reasonable
likelihood he will
again engage, in
acts or practices
inconsistent with
just and equitable
principles of fair
trade.
A
registered
securities
association may examine
and verify the qualifications
of an applicant to become a
salesman
or
associated
person employed by a
member in accordance with
procedures established by
the rules of the association.
A registered association also
may require a salesman or

associated person employed


by a member to be
registered
with
the
association in accordance
with procedures prescribed
in
the
rules
of
the
association.
39.5.

In any proceeding by a registered


securities association to determine
whether a person shall be denied
membership,
or
barred
from
association with a member, the
association shall provide notice to the
person under review of the specific
grounds being considered for denial,
afford him an opportunity to defend
against the allegations, and keep a
record of the proceedings. A
determination by the association to
deny membership shall be supported
by a statement setting forth the
specific grounds on which the denial
is based.

SEC. 40. Powers with Respect to Self-Regulatory


Organizations.
40.1.

Upon the filing of an application for


registration as an Exchange under
Section 33, a registered securities
association under Section 39, a
registered clearing agency under
Section 42, or other self-regulatory
organization under this Section, the
Commission shall have ninety (90)
days within which to either grant
registration or institute a proceeding
to determine whether registration
should be denied. In the event
proceedings are instituted, the
Commission shall have two hundred
seventy (270) days within which to
conclude such proceedings at which
time it shall, by order, grant or deny
such registration.

40.2. Every self-regulatory organization shall


comply with the provisions of this
Code, the rules and regulations
thereunder, and its own rules, and
enforce
compliance
therewith,
notwithstanding any provision of the
Corporation Code to the contrary, by
its members, persons associated with
its members or its participants.

77

40.3.

a)

b)

c)

40.4.

Each self-regulatory
organization shall submit to
the Commission for prior
approval any proposed rule
or
amendment
thereto,
together with a concise
statement of the reason and
effect of the proposed
amendment.
Within sixty (60) days after
submission of a proposed
amendment,
the
Commission shall, by order,
approve
the
proposed
amendment. Otherwise, the
same may be made effective
by
the
self-regulatory
organization.
In the event of an emergency
requiring action for the
protection of investors, the
maintenance of fair and
orderly markets, or the
safeguarding of securities
and funds, a self-regulatory
organization may put a
proposed amendment into
effect summarily: Provided,
however, That a copy of the
same shall be immediately
submitted
to
the
Commission.

The Commission is further authorized,


if after making appropriate request in
writing
to
a
self-regulatory
organization that such organization
effect
on
its
own
behalf
specified changes in its rules and
practices and, after due notice and
hearing it determines that such
changes have not been effected, and
that such changes are necessary, by
rule or regulation or by order, may
alter, abrogate or supplement the
rules
of
such
self-regulatory
organization in so far as necessary or
appropriate to effect such changes in
respect of such matters as:
a)
Safeguards in respect of the
financial responsibility of
members and adequate
provision against the evasion
of financial responsibility
through the use of corporate
forms
or
special
partnerships;

b)
c)
d)
e)
f)
g)

h)
i)

j)
k)
l)
m)

The supervision of trading


practices;
The listing or striking from
listing of any security;
Hours of trading;
The manner, method, and
place of soliciting business;
Fictitious accounts;
The time and method of
making
settlements,
payments, and deliveries,
and of closing accounts;
The transparency of securities
transactions and prices;
The fixing of reasonable rates
of fees, interest, listing and
other charges, but not rates
of commission;
Minimum units of trading;
Odd-lot purchases and sales;
Minimum deposits on margin
accounts; and
The supervision, auditing and
disciplining of members or
participants

40.5. The Commission, after due notice and


hearing, is authorized, in the public
interest and to protect investors:
a)
To suspend for a period not
exceeding
twelve
(12)
months or to revoke the
registration of a selfregulatory organization, or
to censure or impose
limitations on the activities,
functions, and operations of
such
self-regulatory
organization,
if
the
Commission finds that such
a
self-regulatory
organization has willfully
violated or is unable to
comply with any provision
of this Code or of the rules
and regulations thereunder,
or its own rules, or has
failed to enforce compliance
therewith by a member of,
person associated with a
member, or a participant in
such
self-regulatory
organization;
b)
To expel from a self-regulatory
organization any member
thereof or any participant
therein who is subject to an
order of the Commission

78

c)

40.6.

a)

under Section 29 of this


Code or is found to have
willfully
violated
any
provision of this Code or
suspend for a period not
exceeding
twelve
(12)
months for violation of any
provision of this Code or
any other laws administered
by the Commission, or the
rules
and
regulations
thereunder, or effected,
directly or indirectly, any
transaction for any person
who, such member or
participant had reason to
believe, was violating in
respect of such transaction
any of such provisions; and
To remove from office or
censure any officer or
director of a self-regulatory
organization if it finds that
such officer or director has
violated any provision of this
Code,
any
other
law
administered
by
the
Commission, the rules or
regulations thereunder, or
the rules of such selfregulatory
organization,
abused his authority, or
without
reasonable
justification or excuse has
failed to enforce compliance
with any of such provisions.
A self-regulatory organization is
authorized to discipline a
member of or participant in
such
self-regulatory
organization, or any person
associated with a member,
including the suspension or
expulsion of such member or
participant,
and
the
suspension or bar from
being associated with a
member, if such person has
engaged in acts or practices
inconsistent with just and
equitable principles of fair
trade or in willful violation
of any provision of the Code,
any other law administered
by the Commission, the
rules
or
regulations
thereunder, or the rules of

b)

the
self-regulatory
organization.
In
any
disciplinary proceeding by a
self-regulatory organization
(other than a summary
proceeding pursuant to
paragraph (b) of this
subsection)
the
selfregulatory
organization
shall bring specific charges,
provide notice to the person
charged, afford the person
charged with an opportunity
to defend against the
charges, and keep a record
of the proceedings. A
determination to impose a
disciplinary sanction shall
be supported by a written
statement of the offense, a
summary of the evidence
presented and a statement of
the sanction imposed.
A self-regulatory organization
may summarily: (i) Suspend
a member, participant or
person associated with a
member who has been or is
expelled or suspended from
any other self-regulatory
organization; or (ii) Suspend
a member who the selfregulatory
organization
finds to be in such financial
or operating difficulty that
the member or participant
cannot be permitted to
continue to do business as a
member with safety to
investors, creditors, other
members, participants or
the
self-regulatory
organization: Provided, That
the
self-regulatory
organization
immediately
notifies the Commission of
the action taken. Any person
aggrieved by a summary
action pursuant to this
paragraph shall be promptly
afforded an opportunity for
a hearing by the association
in accordance with the
provisions of paragraph a)
of this subsection. The
Commission, by order, may
stay a summary action on its
own
motion
or
upon

79

application by any person


aggrieved thereby, if the
Commission
determines
summarily or after due
notice and hearing (which
hearing may consist solely of
the submission of affidavits
or presentation of oral
arguments) that a stay is
consistent with the public
interest and the protection
of investors.
40.7.

self-regulatory organization shall


promptly notify the Commission of
any disciplinary sanction on any
member thereof or participant
therein, any denial of membership or
participation in such organization, or
the imposition of any disciplinary
sanction on a person associated with a
member or a bar of such person from
becoming so associated. Within thirty
(30) days after such notice, any
aggrieved person may appeal to the
Commission from, or the Commission
on its own motion within such period,
may institute review of, the decision of
the self-regulatory organization, at
the conclusion of which, after due
notice and hearing (which may consist
solely of review of the record before
the self-regulatory organization), the
Commission shall affirm, modify or
set aside the sanction. In such
proceeding the Commission shall
determine whether the aggrieved
person has engaged or omitted to
engage in the acts and practices as
found
by
the
self-regulatory
organization, whether such acts and
practices constitute willful violations
of this Code, any other law
administered by the Commission, the
rules or regulations thereunder, or
the rules of the self-regulatory
organization as specified by such
organization, whether such provisions
were applied in a manner consistent
with the purposes of this Code, and
whether, with due regard for the
public interest and the protection of
investors the sanction is excessive or
oppressive.

40.8. The powers of the Commission under this


section shall apply to organized

exchanges and registered clearing


agencies.

80

CHAPTER XI
ACQUISITION AND TRANSFER OF
SECURITIES AND SETTLEMENT OF
TRANSACTIONS IN SECURITIES

42.2.

SEC. 41. Prohibition on Use of Unregistered


Clearing Agency.
It shall be unlawful for any broker, dealer,
salesman, associated person of a broker or
dealer, or clearing agency, directly or
indirectly, to make use of any facility of a
clearing agency in the Philippines to make
deliveries in connection with transactions in
securities or to reduce the number of
settlements of securities transactions or to
allocate securities settlement responsibilities or
to provide for the central handling of securities
so that transfers, loans and pledges and similar
transactions can be made by bookkeeping entry
or otherwise to facilitate the settlement of
securities transactions without physical
delivery of securities certificates, unless such
clearing agency is registered as such under
Section 42 of this Code or is exempted from
such registration upon application by the
clearing agency because, in the opinion of the
Commission, by reason of the limited volume of
transactions which are settled using the
clearing agency, it is not practicable and not
necessary or appropriate in the public interest
or for the protection of investors to require
such registration.
SEC. 42. Registration of Clearing Agencies.42.1. Any clearing agency may be registered as
such with the Commission under the
terms
and
conditions
hereinafter
provided in this Section, by filing an
application for registration in such form
and containing such information and
supporting documents as the Commission
by rule shall prescribe, including the
following:
a) An undertaking to comply and
enforce
compliance
by
its
participants with the provisions of
this Code, and any amendment
thereto, and the implementing rules
or regulations made or to be made
thereunder,
and
the
clearing
agencys rules;
b) The organizational charts of the
Exchange, its rules of procedure, and
a list of its officers and participants;
c) Copies of the clearing agencys rules.

42.3.

No registration of a clearing agency


shall be granted unless the rules of the
clearing agency include provision for:
a) The expulsion, suspension, or
disciplining of a participant for
violations of this Code, or any
other Act administered by the
Commission,
the
rules,
regulations,
and
orders
thereunder, or the clearing
agencys rules;
b) A fair procedure for the
disciplining of participants, the
denial of participation rights to
any person seeking to be a
participant, and the prohibition
or limitation of any person from
access to services offered by the
clearing agency;
c) The equitable allocation of
reasonable dues, fees, and other
charges among participants;
d) Prevention of fraudulent and
manipulative acts and practices,
promotion of just and equitable
principles of trade, and, in
general, protection of investors
and the public interest; and
e) The transparent, prompt and
accurate
clearance
and
settlement of transactions in
securities handled by the clearing
agency.
f) The establishment and oversight
of a fund to guarantee the
prompt and accurate clearance
and settlement of transactions
executed on an exchange,
including a requirement that
members each contribute an
amount based on their volume
and a relevant percentage of the
daily exposure of the four (4)
largest trading brokers which
adequately reflects trading risks
undertaken or pursuant to
another formula set forth in
Commission rules or regulations
or
order,
upon
application: Provided,
however, That a clearing agency
engaged in the business of a
securities depository shall be
exempt from this requirement.
In the case of an application filed
pursuant to this Section, the
Commission shall grant registration if
it finds that the requirements of this

81

42.4.

42.5.

Code and the rules and regulations


thereunder with respect to the
applicant have been satisfied, and
shall deny registration if it does not
make such finding.
Upon appropriate application in
accordance with the rules and
regulations of the Commission and
upon such terms as the Commission
may deem necessary for the
protection of investors, a clearing
agency may withdraw its registration
or suspend its operation or resume
the same.
Section 32 of this Code shall apply to
every registered clearing agency.

SEC. 43. Uncertificated Securities.


Notwithstanding Section 63 of the Corporation
Code of the Philippines:
43.1.
A corporation whose securities are
registered pursuant to this Code or listed on a
securities Exchange may:
a) If so resolved by its Board of
Directors
and
agreed
by
a
shareholder, investor or securities
intermediary, issue shares to, or
record the transfer of some or all of
its shares into the name of said
shareholders, investors or, securities
intermediary in the form of
uncertificated securities. The use of
uncertificated securities in these
circumstances shall be without
prejudice to the rights of the
securities intermediary subsequently
to require the corporation to issue a
certificate in respect of any shares
recorded in its name; and
b) If so provided in its articles of
incorporation and by-laws, issue all of
the shares of a particular class in the
form of uncertificated securities and
subject to a condition that investors
may not require the corporation to
issue a certificate in respect of any
shares recorded in their name.
43.2. The Commission by rule may allow other
corporations to provide in their
articles of incorporation and by-laws
for the use of uncertificated securities.
43.3. Transfers of securities, including an
uncertificated securities, may be
validly made and consummated by
appropriate book-entries in the
securities accounts maintained by
securities intermediaries, or in the

stock and transfer book held by the


corporation or the stock transfer
agent and such bookkeeping entries
shall be binding on the parties to the
transfer. A transfer under this
subsection has the effect of the
delivery of a security in bearer form
or
duly
indorsed
in
blank
representing the quantity or amount
of security or right transferred,
including
the
unrestricted
negotiability of that security by
reason of such delivery. However,
transfer of uncertificated shares shall
only be valid, so far as the
corporation is concerned, when a
transfer is recorded in the books of
the corporation so as to show the
names of the parties to the transfer
and the number of shares transferred.
However, nothing in this Code shall
preclude compliance by banking and
other
institutions
under
the
supervision of the Bangko Sentral ng
Pilipinas and their stockholders with
the
applicable
ceilings
on
shareholdings
prescribed
under
pertinent
banking
laws
and
regulations.
SEC. 44. Evidentiary Value of Clearing Agency
Record.
The official records and book entries of a
clearing agency shall constitute the best
evidence of such transactions between clearing
agency and its participants and members,
without prejudice to the right of participants
or members clients to prove their rights, title
and entitlement with respect to the book-entry
security holdings of the participants or
members held on behalf of the clients.
However, the corporation shall not be bound
by the foregoing transactions unless the
corporate secretary is duly notified in such
manner as the Commission may provide.
SEC. 45. Pledging
Therein.

Security

or

Interest

In addition to other methods recognized by


law, a pledge of, or release of a pledge of, a
security, including an uncertificated security, is
properly constituted and the instrument
proving the right pledged shall be considered
delivered to the creditor under Articles 2093
and 2095 of the Civil Code if a securities
intermediary indicates by book-entry that such

82

security has been credited to a specially


designated pledge account in favor of the
pledgee. A pledge under this subsection has the
effect of the delivery of a security in bearer
form or duly indorsed in blank representing
the quantity or amount of such security or
right pledged. In the case of a registered
clearing agency, the procedures by which, and
the exact time at which, such book-entries are
created shall be governed by the registered
clearing agencys rules. However, the
corporation shall not be bound by the
foregoing transactions unless the corporate
secretary is duly notified in such manner as the
Commission may provide.

participant arising from a failure by


the participant to meet its obligations
under the clearing agencys rules in
respect of the clearing and settlement
of transactions in securities, in a
dissolution of the participant, and any
such rules and regulations shall bind
the issuers of the securities, investors
in the securities, any third parties
with interests in the securities, and the
creditors of a participant of a
registered clearing agency.
1. Self Regulatory Organization (SRO)

Rulemaking power of SRO


a) SRO may adopt and amend rules as well
as repeal existing rules, implement such
rules
and
provide
interpretative
guidance to aid in compliance subject to
SEC approval and the procedures set
forth in SRC Rule 40.3,
b) An SRO shall adopt comprehensive
rules governing its:
i. organization and governance,
ii. qualifications and rights of
shareholders,
iii. listing of securities,
iv. trading of securities,
v. settlement of contracts,
vi. qualification of members and other
participants,
vii. ethical conduct of members and
other participants,
viii. supervision
and
control
of
members,
ix. financial
and
operational
responsibility of members, and
x. discipline of members and other
participants.

Power over listed companies


a) The SRO shall be solely responsible for:
i. processing and approving or
rejecting applications for new
listing of shares,
ii. suspension and de-listing of listed
issues and
iii. imposition of sanctions on listed
companies for violation of SRO
rules;
Provided, however, that such powers
shall be exercised pursuant to SRO
rules.

An SRO shall establish an independent audit,


compliance and surveillance office separate
from the Exchange or within the Exchange,

SEC. 46. Issuers Responsibility for Wrongful


Transfer to Registered Clearing Agency.
The registration of a transfer of a security into
the name of and by a registered clearing agency
or its nominee shall be final and conclusive
unless the clearing agency had notice of an
adverse claim before the registration was made.
The above provision shall be without prejudice
to any rights which the claimant may have
against the issuer for wrongful registration in
such circumstances.
SEC. 47. Power of the Commission With Respect
to Securities Ownership.
The Commission is authorized, having due
regard to the public interest and the protection
of investors, to promulgate rules and
regulations which:
47.1. Validate the transfer of securities by
book-entries rather than the delivery
of physical certificates;
47.2. Establish when a person acquires a
security or an interest therein and
when delivery of a security to a
purchaser occurs;
47.3. Establish which records constitute the
best evidence of a persons interests in
a security and the effect of any errors
in electronic records of ownership;
47.4. Codify the rights of investors who choose
to hold their securities indirectly
through a registered clearing agency
and/or
other
securities
intermediaries;
47.5.
Codify the duties of securities
intermediaries (including clearing
agencies) who hold securities on
behalf of investors; and
47.6. Give first priority to any claims of a
registered clearing agency against a

83

and in such form and substance that the


Commission, by order, may prescribe.
2. Compliance and Surveillance Office

It shall not be subordinated or otherwise


controlled in its activity by the Exchange
Board or its review unit.

Responsibilities:
a) To carry out the SROs enforcement
role pursuant to the securities law and
for the disciplining of participants.
b) To submit to the Commission a copy of
its findings within three (3) business
days from completion or at the same
time that said office provides a copy to
the Board or a review unit, if said office
is an entity separate from the Exchange,
or to any person or unit outside of the
office if said office is an integral unit
within the Exchange, whichever is
earlier.
c) To submit a status report or any other
kind of report on any of the activities
that it is performing as the SEC may
require.
3. Powers of Compliance and Surveillance Office

Compliance and Surveillance office may


summarily suspend or impose limitations
upon the erring Broker Dealer without need
of approval from the Exchange Board or its
review unit, provided that the Exchange
Board shall
a) within five (5) trading days from
implementation of such order
b) convene to review, confirm, modify, or
reverse
the
Compliance
and
Surveillance offices action.

Purpose of summary order:


a) to protect the interest of investors and
the public in general,
b) arrest the further commission of
violations of the securities law,
c) prevent financial instability and damage
to the capital market caused by delay,
and/or risk manage Broker Dealer
operations effectively,
Failure by the Exchange Board or its review
unit to resolve the summary order shall be
deemed an automatic confirmation of the
action taken by the Compliance and
Surveillance office.

4. Other Oversight Functions of SRO

To enforce compliance with provisions of the


securities laws regulating brokers, dealers
and trading on the SRO and SRO rules by its

members, absent reasonable justification or


excuse.
To enter into a Memorandum of
Understanding with other SROs to clarify its
oversight responsibilities over persons who
are members of or participants in more than
one SRO and coordinate with other SROs to
ensure adequate oversight.
To
monitor
market
conditions and trading activity to detect
violations of the securities law and SRO
rules, specifically:
a) To conduct market surveillance of all
trading activity on the SRO pursuant to
SRO rules setting forth surveillance
procedures and guidelines.
b) To monitor compliance by listed
companies with continuing listing
obligations; provided, however, primary
oversight for compliance with full
disclosure
regulation
under
the
securities law shall remain the
responsibility of the SEC.
To examine members to determine whether
they are in compliance with the securities law
and SRO rules governing, among others,
financial responsibility, dealings of members
with the public, back office procedures,
trading practices, and supervision.
To submit to the SEC for review and
comment its examination calendar for the
year
To file with the SEC monthly reports of its
periodic examinations started and completed
during the month,
To conduct periodic examinations of each
member firm SRO pursuant to written
procedures approved by the SEC.

5. Power of Oversight of SEC over SROs

The SEC may, on its own initiative,


a) monitor the market to ensure (1) that the
SRO is fulfilling its functions and (2)
that each activity or potential problem
area in the market is adequately covered
and being reasonably addressed.
b) conduct
periodic
or
parallel
examinations of members to validate the
SROs findings and
c) conduct on-spot audit inspections of the
relevant SRO department to check if it is
fulfilling its duties and responsibilities
as an SRO.

6. SROs Duty to Conduct Investigations

84

An SRO shall investigate suspected


violations of the securities law and SRO rules
The SRO shall be primarily responsible for
conducting investigations which concern:
a) suspected violation of rules governing
sales practices,
b) financial and operational requirements,
c) trading and floor-related violations, and
d) compliance procedures/supervision of
members.
a) The SRO shall promptly notify the SEC
of any investigation involving suspected
violations of the securities law by
persons not subject to the SROs
jurisdiction,
concerning
disclosure
obligations of listed under the securities
law, and/or involving fraud or
manipulation.
The SEC may, in its own initiative conduct
its own investigation at any time. In such an
event, the SRO shall coordinate, cooperate,
and provide a copy to the SEC, upon notice
or order, documents, pieces of evidence or
other information related to the case that it
may have earlier gathered or are available in
its database and which it may readily
procure. In case of conflict between the
findings of the SEC and the Exchange, the
formers decision shall prevail.

7. Discipline of SRO Members and Participants

An SRO shall discipline suspend or expel a


member, if such person has been found to
have been engaged in a violation of SRO
rules or provisions of the securities law,
including, but not limited to:
a) illegal sales practices, financial and
operational requirements,
b) trading and floor related violations,
and/or
c) violation of SRO listing rules.
Suspension of a member or person associated
with a member of an SRO may be imposed
summarily where such member or associated
person
a) has been expelled or suspended from
another SRO, and/or
b) is found to be in such financial or
operating difficulty that the member
cannot be permitted to do business as a
member with safety to investors,
creditors, other members, or the SRO.
The SRO shall immediately provide written
notice to the SEC of the action taken.
Any person aggrieved by a summary action
pursuant to this paragraph shall be promptly

afforded an opportunity for a hearing by the


SRO
The SEC, by order, may stay a summary
action motu propio or upon application by
any aggrieved person if the SEC determines
summarily or after notice and an opportunity
for hearing that a stay is consistent with the
public interest and the protection of
investors.

8. SRO Discipline by the SEC

The SEC may, after due notice and an


opportunity for a hearing:
a) Suspend for a period not to exceed
twelve (12) months or revoke the
registration,
censure
or
impose
limitations on the activities, functions
and operations of an SRO, if SRO has
i. willfully violated or is unable to
comply with any provision of the
securities law or SRO rules, or
ii. failed to enforce compliance
therewith by a member or
participant without reasonable
justification or excuse;
b) Take over the activities of an SRO
pursuant to SRC Rule 40.5;
c) Suspend for a period not exceeding
twelve (12) months or to expel from the
SRO any member who:
i. is subject to an order of the SEC
under Section 29 of the SRC or
ii. found to have willfully violated any
provision of the securities law, or
effected, directly or indirectly, any
transaction for any person who
such member had reason to believe
was violating, in respect of such
transaction,
any
of
such
provisions;
d) Remove from office or censure any
officer or director of the SRO:
i. for violation of any provision
of the securities law or the
rules of such SRO,
ii. who has abused his authority
or
iii. who,
without
reasonable
justification or excuse, has
failed to enforce compliance
with any of such provisions;
and/or
e) Take other actions as provided by the
Code.

85

SRC Rule 40.5 Commission Powers Over


Exchanges, Clearing Agencies and Self
Regulatory Organizations
1.

2.

3.

4.

Subject to paragraph 2 through 6 of this rule,


the Commission may, when it is satisfied that
it is in the interest of the investing public, or
is appropriate to do so for the protection of
investors, and after due notice and a hearing:
A. suspend registration of an Exchange,
clearing agency and/or self regulatory
organization (hereinafter collectively
Exchange) upon findings that such
Exchange has willfully violated or is
unable to comply with any provision of
this Code, or the rules and regulations
hereunder, or its own rules, or has failed
to enforce compliance therewith by a
member of, person associated therewith,
or a participant in such Exchange; or
B. suspend any or all officers of said
Exchange and appoint an independent
administrator knowledgeable in capital
market operations to take over the
management of the Exchange, and/or
suspend any and all member/s of the
board of directors and appoint new
director/s to serve during the suspension
period, upon findings that such officer/s
and/or director/s have willfully violated
any provision of this Code, any other
law administered by the Commission,
the rules or regulations thereunder, or
the rules of such Exchange, or abused
his authority, or without reasonable
justification or excuse has failed to
enforce compliance with any of such
provisions.
Upon discovery of any of the abovementioned violations or failures, the SEC
shall notify the Exchange, officer/s and/or
director/s thereof and set a period of time in
which such violation or failure shall be
rectified, which period shall be no less than
ten (10) days nor more than ninety (90) days.
In the event that an Exchange fails to rectify
such violation or failure within the stated
period, which the Commission may extend
only once based on its finding that such
extension is in the public interest or for the
protection of investors, the Commission, after
due notice and a hearing, may undertake the
necessary remedies to correct the same.
For as long as an order suspending any
officer/s and/or director/s is in effect under
this rule, none of the functions to which the
order relates shall be performed, by said
suspended officer or director.

5.

Where an independent administrator is


appointed under this rule, such administrator
shall immediately prepare a workplan which
shall be submitted to the Commission for
approval and/or amendment, to address the
underlying reason for the suspension. Such
workplan shall include a timetable for
compliance with this Code which shall not be
later than the period of suspension.
SRC Rule 42 Registration of Clearing Agencies
[formerly SRC Rule 40.5-1]

1.

Registration

A.

An application for registration as a clearing


agency or any amendment thereto shall be
filed with the SEC on SEC Form 42-CA in
accordance with the instructions contained
therein along with the prescribed registration
fee; provided, however, that an applicant for
registration as clearing agency may also, at
the same time, apply for registration as an
SRO pursuant to SRC Rule 39.1, paragraph 3
on SEC Form 42-SRO; provided, further, that
any registered clearing agency existing prior
to the effectivity of these Rules shall, within
45 days from effectivity of these Rules,
comply with all the requirements provided
under this Rule, which were not provided for
in its original registration.
In addition to the prescribed registration fee
prescribed above and for the privilege of
doing business for the preceding calendar
year or any part thereof, every Clearing
Agency shall pay to the Commission, on or
before the thirtieth (30th) day of the fourth
(4th) month after the end of the fiscal year, a
prescribed annual fee.
After reviewing an application for
registration as a clearing agency, or an
amendment thereto, the Commission shall:
i. grant registration or approve the
amendment;
ii. require a change in the Articles of
Incorporation, By-laws, contracts, rules
or procedures (hereinafter rules) to
ensure their fair administration or to
make them conform to the requirements
of the Code and rules and regulations
adopted thereunder;
iii. deny registration or the amendment if:
a. the clearing agency does not have
the capacity and resources to
enforce compliance with its rules as
proposed or amended; or
b. the rules or any amendment thereto
would be inconsistent with
provisions of the Code, or rules and

B.

C.

86

D.

E.

F.

2.

regulations adopted thereunder or


with
the
development
and
operation of a prompt and accurate
clearance and settlement system
and the safeguarding of money and
securities in its custody, within its
control or for which it is
responsible; or
c. the application for registration or
an
amendment
thereto
is
incomplete,
inaccurate
or
misleading; or
iv. exempt from registration due to the
limited volume of transactions and
based on findings that it is not
practicable and necessary or appropriate
in the public interest or for the
protection of investors to require such
registration.
If any of the information reported on SEC
Form 42-CA becomes inaccurate, misleading
or incomplete or requires updating for any
reason, including changes to rules and the list
of directors and officers, the registrant shall
correct the information by filing an
amendment within seven (7) days after the
date on which the information contained in
the
application
became
inaccurate,
misleading or incomplete. Amendments to
SEC Form 42-CA which update the
registrants list of directors, officers, partners
or shareholders shall be deemed to satisfy
Section 26 of the Corporation Code of the
Philippines.
On an annual basis, a registered clearing
agency shall file with the Commission its
audited balance sheet and statement of
income and expenses, and all notes or
schedules thereto within One hundred five
(105) days from the end of its fiscal
year. Financial statements filed pursuant to
this subsection shall be deemed to satisfy
Section 141 of the Corporation Code of the
Philippines.
Nothing in this Rule shall be construed as
precluding the Commission from requiring an
applicant for registration or a registered
clearing agency to submit other requirements
it may deem reasonably necessary to
effectively regulate and supervise the
clearing agency and/or to protect the interest
of the investing public.
Reports from Clearing Agencies
If a registered clearing agency at any time
becomes aware of any development relating
to a participant that leads such clearing
agency to believe that (1) such participant has

breached, is in breach, or is about to breach


the clearing agencys rules; or (2) the
participant has experienced, is experiencing,
or is about to experience material operational
or financial difficulties, which breach or
difficulties may adversely affect such
participant, such registered clearing agency
shall immediately notify the Commission and
provide any documentation or evidence
leading the clearing agency to such
determination.

87

CHAPTER XII
MARGIN AND CREDIT
SEC. 48. Margin Requirements.48.1.

For the purpose of preventing the


excessive use of credit for the
purchase or carrying of securities, the
Commission, in accordance with the
credit and monetary policies that may
be promulgated from time to time by
the Monetary Board of the Bangko
Sentral ng Pilipinas, shall prescribe
rules and regulations with respect to
the amount of credit that may be
extended on any security. For the
extension of credit, such rules and
regulations shall be based upon the
following standard:
An amount not greater than
whichever is the higher of a)
Sixty-five per centum (65%) of
the current market price of
the security, or
b)
One
hundred per
centum (100%) of the lowest
market price of the security
during the preceding thirtysix (36) calendar months,
but not more than seventyfive per centum (75%) of the
current market price.
However, the Monetary Board may
increase or decrease the above
percentages, in order to achieve the
objectives of the Government with
due regard for promotion of the
economy and prevention of the use of
excessive credit.
Such rules and regulations may make
appropriate provision with respect to
the carrying of undermargined
accounts for limited periods and
under specified conditions; the
withdrawal of funds or securities; the
transfer of accounts from one lender
to another; special or different
margin requirements for delayed
deliveries, short sales, arbitrage
transactions, and securities to which
letter (b) of the second paragraph of
this subsection does not apply; the
bases and the methods to be used in
calculating loans, and margins and
market
prices;
and
similar
administrative
adjustments
and
details.

48.2. No member of an Exchange or broker or


dealer shall, directly or indirectly,
extend or maintain credit or arrange
for the extension or maintenance of
credit to or for any customer:
a)
On any security unless such
credit is extended and
maintained in accordance
with
the
rules
and
regulations
which
the
Commission shall prescribe
under this Section including
rules setting credit in
relation to net capital of
such member, broker or
dealer;
b)
Without collateral or on any
collateral
other
than
securities, except (i) to
maintain a credit initially
extended in conformity with
the rules and regulations of
the Commission and (ii) in
cases where the extension or
maintenance of credit is not
for
the
purpose
of
purchasing
or
carrying
securities or of evading or
circumventing
the
provisions of paragraph (a)
of this subsection.
48.3. Any person not subject to Subsection 48.2
hereof shall extend or maintain credit
or arrange for the extension or
maintenance of credit for the purpose
of purchasing or carrying any
security, only in accordance with such
rules and regulations as the
Commission shall prescribe to
prevent the excessive use of credit for
the purchasing or carrying of or
trading in securities in circumvention
of the other provisions of this Section.
Such rules and regulations may
impose upon all loans made for the
purpose of purchasing or carrying
securities limitations similar to those
imposed upon members, brokers, or
dealers by Subsection 48.2 and the
rules and regulations thereunder.
This subsection and the rules and
regulations thereunder shall not
apply: (a) To a credit extension made
by a person not in the ordinary course
of business; (b) To a loan to a dealer
to aid in the financing of the
distribution of securities to customers
not through the medium of an

88

Exchange; or (c) To such other credit


extension as the Commission shall
exempt from the operation of this
subsection and the rules and
regulations thereunder upon specified
terms and conditions or for stated
period.
SEC. 49. Restrictions on Borrowings
Members, Brokers, and Dealers.

by

It shall be unlawful for any registered broker


or dealer, or member of an Exchange, directly
or indirectly:
49.1. To permit in the ordinary course of
business as a broker or dealer his
aggregate indebtedness including
customers credit balances, to exceed
such percentage of the net capital
(exclusive of fixed assets and value of
Exchange membership) employed in
the business, but not exceeding in any
case
two
thousand per
centum (2,000%), as the Commission
may by rules and regulations
prescribe as necessary or appropriate
in the public interest or for the
protection of investors.
49.2. To pledge, mortgage, or otherwise
encumber or arrange for the pledge,
mortgage or encumbrance of any
security carried for the account of any
customer under circumstances: (a)
That will permit the commingling of
his securities, without his written
consent, with the securities of any
customer; (b) That will permit such
securities to be commingled with the
securities of any person other than
a bona fide customer; or (c) That will
permit such securities to be pledged,
mortgaged or encumbered, or
subjected to any lien or claim of the
pledgee, for a sum in excess of the
aggregate indebtedness of such
customers in respect of such
securities. However, the Commission,
having due regard to the protection of
investors, may, by rules and
regulations, allow certain transactions
that may otherwise be prohibited
under this subsection.
49.3. To lend or arrange for the lending of any
security carried for the account of any
customer without the written consent
of such customer or in contravention
of such rules and regulations as the
Commission shall prescribe.

SEC. 50. Enforcement of Margin Requirements


and Restrictions on Borrowing.
To prevent indirect violations of the margin
requirements under Section 48, the broker or
dealer shall require the customer in nonmargin transactions to pay the price of the
security purchased for his account within such
period as the Commission may prescribe,
which shall in no case exceed the prescribed
settlement date. Otherwise, the broker shall sell
the security purchased starting on the next
trading day but not beyond ten (10) trading
days following the last day for the customer to
pay such purchase price, unless such sale
cannot be effected within said period for
justifiable reasons. The sale shall be without
prejudice to the right of the broker or dealer to
recover any deficiency from the customer. To
prevent indirect violation of the restrictions on
borrowings under Section 49, the broker shall,
unless otherwise directed by the customer, pay
the net sales price of the securities sold for a
customer within the same period as above
prescribed by the Commission: Provided, That
the customer shall be required to deliver the
instruments evidencing the securities as a
condition for such payment upon demand by
the broker.

89

1. Margin Trading

Definition:
a) practice of buying stocks with money
borrowed from the broker.
b) an arrangement where the investor
makes a cash down payment (called the
MARGIN) with the broker and can
purchase stock worth about twice the
cash amount.
i. The broker charges interest on the
loan
in
addition
to
the
COMMISSION on each transaction
and the investor has to keep the
entire stockholding with the broker
as collateral.
ii. The investor also has to put up
additional cash in case the value of
the stockholding falls below a
certain amount.
Characterized as a double-edged sword.
a. If the stock price rises, the investor
makes twice as much profits as with his
own cash only.
b. If the stock price falls, the investor loses
twice the amount.

2. Margin Requirements Under SRC Rule 48.1

A Broker Dealer shall not extend credit to a


customer in an amount that exceeds fifty
percent (50%) of the current market value of
the security at the time of the transaction. In
no event shall new or additional credit be
extended in to an account in which the equity
is less than Fifty Thousand Pesos
(P50,000.00).
The margin maintained in a margin account
of a customer shall be no less than twenty
five percent (25%) of the current market
value of all securities long in the account
and thirty percent (30%) of the current
market value of securities short in the
account.
When there is an insufficiency of margin, a
call for additional margin shall be issued
promptly by the Broker Dealer to the
customer.
If a margin call is not met, the Broker Dealer
shall liquidate securities sufficient to meet
the margin call or eliminate the margin
deficiency. The Broker Dealer shall liquidate
the securities through the Exchange on which
it is traded or in the best available public
market.
If the margin deficiency in the account in less
than Ten Thousand Pesos (P10,000.00), no
action need be taken by the Broker Dealer.

90

CHAPTER XIII
GENERAL PROVISIONS
SEC. 51. Liabilities of Controlling Persons,
Aider and Abettor and Other Secondary
Liability. 51.1. Every person who, by or through stock
ownership, agency, or otherwise, or in
connection with an agreement or
understanding with one or more other
persons, controls any person liable
under this Code or the rules or
regulations of the Commission
thereunder, shall also be liable jointly
and severally with and to the same
extent as such controlled persons to
any person to whom such controlled
person is liable, unless the controlling
person proves that, despite the
exercise of due diligence on his part,
he has no knowledge of the existence
of the facts by reason of which the
liability of the controlled person is
alleged to exist.
51.2. It shall be unlawful for any person,
directly or indirectly, to do any act or
thing which it would be unlawful for
such person to do under the
provisions of this Code or any rule or
regulation thereunder.
51.3. It shall be unlawful for any director or
officer of, or any owner of any
securities issued by, any issuer
required to file any document, report
or other information under this Code
or any rule or regulation of the
Commission thereunder, without just
cause, to hinder, delay or obstruct the
making or filing of any such
document, report, or information.
51.4. It shall be unlawful for any person to
aid, abet, counsel, command, induce
or procure any violation of this Code,
or any rule, regulation or order of the
Commission thereunder.
51.5. Every person who substantially assists
the act or omission of any person
primarily liable under Sections 57, 58,
59 and 60 of this Code, with
knowledge or in reckless disregard
that such act or omission is wrongful,
shall be jointly and severally liable as
an aider and abettor for damages
resulting from the conduct of the
person primarily liable: Provided,
however, That an aider and abettor
shall be liable only to the extent of his

relative contribution in causing such


damages in comparison to that of the
person primarily liable, or the extent
to which the aider and abettor was
unjustly enriched thereby, whichever
is greater.
SEC. 52. Accounts and Records, Reports,
Examination of Exchanges, Members, and
Others.52.1. Every registered Exchange, broker or
dealer, transfer agent, clearing
agency, securities association, and
other self-regulatory organization,
and every other person required to
register under this Code, shall make,
keep and preserve for such periods,
records, furnish such copies thereof,
and make such reports, as the
Commission by its rules and
regulations may prescribe. Such
accounts,
correspondence,
memoranda, papers, books, and other
records shall be subject at any time to
such reasonable periodic, special or
other examinations by representatives
of the Commission as the Commission
may deem necessary or appropriate in
the public interest or for the
protection of investors.
52.2. Any broker, dealer or other person
extending credit, who is subject to the
rules and regulations prescribed by
the Commission pursuant to this
Code, shall make such reports to the
Commission as may be necessary or
appropriate to enable it to perform
the functions conferred upon it by this
Code.
52.3 For purposes of this Section, the term
records
refers
to
accounts,
correspondence, memoranda, tapes,
discs, papers, books and other
documents or transcribed information
of any type, whether written or
electronic in character.
SEC. 53. Investigations,
Prosecution of Offenses.-

Injunctions

and

53.1. The Commission may, in its discretion,


make such investigations as it deems
necessary to determine whether any
person has violated or is about to
violate any provision of this Code, any
rule, regulation or order thereunder,
or any rule of an Exchange, registered

91

securities association, clearing agency,


other self-regulatory organization,
and may require or permit any
person to file with it a statement in
writing, under oath or otherwise, as
the Commission shall determine, as to
all
facts
and
circumstances
concerning the matter to be
investigated. The Commission may
publish information concerning any
such violations, and to investigate any
fact, condition, practice or matter
which it may deem necessary or
proper to aid in the enforcement of
the provisions of this Code, in the
prescribing of rules and regulations
thereunder,
or
in
securing
information to serve as a basis for
recommending further legislation
concerning the matters to which this
Code relates: Provided, however, That
any person requested or subpoenaed
to produce documents or testify in
any investigation shall simultaneously
be notified in writing of the purpose
of
such
investigation: Provided,
further, That all criminal complaints
for violations of this Code, and the
implementing rules and regulations
enforced or administered by the
Commission shall be referred to the
Department of Justice for preliminary
investigation and prosecution before
the
proper
court: Provided,
furthermore, That in instances where
the law allows independent civil or
criminal proceedings of violations
arising from the same act, the
Commission shall take appropriate
action
to
implement
the
same: Provided,
finally, That
the
investigation, prosecution, and trial of
such cases shall be given priority.
53.2. For the purpose of any such investigation,
or any other proceeding under this
Code, the Commission or any officer
designated by it is empowered to
administer oaths and affirmations,
subpoena
witnesses,
compel
attendance, take evidence, require the
production of any book, paper,
correspondence, memorandum, or
other record which the Commission
deems relevant or material to the
inquiry, and to perform such other
acts necessary in the conduct of such
investigation or proceedings.

53.3.

Whenever it shall appear to the


Commission that any person has
engaged or is about to engage in any
act or practice constituting a violation
of any provision of this Code, any
rule, regulation or order thereunder,
or any rule of an Exchange, registered
securities association, clearing agency
or other self-regulatory organization,
it may issue an order to such person
to desist from committing such act or
practice: Provided, however, That the
Commission shall not charge any
person with violation of the rules of
an Exchange or other self regulatory
organization unless it appears to the
Commission that such Exchange or
other self-regulatory organization is
unable or unwilling to take action
against such person. After finding
that such person has engaged in any
such act or practice and that there is a
reasonable likelihood of continuing,
further or future violations by such
person, the Commission may issue exparte a cease and desist order for a
maximum period of ten (10) days,
enjoining the violation and compelling
compliance with such provision. The
Commission may transmit such
evidence as may be available
concerning any violation of any
provision of this Code, or any rule,
regulation or order thereunder, to the
Department of Justice, which may
institute the appropriate criminal
proceedings under this Code.
53.4. Any person who, within his power but
without cause, fails or refuses to
comply with any lawful order,
decision or subpoena issued by the
Commission under Subsection 53.2 or
Subsection 53.3 or Section 64 of this
Code, shall after due notice and
hearing, be guilty of contempt of the
Commission. Such person shall be
fined in such reasonable amount as
the Commission may determine, or
when such failure or refusal is a clear
and
open
defiance
of
the
Commissions order, decision or
subpoena, shall be detained under an
arrest
order
issued
by
the
Commission, until such order,
decision or subpoena is complied
with.
SEC. 54. Administrative Sanctions.-

92

(iv)

54.1. If, after due notice and hearing, the


Commission finds that: (a) There is a
violation of this Code, its rules, or its
orders; (b) Any registered broker or
dealer, associated person thereof has
failed reasonably to supervise, with a
view to preventing violations, another
person subject to supervision who
commits any such violation; (c) Any
registrant or other person has, in a
registration statement or in other
reports,
applications,
accounts,
records or documents required by law
or rules to be filed with the
Commission, made any untrue
statement of a material fact, or
omitted to state any material fact
required to be stated therein or
necessary to make the statements
therein not misleading; or, in the case
of an underwriter, has failed to
conduct an inquiry with reasonable
diligence to insure that a registration
statement is accurate and complete in
all material respects; or (d) Any
person has refused to permit any
lawful examinations into its affairs, it
shall, in its discretion, and subject
only to the limitations hereinafter
prescribed, impose any or all of the
following sanctions as may be
appropriate in light of the facts and
circumstances:
(i)
Suspension, or revocation of
any registration for the
offering of securities;
(ii)
A fine of no less than Ten
thousand pesos (P10,000.00)
nor more than One million
pesos (P1,000,000.00) plus
not
more
than
Two
thousand pesos (P2,000.00)
for each day of continuing
violation;
(iii)
In the case of a violation of
Sections 19.2, 20, 24, 26 and
27, 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 this
Code or any other act, rule
or regulation administered
by the Commission;

In the case of a violation of


Section 34, a fine of no more
than three (3) times the
profit gained or loss avoided
as a result of the purchase,
sale
or
communication
proscribed by such Section;
and
(v)
Other penalties within the
power of the Commission to
impose.
54.2.
The imposition of the foregoing
administrative sanctions shall be
without prejudice to the filing of
criminal
charges
against
the
individuals responsible for the
violation.
54.3. The Commission shall have the power to
issue writs of execution to enforce the
provisions of this Section and to
enforce payment of the fees and other
dues collectible under this Code.
SEC. 55. Settlement Offers.55.1.

At any time, during an investigation or


proceeding under this Code, parties
being investigated and/or charged
may propose in writing an offer of
settlement with the Commission.
55.2. Upon receipt of such offer of settlement,
the Commission may consider the
offer based on timing, the nature of
the investigation or proceeding, and
the public interest.
55.3. The Commission 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.
55.4. The Commission shall adopt rules and
procedures governing the filing,
review, withdrawal, form of rejection
and acceptance of such offers.
SEC. 56. Civil Liabilities on Account of False
Registration Statement.56.1.

Any person 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

93

necessary to make such statements


not misleading, and who suffers
damage, may sue and recover
damages
from
the
following
enumerated persons, unless it is
proved that at the time of such
acquisition he knew of such untrue
statement or omission:
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
valuation, 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

56.2.

that
portion
of
the
registration statement which
purports to have been
contributed by him.
g)
Every underwriter with
respect to such security.
If the person who acquired the security
did so after the issuer has made
generally available to its security
holders an income statement covering
a period of at least twelve months
beginning from the effective date of
the registration statement, then the
right of recovery under this
subsection shall be conditioned on
proof that such person acquired the
security relying upon such untrue
statement
in
the
registration
statement or relying upon the
registration statement and not
knowing of such income statement,
but such reliance may be established
without proof of the reading of the
registration statement by such person.

SEC. 57.Civil Liabilities Arising in Connection


With Prospectus, Communications and Reports.57.1. Any person who:
a)
Offers to sell or sells a security
in violation of Chapter III,
or
b)
Offers to sell or sells a security,
whether or not exempted by
the provisions of this Code,
by the use of any means or
instruments
of
transportation
or
communication, by means of
a prospectus or other
written
or
oral
communication,
which
includes
an
untrue
statement of a material fact
or omits to state a material
fact necessary in order to
make the statements, in the
light of the circumstances
under which they were
made, not misleading (the
purchaser not knowing of
such untruth or omission),
and who shall fail in the
burden of proof that he did
not know, and in the
exercise of reasonable care
could not have known, of
such untruth or omission,

94

57.2.

shall be liable to the person


purchasing such security
from him, who may sue to
recover the consideration
paid for such security with
interest thereon, less the
amount of any income
received thereon, upon the
tender of such security, or
for damages if he no longer
owns the security.
Any person who shall make or cause to
be made any statement in any report,
or document filed pursuant to this
Code or any rule or regulation
thereunder, which statement was at
the time and in the light of the
circumstances under which it was
made false or misleading with respect
to any material fact, shall be liable to
any person who, not knowing that
such statement was false or
misleading, and relying upon such
statements shall have purchased or
sold a security at a price which was
affected by such statement, for
damages caused by such reliance,
unless the person sued shall prove
that he acted in good faith and had no
knowledge that such statement was
false or misleading.

SEC. 60. Civil Liability With Respect to


Commodity Futures Contracts and Pre-need
Plans. 60.1.

60.2.

SEC. 61. Civil Liability on Account of Insider


Trading.
61.1.

SEC. 58.Civil Liability For Fraud in Connection


With Securities Transactions..
Any person who engages in any act or
transaction in violation of Sections 19.2, 20 or
26, or any rule or regulation of the Commission
thereunder, shall be liable to any other person
who purchases or sells any security, grants or
refuses to grant any proxy, consent or
authorization, or accepts or declines an
invitation for tender of a security, as the case
may be, for the damages sustained by such
other person as a result of such act or
transaction.
SEC. 59. Civil Liability For Manipulation of
Security Prices.
61.2.
Any person who willfully participates in any
act or transaction in violation of Section 24
shall be liable to any person who shall purchase
or sell any security at a price which was
affected by such act or transaction, and the
person so injured may sue to recover the
damages sustained as a result of such act or
transaction.

Any person who engages in any act or


transaction in willful violation of any
rule or regulation promulgated by the
Commission under Section 11 or 16,
which the Commission denominates
at the time of issuance as intended to
prohibit fraud in the offer and sale of
pre-need plans or to prohibit fraud,
manipulation, fictitious transactions,
undue speculation, or other unfair or
abusive practices with respect to
commodity future contracts, shall be
liable to any other person sustaining
damage as a result of such act or
transaction.
As to each such rule or regulation so
denominated, the Commission by rule
shall prescribe the elements of proof
required for recovery and any
limitations on the amount of damages
that may be imposed.

Any insider who violates Subsection 27.1


and any person in the case of a tender
offer who violates Subsection 27.4
(a)(i), or any rule or regulation
thereunder, by purchasing or selling a
security while in possession of
material information not generally
available to the public, shall be liable
in a suit brought by any investor who,
contemporaneously with the purchase
or sale of securities that is the subject
of the violation, purchased or sold
securities of the same class unless
such insider, or such person in the
case of a tender offer, proves that
such investor knew the information or
would have purchased or sold at the
same price regardless of disclosure of
the information to him.
An insider who violates Subsection 27.3
or any person in the case of a tender
offer who violates Subsection 27.4 (a),
or any rule or regulation thereunder,
by communicating material nonpublic information, shall be jointly
and severally liable under Subsection
61.1 with, and to the same extent as,
the insider, or person in the case of a

95

tender
offer,
to
whom
the
communication was directed and who
is liable under Subsection 61.1 by
reason of his purchase or sale of a
security.
SEC. 62. Limitation of Actions.
63.3.
62.1.

62.2.

No action shall 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
enforce a liability created under
Subsection 57.1(a), unless brought
within two (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 Subsection 57.1 (a) more
than five (5) years after the security
was bona fide offered to the public, or
under Subsection 57.1 (b) more than
five (5) years after the sale.
No action shall be maintained to enforce
any liability created under any other
provision of this Code unless brought
within two (2) years after the
discovery of the facts constituting the
cause of action and within five (5)
years after such cause of action
accrued.

SEC. 63. Amount of Damages to be Awarded.


63.1.

63.2.

All suits to recover damages pursuant to


Sections 56, 57, 58, 59, 60 and 61 shall
be brought before the Regional Trial
Court, which shall have exclusive
jurisdiction to hear and decide such
suits. The Court is hereby authorized
to award damages in an amount not
exceeding triple the amount of the
transaction plus actual damages.
Exemplary damages may also be
awarded in cases of bad faith, fraud,
malevolence or wantonness in the
violation of this Code or the rules and
regulations promulgated thereunder.
The Court is also authorized to award
attorneys fees not exceeding thirty
percentum (30%) of the award.
The persons specified in Sections 56, 57,
58, 59, 60 and 61 hereof shall be
jointly and severally liable for the
payment of damages. However, any
person who becomes liable for the

payment of such damages may


recover contribution from any other
person who, if sued separately, would
have been liable to make the same
payment, unless the former was guilty
of fraudulent representation and the
latter was not.
Notwithstanding any provision of law to
the contrary, all persons, including
the issuer, held liable under the
provisions of Sections 56, 57, 58, 59,
60 and 61 shall contribute equally to
the total liability adjudged herein. In
no
case
shall
the
principal
stockholders, directors and other
officers of the issuer or persons
occupying similar positions therein,
recover their contribution to the
liability from the issuer. However, the
right of the issuer to recover from the
guilty parties the amount it has
contributed under this Section shall
not be prejudiced.

SEC. 64. Cease and Desist Order.


64.1.

The Commission, after proper


investigation or verification, motu
proprio, or upon verified complaint by
any aggrieved party, may issue a
cease and desist order without the
necessity of a prior hearing if in its
judgment the act or practice, unless
restrained, will operate as a fraud on
investors or is otherwise likely to
cause grave or irreparable injury or
prejudice to the investing public.
64.2. Until the Commission issues a cease and
desist order, the fact that an
investigation has been initiated or
that a complaint has been filed,
including the contents of the
complaint,
shall
be
confidential. Upon issuance of a cease
and desist order, the Commission
shall make public such order and a
copy thereof shall be immediately
furnished to each person subject to
the order.
64.3. Any person against whom a cease and
desist order was issued may, within
five (5) days from receipt of the order,
file a formal request for a lifting
thereof. Said request shall be set for
hearing by the Commission not later
than fifteen (15) days from its filing
and the resolution thereof shall be
made not later than ten (10) days

96

from the termination of the


hearing. If the Commission fails to
resolve the request within the time
herein prescribed, the cease and desist
order shall automatically be lifted.
SEC.
65. Substituted
Commission.

Service

Upon

66.4.

the

Service of summons or other process shall be


made upon the Commission in actions or legal
proceedings against an issuer or any person
liable under this Code who is not domiciled in
the Philippines. Upon receipt by the
Commission of such summons, the Commission
shall within ten (10) days thereafter, transmit
by registered mail a copy of such summons and
the complaint or other legal process to such
issuer or person at his last known address or
principal office. The sending thereof by the
Commission, the expenses for which shall be
advanced by the party at whose instance it is
made, shall complete such service.

66.5.

SEC. 66. Revelation of Information Filed with


the Commission.
66.1.

66.2.

66.3.

All information filed with the


Commission in compliance with the
requirements of this Code shall be
made available to any member of the
general public, upon request, in the
premises and during regular office
hours of the Commission, except as
set forth in this Section.
Nothing in this Code shall be construed
to require, or to authorize the
Commission to require, the revealing
of trade secrets or processes in any
application, report, or document filed
with the Commission.
Any person filing any such application,
report or document may make
written objection to the public
disclosure of information contained
therein, stating the grounds for such
objection, and the Commission may
hear
objections
as
it
deems
necessary. The Commission may, in
such cases, make available to the
public the information contained in
any such application, report, or
document only when a disclosure of
such information is required in the
public interest or for the protection of
investors; and copies of information
so made available may be furnished to
any person having a legitimate

interest therein at such reasonable


charge and under such reasonable
limitations as the Commission may
prescribe.
It shall be unlawful for any member,
officer,
or
employee
of
the
Commission to disclose to any person
other than a member, officer or
employee of the Commission or to use
for personal benefit, any information
contained in any application, report,
or
document
filed
with
the
Commission which is not made
available to the public pursuant to
Subsection 66.3.
Notwithstanding anything in Subsection
66.4 to the contrary, on request from
a foreign enforcement authority of
any country whose laws grant
reciprocal assistance as herein
provided, the Commission may
provide assistance in accordance with
this
subsection,
including
the
disclosure of any information filed
with
or
transmitted
to
the
Commission, if the requesting
authority states that it is conducting
an investigation which it deems
necessary to determine whether any
person has violated, is violating, or is
about to violate any laws relating
to securities or commodities matters
that
the
requesting
authority
administers or enforces.
Such
assistance may be provided without
regard to whether the facts stated in
the request would also constitute a
violation of law of the Philippines.

SEC. 67. Effect of Action of Commission and


Unlawful Representations with Respect Thereto.

67.1.

No action or failure to act by the


Commission in the administration of
this Code shall be construed to mean
that the Commission has in any way
passed upon the merits of or given
approval to any security or any
transaction or transactions therein,
nor shall such action or failure to act
with regard to any statement or
report filed with or examined by the
Commission pursuant to this Code or
the rules and regulations thereunder
to be deemed a finding by the
Commission that such statements or
report is true and accurate on its face

97

67.2.

or that it is not false or misleading. It


shall be unlawful to make, or cause to
be made, to any prospective
purchaser or seller of a security any
representation that any such action or
failure to act by the Commission is to
be so construed or has such effect.
Nothing contained in Subsection 67.1
shall, however, be construed as an
exemption from liability of an
employee
or
officer
of
the
Commission for any nonfeasance,
misfeasance or malfeasance in the
discharge of his official duties.

violation of this Code or the rules and


regulations promulgated thereunder.
SEC. 70.
Orders.

Any person aggrieved by an order of the


Commission may appeal the order to the Court
of Appeals by petition for review in accordance
with the pertinent provisions of the Rules of
Court.
SEC. 71. Validity of Contracts. 71.1.

SEC. 68. Special Accounting Rules.


The Commission shall have the authority to
make, amend, and rescind such accounting
rules and regulations as may be necessary to
carry out the provisions of this Code, including
rules and regulations governing registration
statements and prospectuses for various classes
of securities and issuers, and defining
accounting, technical and trade terms used in
this Code.
Among other things, the
Commission may prescribe the form or forms
in which required information shall be set
forth, the items or details to be shown in the
balance sheet and income statement, and the
methods to be followed in the preparation of
accounts, appraisal or valuation of assets and
liabilities, determination of depreciation and
depletion, differentiation of recurring and nonrecurring income, differentiation of investment
and operating income, and in the preparation,
where the Commission deems it necessary or
desirable, of consolidated balance sheets or
income accounts of any person directly or
indirectly controlling or controlled by the
issuer, or any person under direct or indirect
common control with, the issuer.

71.2.

SEC. 69. Effect on Existing Law.


The rights and remedies provided by this Code
shall be in addition to any and all other rights
and remedies that may now exist. However,
except as provided in Sections 56 and 63 hereof,
no person permitted to maintain a suit for
damages under the provisions of this Code
shall recover, through satisfaction of judgment
in one or more actions, a total amount in excess
of his actual damages on account of the act
complained of: Provided, That exemplary
damages may be awarded in cases of bad faith,
fraud, malevolence or wantonness in the

Judicial Review of Commission

71.3.

Any condition, stipulation, provision


binding any person to waive
compliance with any provision of this
Code or of any rule or regulation
thereunder, or of any rule of an
Exchange required thereby, as well as
the waiver itself, shall be void.
Every contract made in violation of any
provision of this Code or of any rule
or regulation thereunder, and every
contract, including any contract for
listing a security on an Exchange
heretofore or hereafter made, the
performance of which involves the
violation of, or the continuance of any
relationship or practice in violation
of, any provision of this Code, or any
rule or regulation thereunder, shall be
void:
a)
As regards the rights of any
person who, in violation of
any such provision, rule or
regulation, shall have made
or
engaged
in
the
performance of any such
contract, and
b)
As regards the rights of any
person who, not being a
party to such contract, shall
have acquired any right
thereunder
with
actual
knowledge of the facts by
reason of which the making
or performance of such
contract was in violation of
any such provision, rule or
regulation.
Nothing in this Code shall be construed:
a)
To affect the validity of any
loan or extension of credit
made or of any lien created
prior or subsequent to the
effectivity of this Code,
unless at the time of the

98

b)

making of such loan or


extension of credit or the
creating of such lien, the
person making such loan or
extension of credit or
acquiring such lien shall
have actual knowledge of the
facts by reason of which the
making of such loan or
extension of credit or the
acquisition of such lien is a
violation of the provisions of
this Code or any rules or
regulations thereunder; or
To afford a defense to the
collection of any debt,
obligation
or
the
enforcement of any lien by
any person who shall have
acquired
such
debt,
obligation or lien in good
faith, for value and without
actual knowledge of the
violation of any provision of
this Code or any rule or
regulation
thereunder
affecting the legality of such
debt, obligation or lien.

72.1

72.3.
SEC. 72. Rules and Regulations; Effectivity. 72.1

This Code shall be self-executory. To


effect the provisions and purposes of
this Code, the Commission may issue,
amend, and rescind such rules and
regulations and orders necessary or
appropriate, including rules and
regulations
defining
accounting,
technical, and trade terms used in this
Code, and prescribing the form or
forms in which information required
in
registration
statements,
applications, and reports to the
Commission shall be set forth. For
purposes of its rules or regulations,
the Commission may classify persons,
securities, and other matters within
its jurisdiction, prescribe different
requirements for different classes of
persons, securities, or matters, and by
rule or order, conditionally or
unconditionally exempt any person,
security, or transaction, or class or
classes of persons, securities or
transactions, from any or all
provisions of this Code.
Failure on the part of the Commission
to issue rules and regulations shall not

72.4.

in any manner affect the selfexecutory nature of this Code.


The Commission shall promulgate
rules and regulations providing for
reporting,
disclosure
and
the
prevention of fraudulent, deceptive or
manipulative practices in connection
with the purchase by an issuer, by
tender offer or otherwise, of and
equity security of a class issued by it
that satisfies the requirements of
Subsection 17.2. Such rules and
regulations may require such issuer to
provide holders of equity securities of
such dates with such information
relating to the reasons for such
purchase, the source of funds, the
number of shares to be purchased, the
price to be paid for such securities,
the method of purchase and such
additional
information
as
the
Commission deems necessary or
appropriate in the public interest or
for the protection of investors, or
which the Commission deems to be
material to a determination by
holders whether such security should
be sold.
For the purpose of Subsection 72.2, a
purchase by or for the issuer or any
person controlling, controlled by, or
under common control with the
issuer, or a purchase subject to the
control of the issuer or any such
person, shall be deemed to be a
purchased by the issuer. The
Commission shall have the power to
make
rules
and
regulations
implementing
this
subsection,
including exemptive rules and
regulations covering situations in
which the Commission deems it
unnecessary or inappropriate that a
purchase of the type described in this
subsection shall be deemed to be a
purchase by the issuer for the purpose
of some or all of the provisions of
Subsection 72.2.
The
rules
and
regulations
promulgated by the Commission shall
be published in two (2) newspapers of
general circulation in the Philippines,
and unless otherwise prescribed by
the Commission, the same shall be
effective fifteen (15) days after the
date of the last publication.

SEC. 73. Penalties.

99

Any person who violates any of the provisions


of this Code, or the rules and regulations
promulgated by the Commission under
authority thereof, or any person who, in a
registration statement filed under this Code,
makes any untrue statement of a material fact
or omits to state any material fact required to
be stated therein or necessary to make the
statements therein not misleading, shall, upon
conviction, suffer a fine of not less than Fifty
thousand pesos (P50,000.00) nor more than
Five million pesos (P5,000,000.00) or
imprisonment of not less than seven (7) years
nor more than twenty- one (21) years, or both
in the discretion of the court. If the offender is
a corporation, partnership or association or
other juridical entity, the penalty may in the
discretion of the court be imposed upon such
juridical entity and upon the officer or officers
of the corporation, partnership, association or
entity responsible for the violation, and if such
officer is an alien, he shall in addition to the
penalties prescribed, be deported without
further proceedings after service of sentence.

Two hundred million (P200,000,000.00) or such


amount necessary to carry out the
reorganization provided in this Code is hereby
appropriated.
All employees of the Commission who
voluntarily retire or are separated from the
service with the Commission and whose
retirement or separation has been approved by
the Commission, shall be paid retirement or
separation benefits and other entitlements
granted under existing laws.
SEC. 75. Partial Use Of Income. To carry out the purposes of this Code, the
Commission is hereby authorized, in addition
to its annual budget, to retain and utilize an
amount equal to one hundred million pesos
(P100,000,000.00) from its income.
The use of such additional amount shall be
subject to the auditing requirements, standards
and procedures under existing laws.
SEC. 76. Repealing Clause.

SEC. 74. Transitory Provisions.


The Commission, as organized under existing
laws, shall continue to exist and exercise its
powers, functions and duties under such laws
and this Code: Provided, That until otherwise
mandated by a subsequent law, the
Commission shall continue to regulate and
supervise commodity futures contracts as
provided in Section 11 and pre-need plans and
the pre-need industry as provided in Section 16
of this Code.
All further requirements herein shall be
complied with upon approval of this
Code: Provided, however, That compliance may
be deferred for such reasonable time as the
Commission may determine but not to exceed
one (1) year from approval of this
Code: Provided, further, That securities which
are being offered at the time of effectivity of
this Code pursuant to an effective registration
and permit, may continue to be offered and
sold in accordance with the provisions of the
Revised Securities Act in effect immediately
prior to approval of this Code:
All unexpended funds for the calendar year,
properties, equipment and records of the
Securities and Exchange Commission are
hereby retained by the Commission as
reorganized under this Code and the amount of

The Revised Securities Act (Batas Pambansa


Blg. 178), as amended, in its entirety, and
Sections 2, 4 and 8 of Presidential Decree 902-A
as amended, are hereby repealed. All other
laws, orders, rules and regulations, or parts
thereof, inconsistent with any provision of this
Code are hereby repealed or modified
accordingly.
SEC. 77. Separability Clause.
If any portion or provision of this Code is
declared unconstitutional or invalid, the other
portions or provisions hereof, which are not
affected thereby shall continue in full force and
effect.
SEC. 78. Effectivity.
This Code shall take effect fifteen (15) days
after its publication in the Official Gazette or in
two (2) newspapers of general circulation.