SECURITIES REGULATION CODE (R.A 8799)

Securities Regulation (1995, 1996, 2001, 2004 Bar Exams)

• The Code is also known as the “Blue Sky Law”, because it was enacted to protect the public from unscrupulous promoters who stake business or venture claims which have really no basis and sell shares or interests therein to investors, who are then left holding certificates representing nothing more than a square of the blue sky.

•

The Code is self-executory and failure of SEC to issue rules and regulations shall not in any manner affect its self-executory nature. (Subsec. 72.1)

Powers and Functions of the SEC:

1. Shall have jurisdiction and supervision over all corporations, partnerships or associations who are grantees of primary franchises;

2. Formulate policies and

recommendations on securities market, advise Congress and other government agencies on all aspects of securities market, and propose legislation and amendments thereto;

3. Approve, reject, suspend, revoke, or require amendments to the registration statements, and registration licensing applications;

4. Regulate, investigate or supervise activities of persons to ensure compliance; 5. Supervise, monitor, suspend or take over activities of exchanges, clearing agencies and other SROs;

6. Impose sanctions for violation of laws and rules, regulations, and orders;

7. Prepare, approve, amend or repeal rules and regulation and orders, and issue opinions and provide guidance on and supervise compliance therewith;

8. Enlist aid and support of and/or deputize any and all enforcement agencies of Government, as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions;

9. Issue cease and desist orders to prevent fraud or injury to investing public;

10. Punish for both direct and indirect contempt;

11. Compel corporate officers to call meetings of stockholders or members thereof under its supervision;

12.

Issue subpoena duces tecum and summon witnesses, and order the examination, search and seizure of all documents, papers, file and records, tax returns, and books of accounts of any entity or person under investigation;

13. Suspend, or revoke, after proper notice and hearing, franchise or certificate of registration of corporations, partnerships or associations; and

14. Exercise such other powers as may be provided by law, implied from, or which are necessary or incidental to the carrying out of express powers.

Securities

Shares, participation or interest 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. (Sec. 3)

Kinds:

a.

Debt Instruments: bonds, debentures,

notes, and other evidences of indebtedness, asset-backed securities;

b.

Equity Instruments: shares of stock,

certificate of deposit for a future subscription, proprietary or nonpropriety membership certificates in corporations;

c.

Investment Instruments: investment

contracts, fractional undivided interests in oil, gas or other mineral rights;

d.

Derivatives: like options and warrants;

e.

Trust Instruments: certificates of

assignments, certificates of participation, trust certificates, voting trust certificates or similar certificates;

f.

Catch-All: other instruments as may in

the future determined by the Commission.

Registration of Securities

General Rule: Securities shall NOT be sold or offered for sale or distribution within the Philippines (a) without registration statement duly filed and approved by SEC; and (b) Prior to such sale, information on the securities in such form and with such substance as SEC may prescribe, shall be made available to each prospective purchaser.

Exception: The following securities may be sold without need of registration;

A. Exempt Securities:

a. Those issued or guaranteed by the Government or by any political subdivision, agency, or by any person controlled or supervised by, and acting as an instrumentality of the Government;

b. Those issued or guaranteed by the government of any country with which the Philippines has diplomatic relations, or by any state, province, or political subdivision thereof on the basis of reciprocity, although the SEC may require compliance with the form and content of disclosures; c. Certificates issued by receiver or by trustee in a bankruptcy duly approved by proper adjudicatory body;

d. Any security or its derivatives the sale or transfer of which, by law, is under supervision and regulation of OIC, HLURB, or BIR;

e. Any security issued by bank, except its own shares.

B. Exempt Transactions

a. Judicial sale by executor, administrator, guardian/receiver in insolvency or bankruptcy;

b. Sale of pledged or foreclosed property to liquidate debts;

c. Sale on isolated transaction by owner;

d. Distribution of stock dividends; e. Sale of capital stock exclusively to

stockholders where no commission is paid;

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

g. Issuance of security in exchange of any security from same issuer pursuant to the right of conversion; h. Broker’s transactions;

i. Pre-incorporation subscription pursuant to the increase of the authorized capital stock;

j. Exchange of securities by issuer with securities holders exclusively; k. Sale to less than 20 persons during

any 12 month period;

l. Sale of securities to banks, registered investment house, insurance companies, pension fund or retirement plan maintained by the government or other persons authorized by the BSP to engage in trust functions.

Procedure for Registration of Securities:

1. The Issuer(originator, maker, obligor, or creator of the security) shall file with the SEC a sworn registration statement; 2. The registration statement shall include

a prospectus (document made by and on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with SEC);

3. The submission of the following information: the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership;

4. The registration statement shall be signed by Issuer’s executive officer, principal operation officer, principal officer, comptroller, principal accounting officer, secretary or persons performing similar functions accompanied by a duly verified petition of the Board of Director’s of the Issuer;

5. Filing of the written consent of the expert named;

6. Written certification of the selling shareholders, if the registration statement includes shares to be sold by selling shareholders;

7. Payment of fees to the SEC by the Issuer;

8. Publication in 2 newspapers of general circulation in the Philippines, once a week for 2 consecutive weeks, reciting that a registration statement has been filed;

9. The SEC may compel the production of all the books of such Issuer, and may administer oaths to, and examine the officers of such Issuer or any other person connected therewith as to its business and affairs;

10. Within 45 days after the date of filing of the registration statement, or by such later date to which the issuer has consented, SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement.

Grounds for Rejection and Revocation: (Sec. 13.1)

1. The issuer:

a. has been judicially declared insolvent;

b. has violated the provisions of the Code or orders issued by the SEC; c. has been engaged in fraudulent

transactions;

d. has made false or misleading representation in any material facts; e. has failed to comply with any

requirement the SEC may impose as a condition of registration;

2. The registration statement is on its face inaccurate or incomplete, or includes ant untrue statement or omits to state a material fact required to be stated therein;

3. The issuer, any officer, director or controlling person performing similar functions, has been convicted by a competent judicial or administrative body (it includes a foreign court of competent jurisdiction), of an offense involving moral turpitude and/or fraud or is restrained by the SEC or other bodies for violation of securities, commodities and other related laws;

4. Non-production of all books and papers, administration of oath or examination of its officers as required by the SEC.

Pre-Need Plans

Contracts which provide for the performance of future services or the payment of future monetary consideration at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverages and includes

life, pension, interment, and other plans which SEC shall approve. (Subsec. 3.9)

Tender Offer (2002 Bar Exam)

A publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a “public company”



It is mandatory to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire in the following circumstances:

a. The person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers;

b.

The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; or

c.

The person intends to acquire shares that would result in ownership of more than 50% of the equity shares of a public company.

(Sec. 19)

 Securities deposited may be withdrawn at any time throughout the period that the tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after 60 days from the date of the original tender offer or request or invitation.



Unlawful and Prohibited Acts Relating to Tender Offers: To make an untrue

statement of a material fact or omit to state any material fact in order to make the statements made, not misleading, or to engage in any fraudulent, deceptive, or manipulative act or practices.

How Tender Offer is made:

1. By filing with the SEC a declaration to make a tender offer;

2. By furnishing the issuer or the originator of the security a statement containing such information required under Sec. 17 of the SRC:

a. Annual Report (includes balance sheet, profit and loss statement); and

b.

Periodical reports for interim fiscal periods; and

3. By publishing all request or invitations for tender, or materials, making a tender offer or requesting on inviting letters of such a security.

Public Company:

1.

Any corporation with a class of equity securities listed on an Exchange; or 2. Any corporation with assets in excess of

P50M and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its securities.

Unlawful Acts:

1.

UNLAWFUL SALE OF SECURITIES-- For any beneficial owner, director, or officer to sell any security if the seller or his principal does not own or does not deliver it within 20 days from sale. (Sec.

23.3)

2.

Manipulation of security prices. (Sec.

24.1)

3.

MANIPULATIVE AND DECEPTIVE DEVICES-- Employment of manipulative or deceptive device or contrivance in connection with purchase and sale of authorities. Execution of “short sale”, “stop-loss order” not in accordance with SEC rules. (Sec 24.2)

4.

OPTION TRADING-- For any member of Exchange directly or indirectly endorse or guarantee the performance of any “put”, “call”, “straddle”, “option” or “privilege” in relation to any security registered. (Sec. 25)

5.

FRAUDULENT TRANSACTION-- Fraudulent transactions in the sale of securities. (Sec. 26)

6.

Insider trading (Sec. 27)

7.

For an insider to communicate material non-public information about the issuer or security (Sec. 27.3)

8.

Unlawful Tender Offer (Sec. 27.4)

9.

Use of Extensive Credit. (Sec. 48.1)

Definition of terms:

1. SHORT SALE— A contract for sale of shares of stock which the seller does not own, or certificates which are not within his control, so as to be available for delivery at the time when delivery must be made.

2. STOP-LOSS ORDER—The direction by a customer to his broker that if the commodity touches the price named, the broker shall close the trade at the best available price.

3.

PUT—An option that, in consideration of a premium paid, give the purchase the right to make the seller take for him a given number of shares of a named stock between a given time at a

stipulated price which is usually below the prevailing market price of the stock at the time the “put” is purchased.

4.

CALL— An option that, in consideration of a premium paid, entitles the buyer the right to compel the seller to deliver to him a certain number of shares within a given time at a stipulated price which is usually higher than the prevailing market price of the stock at the time the “call” is bought. “Call” is the reverse of “put”.

5.

STRADDLE—The double privilege of a “put” and a “call”, and secures to the holder the right to demand of the seller at a certain price within a certain time a certain number of shares of specified stock, or to require him to take, at the price within the same time, the same shares of stock.

6. WASH SALE—the operation of simultaneously buying and selling the same stock. It is any transaction in any security which involves no change in the beneficial ownership thereof. It is the reverse of “matched orders” wherein there is a change in the ownership of the securities.

7. SHORT SWING TRANSACTION—One where a person buys securities and sells the same within a period of six months.

Unlawful Sale of Securities (Sec. 23.3)

• It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer if person selling security or his principal:

a. does not own the security sold; or

b. if owning the security, does not deliver it against such sale within 20 days thereafter, or does not within 5 days after such sale deposit it in the mails or other usual channels of transportation.

• No person shall be deemed to have violated the Code if he proves the exercise of good faith.

• Prohibition does NOT apply to a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise than in an Exchange, for such security.

Insider’s Trading (Sec. 27)



The selling or buying of a security by an insider while in possession of material

non-public information with respect to the issuer or the security. It is considered unlawful unless:

1.

The insider proves that the information was not gained from such relationship; or

2. If the other party selling to or buying form the insider (or his agent) is identified, the insider proves:

a.

that he disclosed the information to the other party; or

b. that he had reason to believe that the other party otherwise is also in possession of the information.

Presumption: A purchase or sale made by

an insider, his spouse, or relatives, shall be

presumed to have been effected while in

possession of material nonpublic information if transacted after such information came into existence but prior to public dissemination of such information.

(Sec 27.1) Insider

A person who, with respect to a particular security, may be any of the following:

a. The issuer;

b. The director or officer of, or a person controlling, controlled by, or under common control with the Issuer;

c. A person whose relationship or former relationship to Issuer gives or gave him access to a fact of special significance about Issuer or the security that is not generally available;

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; e. A person who learns such a fact

from any of the foregoing insiders with knowledge that the person from whom he learns the fact is an insider.

Material Non-Public Information (Sec. 27.2)

1.

Information about the Issuer or the security which has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb information; or

2. Information about the Issuer or the security which would be considered by a reasonable person important under the circumstances in determining his course of action to buy, sell or hold security.

Self- Regulatory Organizations (SROs)

Organizations whose operation are related to or connected with securities market such as but not limited to associations of:

a.brokers and dealers; b.transfer agents; c. custodians;

d.fiscal and paying agents; e.computer services;

f. news disseminating services; g.proxy solicitors;

h.statistical agencies;

i. securities- rating agencies; and j. securities information processors.

Margin

Sum of money, or its equivalent, placed in the hands of a stockbroker by principal or persons on whose account the purchase is to be made, as a security to the former against losses to which he may be exposed by a subsequent depression in the market value of the stock.

Purpose: Margin limitations are provided in the

Code to prevent excessive use of credit for the purchase or carrying of securities.

Margin Trading

A kind of trading that allows a broker to advance for the customer part of the purchase price of a security and to keep it as a collateral for such advance.

• The credit extended must be for an amount not greater than whichever is higher of:

1. 65% of current market price of the security;

2.

100% of the lowest market price of security during the preceding 36 calendar months, but not greater than 75% of the current market price. (Sec. 48)

Margin Call

When a broker makes a demand on the investor to deposit money or securities with the broker when a purchase is made or when the investor’s equity in a margin account declines below a minimum standard set by the exchange or the broker.

Compliance with SRC Provisions

Any condition, stipulation or provision binding any person to waive compliance with any provision of the SRC or of any rule or regulation thereunder, or of any rule of an Exchange

required thereby, as well as the waiver itself,

shall be void.

I.

INTRODUCTION

Banks – entities engage in the lending of funds

obtained in the form of deposits from the public

Quasi-banks –entities engaged in the borrowing

of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations

 Entities authorized to perform universal or commercial banking functions may also engage in quasi-banking functions (Sec. 6)

Deposit substitutes – an alternative form of

obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations.

Nature of Business:

 A bank has a vital role in providing an environment conducive to the sustained national economy. Banking is fiduciary in nature that requires high standards of integrity and performance.

• The appropriate standard of diligence must be very high, if not the highest degree of diligence; highest degree of care (PCI Bank v. CA, 350 SCRA 446)

• This applies only to cases where banks are acting in their fiduciary capacity, as depository of the deposits of their depositors (Reyes v. CA).

• An innocent mortgage is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon what is or is not annotated on the title. (DBP v. CA, 331

SCRA 267)

• The banks are expected to ascertain and verify the identities of the persons it transacts business with (UCPB v. Ramos, G.R. No. 147800,

November 11, 2003)

• Due diligence required of

In document Commercial Law Study Guide (Page 105-110)