SECURITIES REGULATION CODE

Now this Securities Regulation Code. Well the Code contains a definition
of securities which includes:
* Shares of stock
* Evidence of indebtedness. That is why these commercial papers, they are secur
ities, and they have to be registered before you can sell them to the public. L
ike San Miguel Corporation, since its needs for capital is great that even if yo
u exhaust the single limit borrower of all banks in the Philippines, they would
not be enough. So San Miguel floats commercial papers, it sells promissory note
s to the public. These are the money market placements. They have to be regist
ered with the SEC.
* Investment contracts
* Certificates of deposit for a future subscription
* Interest in oil, gas or mineral rights
* Derivatives. The simplest definition I came across of a derivative is that it
is a financial instrument whose value depends on the fluctuation of the value o
f another financial instrument. A very simple form of that would be a forward e
xchange cover. Here is somebody, he buys dollars from the bank to be delivered
one month from now and they fix the price I will buy at P51.50. If the value of t
he dollar goes up, the bank will still have to sell them at P51.50. So the bank
suffers the foreign exchange loss. But if the rate goes down at P51.25. He st
ill has to pay at P51.50. Whether or not he will gain or he will lose depends o
n the fluctuation of the rate of exchange. That is a derivative.
You have the interest rate swap. Instead of your usual time deposit at a
fixed rate, you make your placement with the bank. You play on whether or not
the interest will go up or go down. If the interest goes down you get a loss.
If the interest goes up, you make a gain.
Here, there are no fixed-term definition or classification of derivatives
, the possibilities are limitless. Anything that a creative financial man can t
hink of, he can sell it. Like in that forward exchange cover. Now the bank wil
l make sure that it is protected. When it commits that it will buy at P51.50.
It will enter into another contract with somebody else also to sell him dollars
so that it will pass on the risk. It will not take that risk.
Well, derivatives are supposed to give the edge against inflation because
as I ve said, there is no perfect hedge. The only perfect hedge can be found in
a Japanese Garden. :)
* Warrants. That is an option to buy shares in the future.
* Certificates of participation.
* Voting trust certificates.
* Proprietary memberships in corporations. Yan yung share sa Manila Golf Club.
Manila Polo club. Or these time-sharing. SEC said that is a security. Here is
a country club with cottages but the members will not stay there the whole year
. Most of the time they won t be there. So they sell the unused time. Time-shar
ing. You pay so much, you can use that for how many days. That is also a sale
of securities.
* Pre-need plans. They are also securities. Like this educational plan. The p
arents pay so much so this company that they will pay for the schooling of the c
hildren when they reach college. Or these memorial plans. These MaxiCare. Hea
lth plans. They are not insurance contracts because they involve services.
The rule is that if somebody wants to sell securities to the public, the
securities must be registered with the SEC. There are exceptions:
* Securities issued or guaranteed by the Government or any of its political subd
ivision.
* Securities issued or guaranteed by the Government of a country with which the
Philippines has diplomatic relations.
* Certificates issued by a receiver or trustee in bankruptcy approved by the pro
per court. When the trustee distributes the liquidating properties to the credi
tors, it would be exempt.
* A security under the supervision of the
* Insurance Commission. Like endowment plans.
* Housing and Land Use Regulatory Board. Real estate lots.
* Bureau of Internal Revenue. Pension or retirement plans.
They are exempted because they are already regulated by another governmen
t agency.
* Securities issued by a bank except its own shares of stock. Derivatives offer
ed by a bank. Because they are regulated by the Monetary Board.
The Code mentions transactions which are exempt:
* Judicial sales, like sale by a guardian, executor, administrator or receiver b
ecause the perception is that the sale is regulated by the court so there is no
need for the SEC to intervene.
* When a pledgee or mortgagee will foreclose the mortgage. That s exempt.
* Isolated transactions.
* Distribution by corporation of stock dividends.
* Sale by the corporation of its capital stock to its own stockholders. They of
fer portions of the authorized but unissued shares because its own stockholders
are knowledgeable about its financial condition of the corporation, that transac
tion is exempt.
* Issuance of bonds, secured by a mortgage upon a real estate or personal proper
ty where the entire mortgage and bonds are sold to a single buyer. That is usua
l if Meralco will issue bonds and this is secured by mortgage on all its propert
ies. It will execute a mortgage indenture agreement saying it is mortgaging all
its properties to secure its bond. And they will appoint a bank to handle all t
hat and be the underwriter. So the bank will buy all the bonds secured by the m
ortgage indenture agreement and then they will turn around and sell that to the
public secondary market. So when the bank as underwriter buys all those bonds,
it is exempt because the one who would buy those bonds is a financial institutio
n. So it s knowledgeable, it need not be protected by requirement of registration
.
* The issue and delivery of security in exchange for another security because of
a right of conversion. Suppose somebody bought bonds and the bonds contain a p
rovision that the holder can exchange that for cover stock. That is exempt beca
use when the bonds were floated, they were already registered with the SEC.
* Broker s transactions executed upon customer s orders.
* Subscription of shares when you are incorporating. Or when you are increasing
your capitalization.
* Exchange of securities with existing security holders like when a corporation
will merge with another corporation, the stockholders will be asked to surrender
their shares of stock in exchange for shares of stock in the surviving corporat
ion.
* Sale of securities to less than 20 persons during a 12-month period.
* Sale of securities to any of the following:
* Bank
* Investment houses
* Insurance companies
* Retirement or pension funds maintained by the government or any political subd
ivision. Like, SSS or GSIS or
* Investment companies
The justification is these institutions possess financial expertise so th
ey don t need protection from the SEC.
Commodity futures. If you want to sell commodity futures, you have to ge
t a license from the SEC. And they are regulated by rules. At the moment, ther
e is no commodities market here.
But in the Bonapal case, the Court said that the buyer of the commodities
does not intend to physically take delivery of the commodities but the gains an
d losses will have to be entered in his ledger, that is gambling. Therefore tha
t is prohibited by law. If he incurs losses, the broker cannot ask him to pay f
or the losses and the broker will have to return the margin that he made. Well
the Court said you are merely speculating on the rise and fall of the commoditie
s.
But that s how trading is done. In the market, the volume of trading will
now be more than one trillion dollars a day in Chicago. They want to buy gold,
silver, wheat, pork. If you ve read that book. Liar s Booker. There was this inves
tment adviser in New York with a very sharp mind. He can always see the economi
c implication of events. The Chernobyl incident was reported in the papers. It
is about that nuclear plant in Russia which developed a leak. He immediately c
alled up his customers and said Buy Potatoes. Because the radiation has spread al
l over Europe, the potato crops in Europe were condemned. There was a shortage
of potatoes. So they had to import from the United States so the price of potat
oes went up. Now these people, they will not take delivery of the potatoes, the
y will just post it in the ledger. The Supreme Court said that is gambling.
And the Code mentions the grounds for rejecting registration or revoking
registration:
* That the issuer:
* Has been declared insolvent
* Has violated the provisions of this Code or implementing rules or orders of th
e SEC
* Has engaged or is about to engage in fraudulent transactions
* Has made any false or misleading representations about material facts
* Has failed to comply with the conditions imposed by SEC
* The registration statement is false
* The officer, director or any underwriter has been convicted of any offense inv
olving moral turpitude or fraud.
That s what happened to Puerto Azul. They want to make a public offering.
You know our office have a monopoly on these initial public offerings but some
law offices want to break into that. We usually charge a minimum of P500,000.
A pool of lawyers will be working overtime for several months making due diligen
ce audit. There was one law office which offered to do that for Puerto Azul for
P150,000. There s no way you can make money there. They just want to be able to
break our monopoly and after that, they are hoping to make up for that in futur
e offerings. Parang negosyong Instik, magpapalugi ka muna tapos babawi ka later
. And what happened, the Philippine Stock Exchange refused to sell that in the
stock market. So they went to court. The SEC ordered the Philippine Stock Exch
ange to register that, they refused, they appealed to the court of appeals. The
Court of appeals affirmed the ruling of the SEC. The decision came after a ver
y short period. It was penned by a notorious justice who was corrupt. It appea
led to the Supreme Court, the Supreme Court reversed. The Court said, indeed it
is not prudent to offer those shares to the public because first, the Marcoses
said we own those shares, the Actionis Parnilias (? I have no idea what this is,
sorry) are just are dummies. And then the property where Puerto Azul is locate
d is part of a naval reservation. They were able to get the title although ther
e was no presidential proclamation declaring it open for disposition to the publ
ic. The Supreme Court said it is not prudent to sell those shares to the public
under the circumstances.
Now, tender offer. If a person or group of persons acting together inten
ds to acquire:
a. 15% of the equity of a corporation listed in the stock market OR one with a c
apital of at least 50 million pesos and has at least 200 stockholders who own at
least 100 shares each OR
b. 30% of the equity of such corporation over a period of 12 months
==> They should make a tender offer to the stockholders by filing with the S
EC a declaration to that effect.
 They will file with SEC that We are making a tender offer. We intend to bu
y shares of this corporation. And then everybody else who is interested in selli
ng would then tell the SEC that We intend to sell.
The idea is to make this offer available to all stockholders. So if they
say we want to buy 30%, but we could not buy out the premium, and so many stock
holders offered to sell so that they receive offers that would total 60%. That
would accommodate everybody, so you will only pro-rate. You will buy only of wh
at each one is offering to sell. In other words, you have to spread the bounty
to everybody.
Then, to prevent unfair use of information which might have been obtained
by the owner, director or officer, any profit he realized from the purchase and
sale or sale and purchase of equity of the corporation within a period of six m
onths will be recoverable by the corporation unless he acquired it in good faith
because of previously contracted debt. In other words, debt was converted into
equity. So if he is a director, he bought shares and sold them at a profit wit
hin 6 months, he has to account for that to the corporation. That is a shortswi
ng profit. This was asked when Justice Quiason was the chairman.
And the Code contains prohibitions of manipulations of securities. Illeg
al to:
* Create a false appearance of active trading by effecting any transaction which
involves no change in beneficial ownership. He places an order to buy shares.
He places an order with another broker to sell shares. Sa kanya rin yun. Or h
e places an order to buy a certain number of shares at a certain price, knowing
that an order to buy the same number of shares same price will be send. In othe
r words, they will match.
* Enter into series of transactions which will raise the price of securities to
induce others to buy or to depress, or to induce people to sell or to create thi
s impression of active trading to induce people to buy. What happened to Tawas
Minerals before, the stockholders were buying and selling among themselves. Man
ipulate the market to make it appear that the price was going up. And the publi
c not knowing any better started buying so they get unloaded with shares. Then
they disappeared afterwards.
* Circulate or disseminate information that the price of any such security liste
d will likely to rise or fall because of manipulative market operations.
* Make false statement to induce the purchase or sell of securities.
* Fix the price of securities.
Then fraudulent transactions are also prohibited. It is illegal to buy,
to employ any device, to defraud, obtain money through any untrue statement that
negates or instructs any transaction operate as fraud.
Then you have insider trading. Seems to be an old practice. You will re
call this was what happened in the Battle of Waterloo. The Rothschilds had a ru
nner. So he ran from Waterloo in Belgium to London, Napoleon lost! So the Rothsc
hilds started buying the shares of stock in the market so that when the news fin
ally reached London that Napoleon lost, the price of share went up and they unlo
aded their holdings. In more recent times, you have Michael Milken, Rexel (? A
m really bad with names, sorry.) When they were the ones handling these leverag
e buy-outs. They look for companies which are valuable but their true value is
not being appreciated in the market. Then they ll be targeted for a buy-out. Som
ebody will offer to buy these shares for a premium. That s why leverage, you ll hav
e to borrow, to finance these massive purchases. And then the buyer after that
will normally start selling some of the assets of the corporation to be able to
raise money to pay back the bank and recover what it spent. Now this Michael Mi
lken, 26 times, he bought shares which were targeted for take-overs. He denied
there was insider trading saying that he analyzed the financial statements and k
new that this was a good investment. Too much of a coincidence. He made more t
han a billion dollars but eventually pleaded guilty. He returned all the profit
s he made he was sent for about 10 years in jail. He got out after 5 years.
The law defines what is an insider:
a. The issuer or corporation who sold the share
b. A director or officer
c. A person whose relationship or former relationship to the issuer gives him ac
cess to material information not available to the public. Like here s a lawyer wh
o is asked to attend the board meetings because there are legal questions that m
ay be propounded by the directors. And because of that he learns that the board
will declare 30% cash dividend. So he s an insider.
d. A government employee, officer of SEC. Or an officer of exchange, who has ac
cess to material information not available to the public.
e. A person who learns of such information from any of the foregoing. Like here
is a director who tells his brother-in-law, Oh, mag-de-declare kami ng 30% cash
dividend, bumili ka na. So the brother-in-law is also an insider.
The law said it is unlawful for an insider to buy or sell a security if h
e is in possession of material information not available to the public. Unless
he proves that the information was not gained from his relationship to the corpo
ration or the other party or that he disclosed the information to the other part
y or he had reason to believe the other party is in possession of that informati
on. That is the loophole. Defense, I thought he already has possession of the i
nformation.
I think what happened there was that the brokers lobbied. It was Roco wh
o placed that there. That s why they excluded the media, they excluded the public
when they put that there.
And if the purchaser of the security is the spouse, relative by affinity
or consanguinity, whether legitimate or common-law, will be presumed to have bee
n effected while in possession of material nonpublic information. If he made th
at after the information came into existence but before it was disseminated to t
he public.
And the law defines when information is material. If
a. It would likely affect the price of securities had it been disseminated to th
e public, OR
b. A reasonable person would consider it in determining his course of action to
buy, sell or hold a security.
If a share is listed in the market, the issuer is required to disclose to
the SEC if there is any material information. Well, the rules of the stock exc
hange will also do that. Like if the labor union serves a notice of strike, tha
t has to be disclosed to the SEC and to the stock exchange cause that would affe
ct the price of its shares. That what happened with Interpol (?) When they wer
e negotiating with a corporation in Malaysia, every time there would be a negoti
ating session, the directors would massively buy shares. They denied that there
was insider trading. They were saying that there was no negotiating yet when t
hey were buying but the Philippine Stock Exchange contacted the Kuala Lumpur Sto
ck Exchange, the Kuala Lumpur Stock Exchange said, yes, negotiations started bef
ore they started buying because the directors served a notice that they were neg
otiating. This again is something material that could affect the price of the s
hares there.
There are a lot of people liable for damages under this Code.
Well, remember that the main idea of the Securities Law is to discard cav
eat emptor. Selling should instead be based on good faith. Full disclosure. A
nd thus, these rules against non-disclosure, or manipulation. They apply to all
sales or shares. Even if the shares are not listed in the stock market. These
provisions are applicable. So if there is a private selling of shares listed i
n market and there is inside information available to the seller and he disclose
d that to the buyer, that is covered by the law.
Now if there is any false statement in the registration statement, the on
e who acquired the security may sue the issuer and every person who signed the r
egistration statement. Every person who was a director, the person named as abo
ut to become a director, the auditor, who certified to the financial statement.
Every person who with his written consent has been certified as to having prepa
red the registration statement. That s why the lawyer who signed the registration
would also be liable. That s why we have to conduct due diligence, legal audit.
We examine the corporate papers of the corporation, pending cases, the status o
f those pending cases, etc. Because then it would be a defense that you conduct
ed the due diligence audit as a reasonable man would have done and you relied in
good faith on documents furnished to you.
Every selling stockholder who contributed to the statement and the underw
riter, bank, investment company which sold its share to the public. Those who s
ell their share in violation of this code are liable for damages. Also those wh
o commit fraud, manipulation, insider trading.
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