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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. A. Historical Background 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The SRC repealed the Revised Securities Act (BP 178) in its entirety and Sec. 2, 4, and 8 of PD 902-A.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.

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

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.

C. Features of the SRC 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.

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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 Securities Regulation Code is hereby enacted. A. Key provisions of the SRC 1. 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

iii. 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

B. Protection of Investors and Legitimate Businesses 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

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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 profit-making 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, asset-backed 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. Exchange is an organized marketplace or facility that brings together buyers and sellers and executes trades of securities and/or commodities.

3.8. 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.

3.9. 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.

3.10. 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.

3.11. 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.

3.12. Registration statement is the application for the registration of securities required to be filed with the Commission.

3.13. Salesman is a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities.

3.14. Uncertificated security is a security evidenced by electronic or similar records.

3.15. Underwriter is a person who guarantees on a firm commitment

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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

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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 (T-

bond) 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 non-speculative; 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 mortgaged-backed 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,

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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 non-voting, 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

to the directors or managing groups and its officers shall be submitted.

e. Exercise of Options must be done within the period set by the company and disclosed in its registration statement.

4. 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.

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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.

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. 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.

3. 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.

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.

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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. 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)

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. HUMAN RESOURCE AND

ADMINISTRATIVE DEPARTMENT 2. ECONOMIC RESEARCH AND

INFORMATION MANAGEMENT DEPARTMENT

3. FINANCIAL MANAGEMENT DEPARTMENT

SPECIAL COMMISSION

1. OFFICE OF THE GENERAL

COUNSEL 2. OFFICE OF THE GENERAL

ACCOUNTANT

The Commission may, for purposes of efficiency, delegate any of its functions

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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 and Functions of the Commission. 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

and provide guidance on and supervise compliance with such rules, regulations and orders;

(h) 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;

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

(j) 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;

(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;

(l) 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;

(m) 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

(n) 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

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payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. 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 by-

laws 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

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.

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

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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.

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.

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,

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

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 self-regulatory organization is

12

unable or unwilling to take action against such person.

o 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.

v 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.

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.

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.

C. Cases under Sec. 5 of PD 902-A transferred to the RTC Jurisdiction is ORIGINAL & EXCLUSIVE.

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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 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, Removal of Corporate Officers 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 non-stock 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

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

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. 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).

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CHAPTER III Registration of Securities

SEC. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. 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

can prove that there was incomplete or inaccurate disclosure of important information.

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;

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(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.

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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 bank-trustee 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 non-banks 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 long-term 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.

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

no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.

f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.

g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: 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.

h) Brokers transactions, executed upon customers orders, on any registered Exchange or other trading market.

i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.

j) The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period.

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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. Whether the Commissions confirmation that such offer or sale qualifies as an exempt transaction has been obtained; and

iii. 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.

iii. 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;

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:

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B. Indicate in bold letters on the face of the instrument the words: NON-NEGOTIABLE/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. 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

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 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.

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.

EXEMPT: Small amount or limited character of the

offering.

o 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.

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.

F. Treasury Shares 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.

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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)

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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. 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 for Registration of Securities.

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

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.

12.2. 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.

12.3. 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.

12.4. 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

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contributed to by such selling shareholders shall also be filed.

12.5. 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.

12.6. 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

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.

12.7. 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