SRC Reviewer

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SECURITIES REGULATION CODE

A. Historical Background on Securities
B. Purpose of Laws on Securities
Securities Regulation Code, Sec 2. Declaration of State Policy. The State shall:
a. Establish a socially-conscious, free market that regulates itself
b. Encourage the widest participation of ownership in enterprises
c. Enhance the democratization of wealth
d. Promote the development of capital market
e. Protect investors
f.
Ensure fair and full disclosure about securities and
g. Minimize if not totally eliminate insider trading and other fraudulent and manipulative devices and
practices which create distortions in the free market.
1998 Bar: What is the principal purpose of laws and regulations governing securities in the Philippines?
A: The principal purpose of laws and regulations governing securities in the Philippines is to protect the public against the
nefarious practices of unscrupulous brokers and salesmen in selling securities.
Case: PSE v CA
Facts: Puerto Azul Land (PALI), a domestic real estate corporation, sought to offer its share in public & was issued permit
to sell by SEC. PALI then applied w/ PSE (Phil Stock Exchange) an application to list its shares. Ultimately, PSE denied
the application upon receipt of a letter from heirs of late Pres. Marcos claiming beneficial ownership over certain
properties forming part of PALIs assets. PSE requested PCGG to comment on the dispute between PALI and Marcoses.
PCGG informed PSE that a TRO against the Marcoses was issued to enjoin the Marcoses from further interfering with the
processing and approval of by PSE of the initial public offering of PALI. PSE then rejected PALIs application for the listing
of shares because of serious claims and circumstances surrounding the ownership of its assets. PALI wrote to SEC
regarding PSEs denial and asked SEC, in the exercise of its supervisory and regulatory powers, to review PSEs action.
SEC reversed PSE. After its MR being denied by SEC, PSE filed with CA petition for review. CA upheld SEC. PSE argues
that SEC powers over stock exchange are limited and do not include the power to reverse PSE decisions and when said
decisions are made in good faith (business judgment rule). PSE filed petition for review on certiorari with SC.
Issue: Whether SEC has power to reverse PSEs decision regarding listing of shares.
Held: Yes.
The SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may
be traded or not in the stock exchange. This is in line with the SECs mission to ensure proper compliance with the laws,
such as the Revised Securities Act and to regulate the sale and disposition of securities in the country. But
notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSEs decision
in matters of application for listing in the market, the SEC may exercise such power only if the PSEs judgment is attended
by bad faith.
SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the
private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporate entity, whose
business judgments are respected in the absence of bad faith.
The Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances attendant to this case.
SEC & CA decisions reversed and set aside. PSE affirmed PALI application denied.
C. Definition and General Classification of Securities (Sec 3) 1988 Bar
SRC Code, 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:
TEAM COMM1 - MONETTE
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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.
Two general forms of traditional securities: Equity and Debt securities they differ in terms of relationship between the
issuer and the security holder.
Equity securities, such as shares of stocks, represent ownership right in a corporation, such as right to participate in the
management, surplus profits, and upon dissolution to share in those assets that remain after all debts have been paid.
Debt securities require the issuer to repay the principal amount loaned to it by fixed maturity date, and at a stated rate of
interest.
Shares of stocks defined as the interest or right which the owner, who is the shareholder or stockholder, has in the
management of the corporation, and its surplus profits, and in the dissolution, in all of its assets remaining after the
payment of its debts.
Investment contracts means a contract, transaction or scheme whereby a person invests his money in a common
enterprise and is led to expect profits primarily (not solely) from the efforts of others. A presumption that a contract is an
investment contract arises whenever a person seeks to use the money of others on the promise of profits. A common
enterprise deemed created when two or more investors pool their resources, creating a common enterprise, even if the
promoter receives nothing more than a brokers commission.
What is the Howey Test? Establishes a test to determine whether a transaction falls within the scope of an "investment
contract" and traces its root from the from the 1946 United States (US) case of SEC v. W.J. Howey Co.
For an investment contract to exist, the following elements, referred to as the Howey test must concur: (1) a contract,
transaction, or scheme;
(2) an investment of money;
(3) investment is made in a common enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of others
2010 Bar: Andante Realty, a marketing company that promotes and facilitates sales of real property through leverage
marketing, solicits investors who are required to be Business Center Owner (BCO) by paying an enrollment fee of S250.
The BCO is then entitled to recruit two other investors who pay S250 each. The BCO receives S90 from the S250 paid by
each of his recruits and is credited a certain amount for payments made by investors through the initial efforts of his
Business Center. Once the accumulated amount reaches S5,000, the same is used as downpayment for the real property
chosen by the BCO.
a. Does this multi-level marketing constitute an investment contract under the Securities Regulation Code? Define
an investment contract.
Yes. The multi-level marketing constitutes an investment contract under the SRC. An investment contract is a
contract, transaction or scheme 1) involving an investment of money, 2) in a common enterprise, 3) with expectation
of profits, 4) primarily from efforts of others.
b. What procedure must be followed under the SRC to authorize the sale or offer for sale or distribution of an
investment contract? What are legal consequences of failure to follow procedure?
Before the investment contract is sold or offered for sale or distribution to the public in the Philippines, it should be
registered with the Securities and Exchange Commission in accordance with Section 8 of the Securities Regulation
Code.
The failure to follow the procedure has criminal consequences (i.e., upon conviction, a fine 50,000 to 5 million pesos
and / or imprisonment of 7 to 21 years). It carries also civil liabilities in that the purchaser can recover from the seller
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(i) the consideration paid with interest thereon, less the amount of any income received on the purchased securities,
upon the tender of such securities, or (ii) damages if the purchaser no longer owns such securities (Sections 57 and
73, Securities Regulation Code). Furthermore, the Securities and Exchange Commission (SEC) may issue a cease
and desist order (Subsection 64.1, Securities Regulation Code).
Certificates of interest or participation these are interests in a profit sharing agreement providing for a participation in
the profit of a business venture by the participants of the agreement.
Fractional undivided interests in oil, gas, or other mineral rights normally issued certificates of participation or
interest in the production thereof
Asset-backed securities certificates issued by a Special Purpose Entity (SPE), the repayment of which shall be
derived from the cash flow of assets in accordance with the plan. An SPE means either a Special Purpose Corporation,
a juridical person created in accordance with the Corporation Code solely for the purpose of securitization and to which
the seller makes a true and absolute sale of assets, or a Special Purpose Trust, which means a trust administered by an
entity duly licensed to perform trust functions under the General Banking Law, and created solely for the purpose of
securitization and to which the seller makes a true and absolute sale of assets.
Investment unit instruments (IUIs) participation certificates, debt instruments or similar instruments issued by a
special purpose vehicle company incorporated pursuant to the provisions of RA 9182 (Special Purpose Vehicle Act of
2002, organized primarily to invest in or acquire non-performing assets of financial institutions.
Derivatives a financial instrument whose value changes in response to the change in a specified interest rate, security
price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable or
underlying factor. It requires no initial or little net investment relative to other types of contracts that have similar
responses to changes in market conditions. It is settled at a future date. The term includes but not limited to:
a. Options. Contracts that give the buyer the right, but not the obligation to buy (call options) or sell (put options) an
underlying security at a predetermined price, called the exercise or strike price, on or before a predetermined
date, called expiry date, which can only be extended by the SEC upon stockholders approval.
b. Warrants. 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. Warrants generally have a longer exercise period than options and are
evidenced by warrant certificates.
Proprietary share or certificate evidence of interest or participation or privilege in a corporation which not only entitles
the holder to enjoy the use of a specific property, but also to dividends or earnings of said company, and upon liquidation
of the company, a holder of a proprietary share shall have proportionate ownership right over its assets.
Non-proprietary share or certificate - evidence of interest or participation or privilege over a certain property of a
corporation in view of the amount paid by the holder for the said share/certificate. While the holder is entitled to the use of
the property, he has no right over dividends or of the assets of the company upon liquidation thereof.
Evidences of indebtedness written representations of debt securities or obligations of corporations, such as but not
limited to the ff:
a. Long-term commercial paper with maturity of more than 365 days. Includes bonds (a long-term debt security
supported by a mortgage on corporate property) and notes. Debentures are obligations or notes representing
indebtedness, but not ordinarily secured by any specific mortgage, lien or pledge of security.
b. Short-term commercial paper with maturity of 365 days or less
Bill of exchange unconditional order in writing addressed by one person to another, signed by the person giving it,
requiring the person wo whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer.
Trust certificates form of obligation issued as security for the repayment of the money or property held by the trustee
Certificates of deposit for future subscriptions evidences of money placed as security for the issuance of future
subscriptions
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**Section 3, paragraph g (other instruments as may in the future be determined by SEC) gives the SEC the authority to
regulate trading of any new instruments by an exchange or other recognized markets. The provision is designed to
prevent evasion of promoters or issuers who may adopt ingenious schemes in order to escape regulation or registration.
What are the classes of securities? Exempt and non-exempt
1990 Bar: Profit participation certificate
One day Jerry Haw, doing business under the name Starlight Enterprise, a sole proprietorship, finds himself short on cash
and unable to pay his debts as they fall due although he has sufficient property to cover such debts. He asks you, as his
retained counsel, for advice on the following queries: a) Should he file a petition with the SEC to be declared in a state of
suspension of payments in view of the said financial condition he faces? Explain your answer. b) Should he sell profit
participation certificates to his 10 brothers and sisters in order to raise cash for his business? Explain.
SA on b: Instead of selling profit participation certificates, I would urge Jerry to enter into a partnership or to incorporate in
order to raise cash for his business.
AA on b: Jerry may sell profit participation certificates to his brothers and sisters without registering the same with the
SEC because his sale is an exempted transaction being isolated and not a sale to the public.
Answer to a (On SECs jurisdiction): I would counsel Jerry to file the Petition for Suspension of Payment with the ordinary
courts, rather than the SEC. SECs jurisdiction over such cases is confined only to petitions filed by corporations and
partnerships under its regulatory powers.
Cases:
SEC v Santos, 19 March 2014
Facts: This case involves an investment scam wherein Michael Liew, chair of board of directors Performance Investment
Products Corporation-BVI (PIPC-BVI) disappeared with all investments and money. PIPC-BVI is a foreign corporation
registered in the British Virgin Islands. To do business in the Philippines, PIPC-BVI is incorporated as Philippine
International Planning Center Corporation (PIPC). Because of Liews disappearance, SEC was flooded with individual
complaints by investors of said company for violation of Sec 28 of SRC (Registration of Brokers, Dealers, Salesmen and
Associated
Persons. 28.1. No person shall engage in the business of buying or selling securities in the Philippines as a broker or
dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the
Commission.)
Oudine Santos, as investment consultant was charged for inducing private complainants Lorenzo and Sy to invest money
in PIPC (with minimum investment of $40k w/ income potential of 12 18% per annum at relatively low risk investment
program).
CA affirmed the dismissal of complaint filed by SEC against Santos for violation of Sec 28 of SRC for allegedly selling or
offering for sale unregistered securities. CA also affirmed Sec of Justices Resolution dismissing criminal complaint
against Santos.
Issue: Whether there was violation of Sec 28 of SRC
HELD: Yes.
SC sustained DOJ Panels findings that PIPC-BVI was an issuer of securities without the necessary registration or license
from the SEC and that it is engaged in the buying and selling of securities.
Individual complainants and the SEC have categorically alleged that Liew and PIPC Corporation and/or PIPC-BVI is not a
legitimate investment company but a company which perpetrated a scam on 31 individuals where the president, a foreign
national, Liew, ran away with their money. Liews absconding with the monies of 31 individuals and that PIPC Corporation
and/or PIPC-BVI were not licensed by the SEC to sell securities are uncontroverted facts.
The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or participation in a
profit sharing agreement that falls within the definition of the law. When the investor is relatively uninformed and
turns over his money to others, essentially depending upon their representations and their honesty and skill in managing
it, the transaction generally is considered to be an investment contract. The touchstone is the presence of an investment
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in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or
managerial efforts of others
Additional Notes:
Bale yung investors dito like Lorenzo and Sy, iinvest nila yung pera nila through an investment called Performance
Management Portfolio then they will sign a Performance Management Portfolio Agreement, which in itself is the
investment contract, which in turn is a kind of security under the terms of SRC kaya hindi sya pwedeng ibenta o i-offer
for sale ng walang SEC registration.
SEC v Prosperity.com, 25 Jan 2012
Facts: Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet service. To make
a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently increased to US$294), a buyer could
acquire from it an internet website of a 15-Mega Byte (MB) capacity. At the same time, by referring to PCI his own downline buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States,
and insurance coverage worth P50,000.00. To benefit from this scheme, a PCI buyer must enlist and sponsor at least two
other buyers as his own down-lines. These second tier of buyers could in turn build up their own down-lines. For each pair
of down-lines, the buyer-sponsor received a US$92.00 commission. But referrals in a day by the buyer-sponsor should
not exceed 16 since the commissions due from excess referrals inure to PCI, not to the buyer-sponsor.
PCI patterned this scheme from GVI (Golconda Ventures, Inc.), operations of which were stopped by the SEC through a
cease and desist order (CDO). As it turned out, the same persons who ran the affairs of GVI directed PCIs actual
operations. In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the latter had
taken over GVIs operations. After hearing, the SEC, through its Compliance and Enforcement unit, issued a CDO against
PCI. The SEC ruled that PCIs scheme constitutes an Investment contract and, following the Securities Regulations Code,
it should have first registered such contract or securities with the SEC.
PCI filed petition for certiorari with prayer for issuance of TRO with the CA instead of asking SEC to lift the CDO.
Ultimately, CA granted PCIs petition setting aside the SEC-issued CDO ruling that PCIs scheme did not constitute an
investment contract that needs registration.
Issue: Whether PCIs scheme constitute an investment contract that requires registration under RA 8799 (SRC).
Held: NO
The Securities Regulation Code treats investment contracts as securities that have to be registered with the SEC before
they can be distributed and sold. An investment contract is a contract, transaction, or scheme where a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of others. For an investment contract
to exist, the following elements, referred to as the Howey test must concur: (1) a contract, transaction, or scheme; (2) an
investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising
primarily from the efforts of others. Thus, to sustain the SEC position in this case, PCIs scheme or contract with its buyers
must have all these elements.
PCIs clients do not make such investments. They buy a product of some value to them: an Internet website of a 15-MB
capacity. The client can use this website to enable people to have internet access to what he has to offer to them, say,
some skin cream. The buyers of the website do not invest money in PCI that it could use for running some business that
would generate profits for the investors. The price of US$234.00 is what the buyer pays for the use of the website, a
tangible asset that PCI creates, using its computer facilities and technical skills.
The commissions, interest in real estate, and insurance coverage worth P50,000.00 are incentives to down-line sellers to
bring in other customers. These can hardly be regarded as profits from investment of money under the Howey test.
The CA is right in ruling that the last requisite in the Howey test is lacking in the marketing scheme that PCI has adopted.
Evidently, it is PCI that expects profit from the network marketing of its products. PCI is correct in saying that the US$234
it gets from its clients is merely a consideration for the sale of the websites that it provides.
D.
SEC Structure (Sections 4 & 6, SRC Rule 4)

The supervision of SEC was transferred from Office of the President to the Department of Finance.
SECs structure (principal departments) are also laid down under SRC IRR Rule 4.
The rules of conduct for commissioners, officers and employees are provided under SRC IRR Rule 6.2.
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Section 4. Administrative Agency. 4.1. This Code shall be administered by the Security and Exchange
Commission (hereinafter referred to as the "Commission") as a Collegial body, composed of a chairperson
and (4) Commissioners, appointed by the President for a term of (7) seven years each and who shall serves
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 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,
or 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 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 the objective classification system, at a sum comparable to the members of the Monetary Board
and commensurate 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 the call of the Chairperson or upon the request of (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 of
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.
Section 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 cost and expenses reasonably incurred by such persons in
connection with any civil or criminal actions, suits 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 such as a result of such violation, negligence, abuse, or 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 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 prior authorization of the
Commissioners; or (2) the use of such information for personal gain or to the detriment of the government,
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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.
E. SEC Powers and Jurisdiction (Sec 5)
In interpreting the powers and functions of SEC under Sec 5, one should bear in mind the objective of SRC which is to
make SEC a more effective law enforcement and regulatory body, not an adjudicatory agency. While administrative
bodies, like SEC, do not really exercise judicial power, they have the incidental power to conduct administrative hearings
and make decisions in the course of the performance of their regulatory and law enforcement functions. Otherwise, it
cannot properly regulate and enforce the law.
Judicial courts cannot act on their own, unless cases are first brought before them by party litigants. Essentially, judicial
courts are passive agencies and judicial process is set only by the positive action of the litigants. Whereas, a regulatory
body, like SEC, motu propio, can conduct hearings in the exercise of its regulatory power. Thus, if the case requires
decision or resolution of a violation or conflict brought about in connection with the performance of a regulatory function,
then it is one for the SEC to decide for the best interest of the public. But if the case is adversarial in nature which calls for
adjudication of private rights and obligations, then the question is one for the regular court to entertain.
Appointment rehabilitation receiver 1995, 1984 Bar
Inspection of books 1976 Bar
Section 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. 902A, 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, partnership or associations who are the
grantees of primary franchises and/or a license or a permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress
and other government agencies on all aspect 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 rules, regulations and orders, and 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, regulation and orders;
(h) Enlist the aid and support of and/or deputized 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 function under its Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for the 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, partnership 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.
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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 the 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 payment/rehabilitation cases filed as of 30 June 2000 until finally disposed.
Cases:
PSE v CA (regulatory power of SEC over PSE)
Facts: Puerto Azul Land (PALI) sought to offer its share in public & was issued permit to sell by SEC. PALI then applied w/
PSE (Phil Stock Exchange) an application to list its shares. Ultimately, PSE denied the application upon receipt of a letter
from heirs of late Pres. Marcos claiming beneficial ownership over certain properties forming part of PALIs assets. PSE
requested PCGG to comment on the dispute between PALI and Marcoses. PCGG informed PSE that a TRO against the
Marcoses was issued to enjoin the Marcoses from further interfering with the processing and approval of by PSE of the
initial public offering of PALI. PSE then rejected PALIs application for the listing of shares because of serious claims and
circumstances surrounding ownership of its assets. PALI wrote to SEC regarding PSEs denial and asked SEC, in the
exercise of its supervisory and regulatory powers, to review PSEs action. SEC reversed PSE. After its MR being denied
by SEC, PSE filed with CA petition for review. CA upheld SEC. PSE argues that SEC powers over stock exchange are
limited and do not include the power to reverse PSE decisions and when said decisions are made in good faith (business
judgment rule).
Issue: Whether SEC has power to reverse PSEs decision regarding listing of shares.
Held:
The SECs power to look into the subject ruling of the PSE may be implied from or be considered as necessary or
incidental to the carrying out of the SECs express power to insure fair dealing in securities traded upon a stock exchange
or to ensure the fair administration of such exchange. It is, likewise, observed that the principal function of the SEC is the
supervision and control over corporations, partnerships and associations with the end in view that investment in these
entities may be encouraged and protected, and their activities pursued for the promotion of economic development.
PSEs management prerogatives are NOT under the absolute control of the SEC. The PSE is, after all, a corporation
authorized 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.
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a
distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites
appropriate to such body. 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.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSEs
decision in matters of application for listing in the market, the SEC may exercise such power only if the PSEs
judgment is attended by bad faith. In board of Liquidators vs. Kalaw, it was held that bad faith does not simply connote
bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.
In resum, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances attendant to this case.
{In short, although SEC undeniably has authority to reverse PSEs decisions, it can only do so if such decisions are
attended by bad faith.}
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Cemco Holdings v National Life Insurance, 7 Aug 2007 (power of SEC to nullify acquisitions violating the law)
{Tungkol talaga to sa Mandatory Offer Rule pero i-focus lang muna natin sa power ng SEC ha}
Facts: Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders UCHC, a non-listed
company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHCs stocks were owned
by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.
BCI informed Phil Stock Exchange (PSE) that it and its subsidiary ACC passed resolutions to sell BCIs and ACCs stocks
in UCHC to petitioner CEMCO. Because of this acquisition, CEMCOs total beneficial ownership in UCC amounted to at
least 53% of UCC shares (bale majority owner na ang Cemco). So PSE asked SEC if applicable ang mandatory tender
offer (MTO) rule under Rule 19 of SRC. Sabi ng SEC en banc yung transaction, meaning the acquisition, hindi daw
covered ng MTO rule. Mandatory tender offer rule simply means na kelangan mo i-announce publicly ang intention mo
bago bumili ng stocks, sa stockholders nung kumpanya na bibilhan mo ng shares tapos publication. Tapos yung mga
conditions kung kelan mandatory dapat ang tender offer, nasa Sec 19.1, SRC. Ok? Background lang. Baka nakalimutan
na natin ang Spec Comm.)
Feeling aggrieved by the transaction, respondent National Life Insurance Company, minority stockholder of UCC,
demanded Cemco to comply with the MTO rule.
The transaction (acquisition) was later on consummated and closed. So National Life Insurance filed complaint with SEC
praying that the purchase agreement be declared void and that the MTO rule be applied to its UCC shares. SEC ruled in
favor of National Life and directed Cemco to make tender offer for UCC shares. Petitioner Cemco filed a petition with the
Court of Appeals challenging the SECs jurisdiction to take cognizance of respondents complaint and its authority to
require Cemco to make a tender offer for UCC share. CA affirmed SECs ruling.
Cemcos contention: petitioner Cemco contends that while the SEC can take cognizance of respondents complaint on the
alleged violation by petitioner Cemco of the mandatory tender offer requirement under Section 19 of Republic Act No.
8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of
the parties since, under the same statute, the SECs authority is purely administrative. Having been vested with purely
administrative authority, the SEC can only impose administrative sanctions such as the imposition of administrative fines,
the suspension or revocation of registrations with the SEC, and the like. Petitioner stresses that there is nothing in the
statute which authorizes the SEC to issue orders granting affirmative reliefs. Since the SECs order commanding it to
make a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void.
Issue: Whether SEC has jurisdiction over respondents complaint and to require Cemco to make a tender offer for
respondents UCC shares.
Held: YES
First: SEC has power and authority to regulate, investigate or supervise the activities of persons to ensure compliance
with the Securities Regulation Code, more specifically the provision on mandatory tender offer under Section 19 and this
power emanates from the Amended Implementing Rules and Regulations of the Securities Regulation Code (na merong
authority ang SEC, upon complaint, to nullify acquisitions and direct the holding of a tender offer in case of violations of
SRC.
Second: Another provision is Sec 5.1(n) see above yung exercise such other powers Supreme Court explained: The
foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers of
the Commission or which is incidental to, or reasonably necessary to carry out, the performance of the administrative
duties entrusted to it. 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.
Third: Sec 5.1(g) see above - SEC has the authority to promulgate rules and regulations, subject to the limitation that the
same are consistent with the declared policy of the Code. Among them is the protection of the investors and the
minimization, if not total elimination, of fraudulent and manipulative devises.
Fourth: Sec 72, which gives SEC the power to promulgate rules and regulations in connection with purchases, by tender
offer or otherwise, in order to prevent fraudulent and manipulative practices.
In short madaming provisions sa SRC and its IRR vesting SEC with jurisdiction to take cognizance of the case.
10
Philippine Association of Stock Transfer and Registry Agencies v CA, 15 Oct 2007 (power to regulate fees)
Facts: Petitioner Phil Association of Stock Transfer is engaged in the registration of stock transfers in the stock-andtransfer book of corporations. To sustain its financial viability and upgrade its facilities and services, petitioner increased its
transfer processing fee from P45 to to P75 to P100 per certificate and P20 cancellation fee since it was over five years
since the old rates were fixed. SEC allowed the P75 increase but advised petitioner to hold in abeyance the P100
increase due to the objection by Philippine Association of Securities Brokers and Dealers, Inc. Petitioner nevertheless
implemented the increased fees (P100). SEC sent petitioner 2 letters reiterating its directive to hold in abeyance the P100
fee increase. Petitioner replied that it could no longer hold in abeyance the implementation of the new fees because its
members had already put in place the procedures necessary for their implementation and argued that the imposition of
the processing fee was a management prerogative, which was beyond the SECs authority to regulate absent an express
rule or regulation. SEC then issued an order enjoining petitioner from imposing the increased fee and fined it for
continuing violation of SECs order. Petitioner went to CA on a certiorari proceeding. CA dismissed the petition.
Issue: Whether SEC has power to regulate/restrict petitioners fees.
Held: YES
As a securities-related organization under the jurisdiction of SEC, petitioner is under the obligation to comply with SECs
order (yung order na to hold in abeyance imposing new fees). Under the Revised Securities Act, SEC has power, motu
propio or upon complaint, to issue cease and desist order without prior hearing if the act or practice, unless restrained,
may cause grave or irreparable injury or prejudice to the investing public or may amount to fraud or violation of the
disclosure requirements under the Act. This power is broad enough to include SECs power to regulate petitioners fees.
Hence, petition for certiorari denied for lack of merit.
Additional Notes: In Philippine Stock Exchange, Inc. v. Court of Appeals,the Court held that the SEC is without authority to
substitute its judgment for that of the corporations board of directors on business matters so long as the board of directors
acts in good faith. This Court notes, however, that this case involves, not whether petitioners actions pertained to
management prerogatives or whether petitioner acted in good faith. Rather, this case involves the question of whether the
SEC had the power to enjoin petitioners planned increase in fees after the SEC had determined that said act if pursued
may cause grave or irreparable injury or prejudice to the investing public. Petitioner was fined for violating the SECs
cease-and-desist order which the SEC had issued to protect the interest of the investing public, and not simply for
exercising its judgment in the manner it deems appropriate for its business.
Pua v Citibank, 16 Sept 2013 (Civil vs Criminal Case >if civil, RTC; if criminal, SEC)
Facts: Petitioners (2 sila parehong Pua) are depositors of Citibank Binondo Branch. After being introduced with VP Yau
of Citibank Hongkong, they bought numerous securities issued by various public limited companies in Channel Islands
(san yun??) which were offered to them by Yau. Later on, petitioners discovered that the securities sold to them were not
registered with the SEC and that the terms and conditions covering the subscription were not likewise submitted to the
SEC for evaluation, approval, and registration. They filed a complaint filed with RTC for declaration of nullity of contract
and sums of money with damages against respondent bank. Respondent Citibank filed MTD for violating the doctrine of
primary jurisdiction stating that the case should have been filed with the SEC since the merits of the case would largely
depend on the issue of whether or not there was a violation of the SRC, in particular, whether or not there was a sale of
unregistered securities. RTC denied respondents MTD. CA reversed and set aside RTC order for violation of doctrine of
primary jurisdiction.
Issue: Whether or not petitioners action falls within the primary jurisdiction of the SEC.
Held: NO, not w/in SECs primary jurisdiction
A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it must first be referred to
an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts will not
determine a controversy involving a question within the jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate matters of fact. The Securities Regulation Code is a special law.
Its enforcement is particularly vested in the SEC. Hence, all complaints for any violation of the Code and its implementing
rules and regulations should be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse
the complaint to the DOJ for preliminary investigation and prosecution.
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Cases falling under Section 57of the SRC, which pertain to civil liabilities arising from violations of the requirements for
offers to sell or the sale of securities, as well as other civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be
exclusively brought before the regional trial courts.
Civil suits falling under the SRC are under the exclusive original jurisdiction of the regional trial courts and
hence, need not be first filed before the SEC, unlike criminal cases wherein the latter body exercises primary
jurisdiction.
Petition granted, CA reversed.
F. Amendments introduced by Sec 5.2 to Sec.5 of PD 902-A
Sec 5, PD 902-A
In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving.
a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners, members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership
or association of which they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the state insofar as it concerns their individual
franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.
Sec 5.2, SRC (ito na yung amendment)
The Commissions jurisdiction over all cases enumerated under Sec. 5 of PD 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate RTC; Provided, that the Supreme Court in the exercise of its
authority may designate the RTC 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 year from the enactment of this Code. The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
The objective of the SRC is to make SEC a more effective law enforcement and regulatory body, not an adjudication
agency. While administrative bodies, like the SEC, do not really exercise judicial power, they have the incidental power to
conduct administrative hearings and make decisions in the course of the performance of their regulatory and law
enforcement functions. Otherwise, it cannot properly regulate and enforce the law.
The adjudicatory functions of a judicial body can easily distinguished from that of the regulatory body. Judicial courts
cannot act on their own, unless cases are first brought before them by party litigants. Essentially, judicial courts are
passive agencies and judicial process is set only by the positive action of the litigants; whereas, a regulatory body, like
the SEC, motu proprio, can conduct hearings in the exercise of tits regulatory power. Thus, if the case requires
decision or resolution of a violation or conflict brought about in connection with the performance of a regulatory function,
then it is one for the SEC to decide for the best interest of the public. But if the case is adversarial in nature which calls for
adjudication of private rights and obligations, then the question is one for the regular court to entertain.
The exercise of regulatory power of the SEC continues to be the same as before. If there is any change, it is only in
the sense that the quasi-judicial function of the SEC pertaining to the regular courts has been removed, so it can
devote to its regulatory responsibility. Thus, if the matter calls for the exercise of the regulatory responsibilities of the
SEC, which includes, among others, the imposition of fines and penalties for violations of the Corporation Code, SRC, and
other laws implemented by it, as well as its rules and regulations, then the SEC may take cognizance of the complaint
and the proceedings therein partaking of the nature of an administrative determination, but it cannot award
damages, nor grant recovery of investments. At most, the SEC can impose administrative sanctions, such as
suspension or revocation of its license, issuance of a cease and desist order, and implead its officers for criminal
violations of securities laws before the DOJ.
Under Sec 70, SRC, orders of the SEC through adjudication, such as rulings whether to impose sanctions, enter
injunctions for violations, or grant exemptions, may be appealed to the CA.
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1. Devices or schemes amounting to fraud
Sumndad v Harrigan and Boracay Beach Club Hotel, Inc. (BBCHI), 12 April 2002
Facts: Petitioner Mila Yap-Sumndad and Respondent John William Harrigan entered into a joint venture agreement to
develop a first class tourist resort on a land owned by Sumndad. Yung lupa na yun naka-assign kay BBCHI. To finance
said project, Harrigan invested Php1M for 8,000 BBCHI shares corresponding to 40% of its authorized capital stock.
Harrigan continued to give advances (in the character of loan, utang) na umabot na ng 8 million, and despite written
demand for payments, hindi nagbayad si BBCHI. So Harrigan filed a collection of sum of money case with a prayer for
preliminary attachment against BBCHI and later on impleading its management committee through acting chairman
(Corazon Tirol).
Nakialam si Sumndad (thru motion for leave to intervene) but was later on declared in default. Nagkaron ng judgment by
default and RTC ruled in favor of Harrigan. Sumndad filed petition for CPM with CA, w/c was denied. Then certiorari
petition w/ SC mainly contending that under PD 902-A SEC has jurisdiction over the case (remember sa RTC na-file ang
kaso) because the complaint alludes to fraud committed by respondent corporation, and the complainant is a stockholder
of the respondent corporation.
Issue: Whether jurisdiction is lodged with RTC or SEC.
HELD: RTC
Harrigan seeks to collect from BBCHI his advances or loans in the amount of at least P8 million, which are demandable in
character pursuant to their agreement, The cause of action of the suit is, clearly, for the collection of a sum of money.
From the totality of the complaint filed by Harrigan, the main issue is whether or not he is entitled to collect the loan and
not whether or not he was defrauded by BBCHI. The mere use of the phrase in fraud of creditors does not, ipso facto,
throw the case within SECs jurisdiction. The amended complaint filed by Harrigan does not sufficiently allege acts
amounting to fraud and misrepresentation committed by respondent corporation.
In Alleje vs. CA,fraud is defined as a generic term embracing all multifarious means which human ingenuity can devise,
and which are resorted to by one individual to secure an advantage over another by false suggestions or by suppression
of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated. Within the
context of the complaint as quoted above, the phrase in fraud of creditors can only mean, to the prejudice of creditors and
not to the use of devises or schemes tantamount to fraud and misrepresentation employed by the Board of Directors,
business associates or its officers and partners to divert corporate funds and assets for personal use, as contemplated in
Section 5 of PD 902-A.
Equally unavailing is petitioners contention that the case involves an intra-corporate controversy, or one between the
corporation and its stockholder transposing it within the domain of the SEC. It should be noted that the issue has become
moot and academic because with Republic Act No. 8799, Securities Regulation Code, it is now the Regional Trial Court
and no longer the SEC that has jurisdiction. Under Section 5.2 of Republic Act No. 8799, original and exclusive
jurisdiction to hear and decide cases involving intra-corporate controversies have been transferred to a court of
general jurisdiction or the appropriate Regional Trial Court.
Foregoing given, Harrigans complaint against petitioner to recoup his financial exposure with BBCHI was properly lodged
with the regular court and not with the SEC. This view is in accord with the rudimentary principle that administrative
agencies, like the SEC, are tribunals of limited jurisdiction and, as such, could wield only such powers as are specifically
granted to them by their enabling statutes
2. Intra-corporate controversies
Definition and Jurisdiction
2006 Bar: What is an intra-corporate controversy?
An intra-corporate controversy is a conflict between stockholders, members or partners and the corporation, association
or partnership regarding the regulation of the corporation. The controversy must arise out of intra-corporate or partnership
relations of the parties; or between such corporation, partnership or association and the State insofar as it concerns their
individual franchises. It is further required that the dispute be intrinsically connected with the regulation of the corporation
(Speed
Distributing Corp., et al. v. Court of Appeals, et al, G.R. No. 149351, March 17, 2004; Intestate Estate of Alexander T.Ty v.
Court of Appeals, G.R. No. 112872, April 19, 2001).
Is the Securities and Exchange Commission the venue for actions involving intra-corporate controversies?
13
No, pursuant to Subsection 5.2 of the Securities Regulation Code, the quasi-judicial jurisdiction of the Securities and
Exchange Commission to hear corporate cases, including intra-corporate controversies, under Section 5 of Pres. Decree
No. 902-A, has been expressly transferred to the designated Regional Trial Court. Pursuant to a memorandum circular
issued by the Supreme Court, only particularly designated RTC special commercial courts in each judicial region have
original and exclusive jurisdiction over such cases (See Intestate Estate of Alexander T. Ty v. Court of Appeals, G.R. No.
112872, April 19, 2001).
Yujuico v. Quiambao, G.R. No. 168639
An intra-corporate controversy is one which "pertains to any of the following relationships:
(1) between the corporation, partnership or association and the public;
(2) between the corporation, partnership or association and the State in so far as its franchise, permit or license to operate
is concerned;
(3) between the corporation, partnership or association and its stockholders, partners, members or officers; and
(4) among the stockholders, partners or associates themselves."
2009 Bar Q: Atlantis Realty Corporation (ARC), a local firm engaged in real estate development, plans to sell one of its
prime assetsa three-hectare land valued at about P100-million. For this purpose, the board of directors of ARC
unanimously passed a resolution approving the sale of the property for P75-million to Shangrila Real Estate Ventures
(SREV) a rival realty firm. The resolution also called for a special stockholders meeting at which the proposed sale would
be up for ratification. Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop the sale. He then
commences a derivative suit for and in behalf of the corporation, to enjoin the board of directors and the stockholders
from approving the sale.
(A) Can Atty. Edric, who owns only one share in the company, initiate a derivative suit? Why or why not?
Yes, Atty. Edric can initiate a derivative suit, otherwise known as the minority stockholders suit. It is allowed by
law to enable the minority stockholder/s to protect the interest of the corporation against illegal or
disadvantageous act/s of its officers or directors, the people who are supposed to protect the corporation (Pascual
v. Del Zaz Orozco, 19 Phil. 82 (1991)).
(B) If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why and where would
such a suit be filed? If not, why not?
Yes, such suit would constitute an intra-corporate dispute as it is a suit initiated by a stockholder against other
stockholders who are officers and directors of the same corporation (P.D. No. 902-A, Sec. 5(b)). Such suit should
be filed in the Regional Trial Court designated by the Supreme Court as a corporate or commercial court.
(C) Will the suit prosper? Why or why not?
No. The suit will not prosper. There is no requisite demand on the officers and directors concerned. There is,
therefore, no exhaustion of administrative remedies.
1996 Bar RTC not divested of jurisdiction if a person is no longer a stockholder
Jennifer and Gabriel owned the controlling stocks in MFF Co and CLO Inc, both family corporations. Due to serious
disagreements, Jennifer assigned all her shares in MFF to Gabriel, while Gabriel assigned all his shares in CLO to
Jennifer. Subsequently, Jennifer and CLO filed a complaint against Gabriel and MFF in the SEC seeking to recover the
corporate records and funds of CLO which Gabriel allegedly refused to turn over, and which remained in the offices of
MFF. Is there an intra-corporate controversy in this case?
Yes, there is an intra-corporate controversy in this case. The fact that, when the complaint against Gabriel and MFF was
filed with the SEC (per 2006, RTCs Jurisdiction), Jennifer and CLO were no longer stockholders of MFF did not divest the
SEC (per 2006, RTCs Jurisdiction) of its jurisdiction over the case inasmuch as Jennifer was a former stockholder of MFF
and the controversy arose out of this relation. (SEC v CA GR 93832)
Corporate officers dismissal intra-corporate
Matling Industrial v Coros, 13 Oct 2010 (Matling teaches us how to determine whether a position/office is considered
corporate or not. If corporate officer, then it is an intra-corporate controversy and jurisdiction is with RTC. Otherwise,
labor arbiter)
Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy falls under the jurisdiction
of the Securities and Exchange Commission (SEC), because the controversy arises out of intra-corporate or partnership
relations between and among stockholders, members, or associates, or between any or all of them and the corporation,
partnership, or association of which they are stockholders, members, or associates, respectively; and between such
corporation, partnership, or association and the State insofar as the controversy concerns their individual franchise or right
14
to exist as such entity; or because the controversy involves the election or appointment of a director, trustee, officer, or
manager of such corporation, partnership, or association. Such controversy, among others, is known as an intra-corporate
dispute.
Effective on August 8, 2000, upon the passage of Republic Act No. 8799,15 otherwise known as The Securities
Regulation Code, the SECs jurisdiction over all intra-corporate disputes was transferred to the RTC, pursuant to Section
5.2 of RA No. 8799.
*****
Conformably with Section 25 (Corporation Code), a position must be expressly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling provision is not
enough to make a position a corporate office. [In] Guerrea v. Lezama the first ruling on the matter, held that the only
officers of a corporation were those given that character either by the Corporation Code or by the by-laws; the rest of the
corporate officers could be considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:
An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders.
On the other hand, an employee occupies no office and generally is employed not by the action of the directors
or stockholders but by the managing officer of the corporation who also determines the compensation to be paid
to such employee.
xxxx
This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the corporate
officers are the President, Secretary, Treasurer and such other officers as may be provided for in the by-laws. Accordingly,
the corporate officers in the context of PD No. 902-A are exclusively those who are given that character either by the
Corporation Code or by the corporations by-laws. (Review Matling case)
A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally
guaranteed security of tenure of the employee by the expedient inclusion in the by-laws of an enabling clause on the
creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code, adopted a
similar interpretation of Section 25 of the Corporation Code in its Opinion dated November 25, 1993, to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers
enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to create other
Offices without amending first the corporate by-laws. However, the Board may create appointive positions other than the
positions of corporate Officers, but the persons occupying such positions are not considered as corporate officers within
the meaning of Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board
of Directors/Trustees
Buying out shares considered intra-corporate
1991 Bar: On December 6, 1988, A, an incorporator and the General Manager of the Paje Multi Farms Co, resigned as
GM and sold to the corporation his shares of stocks in the corporation for P300th, the book value thereof, payable as
follows: a) P100th as down payment; b) P100th on or before 31 July1989; and c) the remaining balance of P100th on or
before 30 Sep 1989. A promissory note, with an acceleration clause, was executed by the corporation for the unpaid
balance. The corporation failed to pay the first installment on due date. A then sued Paje on the promissory note in the
RTC.
a) Does the court have jurisdiction over the case?
The RTC has jurisdiction over the case. The SC said that a corporation may only buy its own shares of stock if it has
enough surplus profits therefore.
b) Would your answer be the same if A instead sold his shares to his friend Mabel and the latter filed a case with
the RTC against the corporation to compel it to register the sale and to issue new certificates of stock in her
name?
My answer would be the same. An action to compel a corporation to register a sale and to issue new certificates of stock
is itself an intra-corporate matter that exclusively lies with the RTC.
15
Stockholder vs stockholder dispute considered intra-corporate
Saavedra v SEC (wala sa course outline to, nilagay ko lang as an example of stockholder vs another stockholder
dispute)
Facts: Private respondents sold all their shares, rights and interests in Philippine, Inc. to petitioners. As agreed upon by
the parties through a Memorandum of Agreement and Deed of Assignment, the sale agreement would automatically be
considered rescinded upon failure of petitioners to pay any amount due. Because petitioners failed to pay the last sum
due on the schedules date, private respondents filed case praying for the rescission of instrument and for issuance of
TRO. Respondent SEC issued TRO. Petitioners filed motion to dismiss alleging lack of jurisdiction of SEC.
Issue: Whether the dispute between petitioners and private respondents is an intra-corporate dispute as to bring the
matter within SECs jurisdiction.
Held: Yes (pero as the law stands now, SECs jurisdiction here is transferred to RTC being an intra-corp dispute; ang
focus lang dito ay yung stockholder-stockholder dispute being an intra-corp controversy)
The dispute at bar is an intra-corporate dispute that has arisen between and among the principal stockholders of the
corporation due to the refusal of the petitioners to fully comply with what has been covenanted by the parties. Such
dispute involves a controversy "between and among stockholders,' specifically as to plaintiffs' right, as stockholders, over
unpaid assignment of shares and the validity of defendants' acquisition of the same. In other words, the present case
involves an intra-corporate dispute as to who has the right to remain and act as owners-stockholders of the corporation.
An intra-corporate controversy is one which arises between stockholder and the corporation. There is no distinction,
qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between
stockholders and corporations.
Cases:
Speed v CA, 17 March 2004 (Elements for intra-corporate controversy)
Facts: Si Pastor Lim (deceased) and Rufina Lim (private respondent) ay mag-asawa, mayaman, nagtayo ng mga
korporasyon, using their conjugal funds. Yung mag-asawa parehong incorporators and major stockholders ng mga
korporasyon na yun. Wala silang anak so nag-adopt ng 2 bata na anak ng mga mahihirap nilang kamag-anak. Anyway,
later on nag-away ang mag-asawa. Lumala ang pag-aaway hanggang sa nag-file ng legal separation si Rufina.
Meanwhile, take note of these corporations Skyline Sales Corp, Speed Distributing Corp and Leslim Corporation. Lahat
yan ang major stockholder ay si Pastor Lim, ang iba pang stockholders, yung mga in-adopt at asawa nung isa sa mga
adopted child nung mag-asawa.
So papasok na sa eksena si petitioner Speed. Si Leslim Corp nag-execute ng deed of sale in favor of Speed (lupain sa
Diliman, QC).
Namatay si Pastor Lim, survived by his wife syempre nag-file ng petition for administration of estate with motion praying
for annotation of notice of lis pendens sa lahat ng properties ng asawa niya. Nag-reklamo ngayon ang mga korporasyon
Skyline, Speed and Lesllim claiming na sa kanila yung properties at hindi kay Pastor. Na-cancel pero in the end nareinstate din ang lis pendens notice.
So eto naman ang nangyari, nag-file si Rufina ng separate complaint sa RTC against Speed and petitioners (petitioners
dito ay yung alleged president, VP at corp secretary ng Leslim Corp). Rufina sought to nullify the deed of absolute sale
executed by Leslim in favor of Speed (remember yung lupa na binenta ni Leslim kay Speed). Rufina is claiming na lahat
ng property nung mga korporasyon ay part of their conjugal property so as intestate heir meron syang share sa mga
property na yun, since dummies lang naman yung ibang stockholders for purposes of SEC registration. Si petitioners
naman sabi jurisdiction is with SEC and not RTC since the case involved intra-corp controversy and at the time na matransfer yung jurisdiction over intra-corp controversies from SEC to RTC pending na sa CA yung appeal so no
retroactivity. (Bale in-appeal sya sa CA kasi si RTC dismissed the complaint saying that Rufina cannot sue the corporation
since hindi naman sya privy dun sa sale between the 2 corps. Si CA naman ni-nullify yung RTC order at ni-remand yung
case sa RTC since intra-corp controversy daw yung dispute and under the amendment (RA 8799, yung SRC as we now
know) RTC ang may jurisdiction pag intra-corp dispute.
Issue: Whether the dispute is considered as an intra-corporate controversy.
Held: NO
16
Summary: Rufinas complaint is not an intra-corp controversy because her complaint is for nullification of deed of sale
executed by Leslim in favor of Speed. Rufina is not a stockholder of any of those corporations but since the property
acquired by her husband during their marriage, they are conjugal in nature; hence, she was being deprived of her share
over said property. Since hindi sya intra-corp dispute, complaint was properly filed in the RTC.
To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the Branches of
the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or
relationship of the parties; and (2) the nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of intra-corporate or partnership relations between any or all
of the parties and the corporation, partnership or association of which they are stockholders, members or associates;
between any or all of them and the corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns
their individual franchises. The second element requires that the dispute among the parties be intrinsically connected with
the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate controversy. The determination of whether a contract is
simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code.
In the present recourse, it is clear that the private respondents complaint in the RTC is not an intra-corporate case. For
one thing, the private respondent has never been a stockholder of Leslim, or of Speed for that matter. The complaint is
one for the nullification of the deed of absolute sale executed by Leslim in favor of Speed over the property covered by
TCT No. T-36617 in the name of Leslim, the cancellation of TCT No. T-116716 in the name of Speed, as well as the
Secretarys Certificate dated August 22, 1994. The private respondent alleged that since her deceased husband, Pastor
Lim, acquired the property during their marriage, the said property is conjugal in nature, although registered under the
name of Leslim She asserted that the petitioners connived to deprive the estate of Pastor Lim and his heirs of their
possession and ownership over the said property using a falsified Secretarys Certificate stating that the Board of
Directors of Leslim had a meeting on August 19, 1995, when, in fact, no such meeting was held. Petitioner Lita Lim was
never a stockholder of Leslim or a member of its Board of Directors; her husband, petitioner Ireneo Marcelo was the VicePresident of Speed; and, petitioner Pedro Aquino was Leslims corporate secretary. The private respondent further
averred that the amount of P3,900,000.00, the purchase price of the property under the deed of absolute sale, was not
paid to Leslim, and that petitioners Spouses Marcelo and petitioner Pedro Aquino contrived the said deed to consummate
their devious scheme and chicanery. The private respondent concluded that the Deed of Absolute Sale was simulated;
hence, null and void.
We are convinced that on the basis of the material allegations of the complaint, the court a quo had jurisdiction over the
case. (court a quo refers to RTC)
Petition dismissed. Records of the case are remanded to RTC for further proceedings.
Vesagas v CA and Spouses Raniel, 5 Dec 2001 (Members vs Association)
Facts: Private respondents filed complaint with SEC alleging that petitioners (president & VP/legal counsel of Luz Village
Tennis Club, Inc or LVTCI) stripped them of their membership without due process of law. They asked the SEC to declare
as illegal their expulsion from the club as it was allegedly done in utter disregard of the provisions of its by-laws as well as
the requirements of due process. Petitioners filed motion to dismiss on the ground of SECs lack of jurisdiction. MTD
denied by the hearing officer. Petitioners filed petition for certiorari with SEC en banc denied; went to CA which
dismissed their petition. Petitioners then filed petition for review on certiorari with the Supreme Court. Petitioners contend
that LVTCI in practice has not been a corporation and the spouses surreptitiously caused the LVTCI to be registered with
the SEC in order to make money from the club. At any rate, the club ceased to be a corporate body following a
unanimously-approved Board Resolution to dissolve the club. Thus, no intra-corporate relations can arise as between the
respondent spouses and the club or any of its members. Petitioners insist that since the club, by their reckoning is not a
corporation, the SEC does not have the power or authority to inquire into the validity of the expulsion of the respondent
spouses. Consequently, it is not the correct forum to review the challenged act.
Issue: Whether the dispute between the respondents and petitioners is a corporate matter within the exclusive
competence of the SEC to decide.
Held:
Summary: Dispute is intra-corporate in character since the parties involved are members and officers of the club. The
legality of the expulsion of private respondents and validity of amendments in by-laws (which caused the spouses
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dismissal) is a matter within SECs jurisdiction. Moreover, a certification of incorporation was issued by SEC in favor of
LVTCI hence, it is a corporate body. Its dissolution by virtue of the Board Resolution is not valid since it did not comply
with the notice and publication requirements in accordance with the Corporation Code.
In order that the commission can take cognizance of a case, the controversy must pertain to any of the following
relationships: a) between the corporation, partnership or association and the public; b) between the corporation,
partnership or association and its stockholders, partners, members, or officers; c) between the corporation, partnership, or
association and the state as far as its franchise, permit or license to operate is concerned; and d) among the stockholders,
partners or associates themselves. The fact that the parties involved in the controversy are all stockholders or that the
parties involved are the stockholders and the corporation, does not necessarily place the dispute within the loop of
jurisdiction of the SEC. Jurisdiction should be determined by considering not only the status or relationship of the parties
but also the nature of the question that is the subject of their controversy.
We rule that the present dispute is intra-corporate in character. In the first place, the parties here involved are officers and
members of the club. Respondents claim to be members of good standing of the club until they were purportedly stripped
of their membership in illegal fashion. Petitioners, on the other hand, are its President and Vice-President, respectively.
More significantly, the present conflict relates to, and in fact arose from, this relation between the parties. The subject of
the complaint, namely, the legality of the expulsion from membership of the respondents and the validity of the
amendments in the clubs by-laws are, furthermore, within the Commissions jurisdiction.
Cosare v Broadcom Asia and Dante Arevalo, 5 Feb 2014
Facts: Petitioner Cosare was hired by Arevalo as salesman and when Broadcom Asia, Inc. was set up by Arevalo, Cosare
was named incorporator and was assigned 100 shares. Cosare became Assistant VP for Sales. Thereafter, Abiog,
appointed VP for Sales, became Cosares immediate superior. Cosare sent Arevalo a confidential memo regarding
Abiogs anomalies. Arevalo did not act on Cosares accusations against Abiog. Instead, Cosare was called by Arevalo in a
meeting and was asked to immediately resign in exchange of financial assistance. Cosare refused to resign and thereafter
he received a show-cause memo charging of serious misconduct and willful breach of trust. He was then suspended and
his reply to the memo was not accepted for having been filed beyond 48 hours. Cosare was also prevented from entering
Broadcoms office and from even getting his personal belongings.
Cosare then filed complaint for constructive dismissal before Labor Arbiter, which ruled in favor of Broadcom. NLRC
reversed labor arbiter and ruled in favor of Cosare. On appeal to CA, respondents raised the argument that the case
involved an intra-corporate controversy which was within the jurisdiction of the RTC, instead of the LA. They argued that
the case involved a complaint against a corporation filed by a stockholder, who, at the same time, was a corporate officer,
to which the CA agreed; hence, granted respondents petition.
Issue: Whether or not the case instituted by Cosare was an intra-corporate dispute that was within the original jurisdiction
of the RTC, and not of the LAs.
Held: Contrary to CAs ruling, it is the LA, and not the regular courts, which has the original jurisdiction over the subject
controversy. An intra-corporate controversy, which falls within the jurisdiction of regular courts, has been regarded in its
broad sense to pertain to disputes that involve any of the following relationships: (1) between the corporation, partnership
or association and the public; (2) between the corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or associates, themselves. Settled
jurisprudence, however, qualifies that when the dispute involves a charge of illegal dismissal, the action may fall under the
jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination disputes and claims for damages arising from
employer-employee relations as provided in Article 217 of the Labor Code. Consistent with this jurisprudence, the mere
fact that Cosare was a stockholder and an officer of Broadcom at the time the subject controversy developed failed to
necessarily make the case an intra-corporate dispute.
The LA had the original jurisdiction over the complaint for illegal dismissal because Cosare, although an officer of
Broadcom for being its AVP for Sales, was not a "corporate officer" as the term is defined by law.
There are two circumstances which must concur in order for an individual to be considered a corporate officer, as against
an ordinary employee or officer, namely: (1) the creation of the position is under the corporations charter or by-laws; and
(2) the election of the officer is by the directors or stockholders. It is only when the officer claiming to have been illegally
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dismissed is classified as such corporate officer that the issue is deemed an intra-corporate dispute which falls within the
jurisdiction of the trial courts.
An enabling clause in a corporations by-laws empowering its board of directors to create additional officers, even with the
subsequent passage of a board resolution to that effect, cannot make such position a corporate office. The board of
directors has no power to create other corporate offices without first amending the corporate by-laws so as to include
therein the newly created corporate office. (So ang sinasabi dito kahit na yung by-laws ng Broadcom nagbibigay ng
authority sa Board to appoint officers other than Pres, VP, Treasurer and Secretary, KAHIT MAY BOARD RESOLUTION,
is not sufficient to make that position a corporate office. Kelangan i-amend muna yung by-laws para maging corporate
office. More so, in case of Cosare, no records were shown na yung creation/appointment of the AVP office ay supported
by a board resolution.)
As to the fact that Cosare was a stockholder of Broadcom, Supreme Court said that not all conflicts between the
stockholders and the corporation are classified as intra-corporate. There are other facts to consider in determining
whether the dispute involves corporate matters as to consider them as intra-corporate controversies. The Court has ruled
that in determining the existence of an intra-corporate dispute, the status or relationship of the parties and the nature of
the question that is the subject of the controversy must be taken into account. Considering that the pending dispute
particularly relates to Cosares rights and obligations as a regular officer of Broadcom, instead of as a
stockholder of the corporation, the controversy cannot be deemed intra-corporate. This is consistent with the
"controversy test".
So what is the controversy test?
Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate. The controversy must not only be rooted in the existence of
an intra-corporate relationship, but must as well pertain to the enforcement of the parties correlative rights and obligations
under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the relationship and
its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist,
then no intra-corporate controversy exists.
Medical Plaza Makati Condominium Corporation v Robert Cullen, 11 Nov 2013 (2014 Bar)
Facts: Si private respondent Cullen bumili ng condo unit sa Medical Plaza Corp (MPMCC, petitioner in this case). Yung
unit previously owned by Meridien Land Holding, Inc. After some time, petitioner demanded from Cullen payment of
alleged unpaid association dues and assessments. Tanong ni Cullen bakit e religiously nagbabayad naman sya ng dues
and in fact previously elected sya as president and director of MPMCC. Sabi ng petitioner yung unpaid dues carry-over pa
ng obligations ni Meridien. Dahil hindi nagbayad si Cullen, he was prevented from exercising his rights to vote and be
voted for in the 2002 Board of Directors election. So Cullen verified with Meridien the veracity of petitioners claim. Sabi
naman ni Meridien, ano?? E bayad na yun ah! This prompted respondent Cullen to demand from petitioner an explanation
why he was considered a delinquent payer despite the settlement of the obligation. Petitioner failed to make such
explanation; hence he filed a complaint for damages with RTC against Meridien and MPMCC, who separately filed motion
to dismiss. Sabi ng Meridien, HLURB ang may jurisdiction. Sabi naman ni petitioner walang jurisdiction ang RTC since
intra-corporate controversy (dapat RTC designated as special commercial court) and estoppel on respondents part since
siya ang mismong nag-approve nung assessment nung presidente sya; and for being moot and academic dahil settled na
ang obligation (nabawasan sana ang babasahin natin kung hindi nagkasuhan ang mga ulol na to).
RTC granted motion to dismiss but on appeal to CA, case was remanded to RTC for further proceedings since, as CA
held, the case is an ordinary action for damages falling within the jurisdiction of regular courts.
Issue: Does the controversy involve intra-corporate issues as would fall within the jurisdiction of the RTC sitting as a
special commercial court or an ordinary action for damages within the jurisdiction of regular courts?
Held: Intra-corp because dispute arose from the intra-corporate relations between the parties, and the questions involved
pertain to their rights and obligations under the Corporation Code and matters relating to the regulation of the corporation.
Petitioner is a condominium corporation duly organized and existing under Philippine laws, charged with the management
of the Medical Plaza Makati. Respondent, on the other hand, is the registered owner of Unit No. 1201 and is thus a
stockholder/member of the condominium corporation. Clearly, there is an intra-corporate relationship between the
corporation and a stockholder/member. Though denominated as an action for damages, the complaint shows that the
principal issue is on the propriety of the assessment made by petitioner against respondent as well as the validity of
petitioners act in preventing respondent from participating in the election of the corporations Board of Directors. The
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Supreme Court has already held in a previous case the dispute as to the validity of the assessments is purely an intracorporate matter between petitioner and respondent and is thus within the exclusive jurisdiction of the RTC sitting as a
special commercial court.
As to HLURBs jurisdiction, SC said that while HLURB can hear and decide inter/intra-association controversies/conflicts,
this is not applicable in a controversy between a condominium unit owner and a condominium corporation. While the term
association as defined in the law covers homeowners associations of other residential real property which is broad
enough to cover a condominium corporation, it does not seem to be the legislative intent.
Petition granted. The complaint before RTC-Makati dismissed for lack of jurisdiction because it is not designated as a
special commercial court.
Additional Notes
In determining whether a dispute constitutes an intra-corporate controversy, the Court uses two tests, namely, the
relationship test and the nature of the controversy test.
An intra-corporate controversy is one which pertains to any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation, partnership or association and the State insofar as
its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves. Thus,
under the relationship test, the existence of any of the above intra-corporate relations makes the case intra-corporate.
Under the nature of the controversy test, "the controversy must not only be rooted in the existence of an intra-corporate
relationship, but must as well pertain to the enforcement of the parties correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the corporation." In other words, jurisdiction
should be determined by considering both the relationship of the parties as well as the nature of the question involved.
SEC v CA, 22 Oct 2014
Facts: Omico is a company whose shares of stock are traded in the Phil Stock Exchange. Astra is a stockholder of Omico
owning about 18% of Omicos outstanding capital stock.
For Omicos annual stockholders meeting, it set deadline for the submission and validation of proxies on different dates.
Astra objected to the validation and inclusion of proxies of some of Omicos stockholders. Despite these objections, Omico
declared the proxies valid so Astra filed complaint with SEC praying for the invalidation of the proxies issued and prayed
for the issuance of cease and desist order (CDO) enjoining the holding of the stockholders meeting. SEC issued CDO but
the meeting and election of board members were still held. Astra instituted indirect contempt proceedings with SEC
against Omico for violation of the CDO while Omico filed certiorari and prohibition petition with CA against SEC for issuing
CDO with grave abuse of discretion. CA declared the CDO null and void since the case involves intra-corp controversy
which should be within the regular courts jurisdiction. SEC then filed certiorari petition with Supreme Court.
Issue: Whether the SEC has jurisdiction over controversies arising from the validation of proxies for the election of the
directors of a corporation.
Held:
Remember yung jurisdiction ng SEC under PD 902-A, section 5c (w/c was transferred to RTC) na controversies in the
election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations., this
does not extend to every potential subject that may be voted on by shareholders, but only to the election of directors or
trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code.
This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate proxy
solicitation, and the statutory jurisdiction of regular courts over election contests or controversies. The power of the SEC to
investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters
unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are
solicited in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised
the violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within the
original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c)
of Presidential Decree No. 902-A.
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The Supreme Court explained that the power of the SEC to regulate proxies remains in place in instances when
stockholders vote on matters other than the election of directors. The test is whether the controversy relates to such
election. All matters affecting the manner and conduct of the election of directors are properly cognizable by the regular
courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers it
exercises over corporations, partnerships and associations.
Ang sinasabi ng SC bale kahit ang issue ay validation of proxies at anumang incidental/related matters to proxy
compliance basta related sa election of directors, regular courts ang may jurisdiction. Kung proxy-related matter at hindi
tungkol sa elexn of directors, compliance therewith falls within SECs jurisdiction. Ang sinasabi kasi ng Astra yung
validation of proxies related sa determination of existence ng quorum at wala naman daw actual voting na nangyari since
the directors were elected merely through motion. Isa pa ang sabi ng Astra before stockholders mtg yung issue re: proxy
validation should fall within SECs jurisdiction tapos after the mtg, sa regular courts since it is only then na meron ng
elexn. Sabi ng SC nagpapalusot lang daw ang Astra kasi yung validation and quorum related sa elexn of directors. Also
there should be no distinction as to before or after the stockholders mtg kung kanino ang jurisdiction kasi ang mangyayari
daw ia-allege lang na mali yung process either or before the mtg and there would be two competing jurisdictions (gets nyo
ba? Ang gulo ng Astra e no)
Lastly, SC said that quasi-judicial agencies do not have the right to seek the review of an appellate court decision
reversing any of their rulings. This is because they are not real parties-in-interest. Thus, the Court expunged the petition
filed by the SEC for the latters lack of capacity to file the suit.
3. Election, appointment, removal of corporate officers
Velarde v Lopez, Inc., 14 Jan 2004 (money claims interlinked with position)
Facts: Respondent Lopez Inc (through its then president Eugenio Lopez) as lender and petitioner Velarde, GM of Sky
Vision Corp as borrower, entered into a 10 million-peso agreement. The agreement provided for the manner of payment
and circumstances constituting default which would give the lender (Lopez Inc) the right to declare the loan and interest
immediately due and payable. (Sky Vision is a subsidiary corp of Lopez, Inc.) Default under said agreement would arise if
borrower fails to make payment when due and payable or when borrower fails to mortgage in favor of lender real property
sufficient to cover the amount of loan.
Petitioner failed to pay installments as they became due and proposed a settlement of the loan and in answer to such
proposal, respondent advised petitioner that he (respondent Velarde) may use his retirement benefits in Sky Vision as
partial settlement of his loan after settling his accountabilities with Sky Vision. Petitioner protested the computation of his
retirement benefits (kumbaga yung accountabilities ni Velarde with Sky Vision ibabawas muna sa retirement benefits nya
tapos yung matitira ibabayad sa loan. So ang pino-protesta ni Velarde dun sa computation na sinasabi e yung
unliquidated advances daw ay properly liquidated na.)
Respondent filed collection of sum of money with the RTC alleging that petitioner violated the loan agreement. Petitioner
in his answer alleged that the loan agreement did not reflect their true agreement. (Ang agreement daw nila talaga yung
loan agreement ay cover document lang to evidence yung 10 million reward for his loyalty and excellent performance in
Sky Vision. At kung meron daw payment for that reward, it is in the form of continued service.) By way of compulsory
counterclaim, petitioner claimed that he is entitled to retirement benefits amounting to P98+ million, unpaid salaries and
incentives, return on stock ownership plan, etc. Respondent filed motion to dismiss the counterclaim for want of
jurisdiction. RTC denied the MTD so respondent filed certiorari petition with CA, which dismissed the counterclaim.
Issue: Whether RTC has jurisdiction over petitioners counterclaim. (Respondent claims that NLRC has jurisdiction since
the counterclaim involves money claims arising from labor relationship while petitioner claims RTC has jurisdiction due to
the tortious manner he was coerced into retirement)
Held:
Summary: SEC na nalipat na sa RTC supposedly has jurisdiction since the dispute involves intra-corp controversy. Intracorp kasi yung money claims ni petitioner Velarde interlinked with his relations with the corporation, that he is not a mere
employee but an officer and stockholder of the corporation so hindi siya simple labor problem. However, kahit na intracorp sya so dapat RTC ang may jurisdiction, si respondent Lopez, Inc is not the real party in interest. Dapat yung claims
ni petitioner filed against Sky Vision. So may issue dito re: piercing corporate fiction chenes. Remember that Sky Vision is
subsidiary ng Lopez Inc pero sabi ng SC hindi warranted ang piercing since wala naming control si LI kay SV,
independent sila from each other.
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At the heart of petitioners counterclaim is his alleged forced retirement which is also the basis of his claim for, among
other things, unpaid salaries, unpaid incentives, reasonable return on the stock ownership plan, and other benefits from a
subsidiary company of the respondent.
Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) applies to a corporate officers
dismissal. For a corporate officers dismissal is always a corporate act and/or an intra-corporate controversy and that its
nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action.
With regard to petitioners claim for unpaid salaries, unpaid share in net income, reasonable return on the stock ownership
plan and other benefits for services rendered to Sky Vision, jurisdiction thereon pertains to the Securities Exchange
Commission even if the complaint by a corporate officer includes money claims since such claims are actually
part of the prerequisite of his position and, therefore, interlinked with his relations with the corporation. The
question of remuneration involving a person who is not a mere employee but a stockholder and officer of the
corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and
management, and is in fact a corporate controversy in contemplation of the Corporation Code.
But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing thereof against respondent is
improper, it not being the real party-in-interest, for it is petitioners employer Sky Vision, respondents subsidiary.
Nacpil v Intercontinental Broadcasting Corp., 21 March 2002 (officer not elected or appointed by the BOD)
Facts: Petitioner was Assistant General Manager for Finance/Administration and Comptroller of respondent IBC. Upon
appointment of new IBC president Templo, petitioner alleged that Templo harassed and pressured petitioner into resigning
until he was forced to retire. However, Templo refused to pay petitioner his retirement benefits allegedly because he
(petitioner) has not yet secured clearances from PCGG and COA. Petitioner filed Labor Arbiter a complaint for illegal
dismissal and non-payment of benefits. IBC filed motion to dismiss alleging that LA has no jurisdiction over the case,
contending that since petitioner was a corporate officer who was duly elected by the Board of Directors of IBC; hence, the
case qualifies as an intra-corporate dispute falling within the jurisdiction of SEC. LA and NLRC ruled in favor of petitioner.
CA reversed.
Issue: Whether labor arbiter has jurisdiction over the case for illegal dismissal and non-payment of benefits.
Held: No
Under Presidential Decree No. 902-A (the Revised Securities Act), the law in force when the complaint for illegal dismissal
was instituted by petitioner in 1997, the following cases falls under the exclusive of the SEC: (now RTC)
xxx
c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations,
partnerships or associations;
The Court has consistently held that there are two elements to be considered in determining whether the SEC has
jurisdiction over the controversy, to wit: (1) the status or relationship of the parties; and (2) the nature of the question that
is the subject of their controversy.
Petitioner argues that he is not a corporate officer but an employee since he had not been elected nor appointed as
Comptroller and Assistant Manager by the IBCs Board of Directors and was only appointed as AM by IBCs GM. In
support of his argument, petitioner underscores the fact that the IBCs By-Laws does not even include the position of
comptroller in its roster of corporate officers. He therefore contends that his dismissal is a controversy falling within the
jurisdiction of the labor courts. Petitioners argument is untenable. Even assuming that he was in fact appointed by the
General Manager, such appointment was subsequently approved by the Board of Directors of the IBC. That the position of
Comptroller is not expressly mentioned among the officers of the IBC in the By-Laws is of no moment, because the IBCs
Board of Directors is empowered under Section 25 of the Corporation Code and under the corporations By-Laws to
appoint such other officers as it may deem necessary.
The Court has held that in most cases the by-laws may and usually do provide for such other officers, and that where a
corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the board of
directors may also be empowered under the by-laws to create additional officers as may be necessary. As petitioners
appointment as comptroller required the approval and formal action of the IBCs Board of Directors to become valid, it is
clear therefore that petitioner is a corporate officer whose dismissal may be the subject of a controversy cognizable by the
SEC under Section 5(c) of P.D. 902-A which includes controversies involving both election and appointment of corporate
22
directors, trustees, officers, and managers. Had petitioner been an ordinary employee, such board action would not have
been required.
4. Suspension of payments (PD 1758 amending PD 902-A)
PD 1758, Section 3. Section 5 of the same Presidential Decree is hereby amended by adding thereunder sub-paragraph
d) to read as follows:
"d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association
has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree."
So bale Sec 5 of PD 902-A reads as follows:
In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it
shall have original and exclusive jurisdiction to hear and decide cases involving.
(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership,
amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder,
partners, members of associations or organizations registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or
associates; between any or all of them and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity; and
(c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association
has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree.
And we already know that Sec 5, a to d is now transferred to RTCs jurisdiction.
G. General Rule on Registration
SRC Code, 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.
NOTE: PROSPECTUS (The registration statement shall include any prospectus required or permitted to be delivered.)
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SRC Code, 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.
SRC Code, 3.12. "Registration statement" is the application for the registration of securities required to be filed with the
Commission.
*SRC Rule 8.1 (IRR) Requirement to File Registration Statement (RS) masyadong mahaba ito pero ang sinasabi
dito na kelangan merong RS at prospectus bago ma-register at mabenta ang securities. SEC ang magde-declare if
effective yung RS. As to pano malalaman kung effective ang RS, go to Sec.12, SRC. Pwede nang ibenta yung securities
w/in 2 business days from effectivity nung RS. Dito din nakalagay yung prospectus delivery requirements at ano ang
format ng prospectus.
*SRC Rule 14.1 Amendments to the Registration Statement and Prospectus
For purposes of this Rule, material information shall include, but not be limited to, the following:
1. Any event or transaction which increases or creates a risk on the investments or on the securities
covered by the registration;
2. Increase or decrease in the volume of the securities being offered at an issue price higher or lower
than the range set and disclosed in the registration statement and which results to a derogation of
the rights of existing security holders, as may be determined by the Commission;
3. Major change in the primary business of the Issuer;
4. Reorganization of the company;
5. Loss, deterioration or substitution of the property underlying the securities;
6. Ten percent (10%) or more change in the financial condition or results of operation of the Issuer
unless a report to that effect has been filed with the Commission and furnished the prospective
purchaser;
7. Classification, de-classification or re-classification of securities which results to the derogation of the
rights of existing security holders, as may be determined by the Commission.
General Rule: Securities are prohibited from being offered and sold within the Philippines, unless a registration statement
and a prospectus covering the securities executed and established in accordance with the requirements and procedures
laid down under SRC Rules 8 and 12 of the Amended SRC Implementing Rules and Regulations, are both filed and in
effect. (The RS must first be declared effective by SEC.)
Exception: SRC, Sections 9 and 10
Public Offering
Public Offering of shares, for purposes of registration under the Code, means a random or indiscriminate offering of
securities in general to anyone who will buy, whether solicited or unsolicited. Any solicitation or presentation of securities
for sale through any of the following modes shall be presumed to be a public offering:
1. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or
any part thereof;
2. Presentation in any public or commercial place;
3. Advertisement or announcement in any radio or television, or in any online or email system; or
4. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or
mailing the same to prospective purchasers.
A notice, circular, advertisement, letter, or other communication is not deemed an offer sale in violation of Sec. 8 of the
Code if it is published or transmitted to any person after a registration statement has been filed and contains any or all of
the information required in the SRC IRR.
The phrase offered for sale or distribution in the provision also covers the act of accepting future subscription deposits.
Public Distribution refers to the sale of securities to at least 20 persons or enterprises. However, under SRC (exempt
transactions), sale to more than such number of persons (20) may be exempted by the SEC from registration if the
registration thereof is not necessary in the public interest and for the protection of the investors by reason of the small
amount involved or the limited character of the public offering. A corporation may have 20 or more stockholders, but they
may all be close business associates or high net individuals or institutional investors who are in a position to know the
present affairs of the corporation, such that registration under the Code is not necessary for their protection.
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Merit System vs Full Disclosure Method
Merit System is the regulatory method of registration under the old law, which is based on merits. The old law focused on
investor protection not only by requiring some form of disclosures of information, but also by empowering the SEC to look
into the merit of the securities to be sold to the public. While a disclosure approach was recognized, nevertheless, it sets
certain standards which the securities issuer must satisfy making 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 SEC (ito yung
sinasabi sa kaso ng PSE v CA). A strict financial ratio requirements or other minimum standard parameter was required to
be met before the registration is rendered effective. However, while strict financial stability was imposed, the issuers and
underwriters, are free to sell securities without making full disclosures to investors about the issuer or the nature of the
offering. They may also be able to disseminate written information describing the issues and the offering without adhering
to any standard regarding the extent, manner or nature disclosures.
One fundamental problem under the old system is the lack of equality of access to information. More often securities
issuers have more and better information about the issues than the investors. This lack of equality of access to
information on the technical situation of the stocks or securities that are being sold or offered was thought can only be
solved by adopting the full disclosure approach.
Full Disclosure Method
This is the approach, under the present law, of regulating public offerings. Registration under the new Code gives more
emphasis to full disclosure as the principal method of investors protection intended to provide adequate and accurate
disclosure of material facts concerning the issuer and the securities it proposes to offer and sell. This approach veers
away from the merit-based system and ensures that the investors concerned are equipped with all the necessary material
information upon which to base their investment decisions. While under the full disclosure approach, the SEC does not
give assurance that every security is suitable or proper for all investors, with the adoption of the full disclosure rule, full
flow of material information that may affect investors decision is being assured.
Material Fact or Information means any fact/information that could result in a change in the market price or value in any of
the issuers securities or would potentially affect the investment decisions of an investor; or matters which an average
prudent investor ought reasonably to be informed before purchasing the security, or a fact which if it had been correctly
stated or disclosed would have deterred or tended to deter the average prudent investor from purchasing the securities in
question. A fact is thus deemed material if it tends to induce or otherwise affects the sale or purchase of the securities.
While the registration does not guarantee the accuracy of the facts represented in the registration statement and
prospectus, the Code prohibits false and misleading statements under the penalty of fine, imprisonment, or both.
Under the new regulatory framework, the SEC no longer passes upon judgment on the investment merit of an issue but
leaves it to the investor to make a decision on whether or not to buy the shares on the basis of disclosure of material facts
concerning the company and the securities to be sold. Registration of securities does not preclude the sale of stock in
risky, poorly managed, or unprofitable companies, nor does the SEC approve or disapprove securities on the merits. The
only standard which must be met when registering securities is adequate and accurate disclosure of required
material facts covering the company and securities it proposes to sell. Low financial ratio or capability of a registrant
will not abet registration for as long as the said weakness is fully disclosed to the investing public and even if the company
is facing court proceedings on all or any of its corporate assets. Simply stated, any company could apply for
registration, provided it complies with the registration requirements on SEC full disclosure rules.
Case: PSE v CA (This case discusses the merit-based system, which is no longer applicable now ha kasi nga full
disclosure method na tayo. Tsaka 1997 case pa ito, Revised Securities Act pa ang applicable law, hindi pa yung SRC as
we now know.)
Facts: Puerto Azul Land (PALI) sought to offer its share in public & was issued permit to sell by SEC. PALI then applied w/
PSE (Phil Stock Exchange) an application to list its shares. Ultimately, PSE denied the application upon receipt of a letter
from heirs of late Pres. Marcos claiming beneficial ownership over certain properties forming part of PALIs assets. PSE
requested PCGG to comment on the dispute between PALI and Marcoses. PCGG informed PSE that a TRO against the
Marcoses was issued to enjoin the Marcoses from further interfering with the processing and approval of by PSE of the
initial public offering of PALI. PSE then rejected PALIs application for the listing of shares because of serious claims and
circumstances surrounding ownership of its assets. PALI wrote to SEC regarding PSEs denial and asked SEC, in the
exercise of its supervisory and regulatory powers, to review PSEs action. SEC reversed PSE. After its MR being denied
by SEC, PSE filed with CA petition for review. CA upheld SEC. PSE argues that SEC powers over stock exchange are
limited and do not include the power to reverse PSE decisions and when said decisions are made in good faith (business
judgment rule).
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Issue: Whether PALIs application for registration and sale of securities be granted.
Held: No.
The question as to what policy is, or should be relied upon in approving the registration and sale of securities in the SEC
is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange Commission. In
mandating the SEC to administer the Revised Securities Act, and in performing its other functions under pertinent laws,
the Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations as
it may consider appropriate in the public interest for the enforcement of the said laws. The second paragraph of Section 4
of the said law, on the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other 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 Commission. 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.[15] 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.[16] 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
xxx
(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. (Emphasis Ours)
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.
H. Exempt Securities
What are the so-called exempt securities under the SRC and why are they exempt?
Exempt securities are exempt from the registration requirements because of the character of the issues or existence of a
regulatory regime recognized as already providing adequate protection to the investors.
1. Government issues
Exempt because these are issued and sold by the government over which a particular government agency exercises
regulatory or supervisory care, thereby, investors are deemed adequately protected. It would be repetitious for the
SEC to require registration of said securities and to exercise additional supervision over said institutions.
2. Issuances by foreign governments
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Though exempt, the SEC may prescribe rules for disclosure with respect to offerings of securities by foreign
governments as investors need disclosures to these offerings securities. The imposition of disclosure obligations upon
foreign sovereigns is not considered onerous and common practice in other countries.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body
Exempt because certificates issued to creditors by a receiver or trustee in a rehabilitation/insolvency proceedings
does not affect the general public, but only the creditors of the issuer who are seeking full or partial payment of their
claims. To expedite the insolvency process and help ensure that creditors receive some or all of the monies owed, it is
important that the insolvency receiver or trustee would be able to act expeditiously. This exemption is necessary for
the efficient and quick processing of claims against an insolvent company.
4. Sale of securities which are under the regulation of the Office of the Insurance Commission, HLURB, or BIR
Dahil regulated na sila ng mga nabanggit na government agencies; so it is construed that, in the event the securities
which are supposedly to be regulated by any of the above-mentioned government offices, are not actually regulated
by the concerned govt agency, they should be required to be registered under the Code, otherwise, it would be
unregulated leaving the investors without any protection.
What if securities issued by cooperatives regulated by the Cooperative Development Authority (CDA) under RA 6938?
Under the old law, exempted sila but since under the SRC, the exemption was not reproduced, SEC opined that the
deletion of the exemption in the new Code indicates the manifest intention of the legislature to suppress the
exemption, and hence, the exemption no longer exists.
BUT, Decasa says that SECs opinion seems to be inconsistent with the rationale behind the exemptions granted
under Sec 9(d), SRC exemption granted to banks and to financial institutions engaged in quasi-banking activity.
Inasmuch as the operation of cooperatives are already regulated and supervised by the CDA, securities issued by
cooperatives should have been also exempted in the same way as the above-mentioned exemptions, except their
own shares of stock. More so that the SEC had lost total jurisdiction over cooperatives. Required lang sila to
registered under the SRC only if the securities issued by cooperatives are not actually regulated by the concerned
government agency.
5. Bank issues, except their own shares of stock
The phrase except their own shares of stock is added to clarify that only customary or traditional banking activities
are exempt from SEC registration.
Exempt because issuance of securities by banking institutions is already supervised and regulated by the BSP, and
therefore are presumed be already adequately regulated by that office. But share issued by banks to the public for the
purpose of raising capital for such banks will have to be registered with the SEC. Bank shares are not exempted, as
they are significant segments of the trading market in securities, and investors need protection with respect to the
public offering and trading of those shares no less than with respect to the shares of other issuers. The BSP would
regulate only debt securities issued by banks while banks own shares of stock would be registered and regulated by
the SEC.
SRC, 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.
This provision gives SEC the discretionary power to exempt other securities, if appropriate under existing
circumstances, whether or not the exception is similar to the ones set forth in the provision, provided the investors
are adequately protected. Thus, in addition to the exemptions enumerated under the SRC, the SEC granted
exemptions to other securities (see IRR 9.2 below).
SRC Rule 9.2 (IRR) Exempt Securities
1. Any evidence of indebtedness issued by a financial institution that has been licensed by the BSP to
engage in banking or quasi-banking shall be exempt from registration under Section 8.1 of the Code.
2. The registration requirements shall not likewise apply to the following:
a. Evidence of indebtedness issued to the 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, nonstock 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 or such higher amount as the Commission may
prescribe by resolution.
NOTE: Securities exempt under Sec 9, are still subject to the anti-fraud and civil liability provisions in the SRC, trading
regulation where they are traded on an exchange, and the persons who sell these securities are subject to SEC
regulation. Likewise, while they are exempt from the registration requirements, they are not exempt from complying with
the reportorial requirements under the Code and SEC rules and regulations. The burden of proof for establishing any of
the exemptions is on the person claiming the exemption which should be strictly construed.
2009 Bar: What are the so-called exempt securities under the Securities Regulation Code?
A: alam nyo na
Union Bank of the Phils v SEC, 6 June 2001 (exemption from registration requirements vis--vis disclosure
requirements)
Facts: Petitioner Union Bank sought the opinion of SEC on whether the Full Material Disclosure Rule (FMD Rule) on
banks applies to them, contending that the FMD Rule in effect amended the Revised Securities Act (RSA pa applicable sa
kaso na to hindi pa SRC pero essentially the same lang ang exempt securities), which exempts securities issued or
guaranteed by banking institutions from the registration requirement. Main argument of petitioner ay since exempt ang
securities nila from registration reqts, hindi na din daw sila covered ng RSA, na nagre-require naman ng filing of
annual/quarterly reports, proxy statements, information statements, etc.
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SEC said that while bank securities are exempt from registration requirements, banks of a class of securities listed for
trading on the PSE are covered by certain RSA provisions governing the filing of various reports with respondent
Commission (i.e. reportorial requirements).
Ang tangang Union Bank, nagtanong pa ayaw din naman pala maniwala stating that they will refer the matter to the
PSE. Ultimately, Union Bank was fined by SEC for failure to comply with the reportorial requirements. Went up to CA,
which affirmed SEC order. R45 petition filed with SC.
Issue: Whether or not petitioner is required to comply with the respondent SECs full disclosure rules.
Held: Required
Summary: The mere fact that petitioner, in regard to its banking functions, is already subject to the supervision of the BSP
does not exempt the former from reasonable disclosure regulations issued by the SEC. These regulations -- imposed on
petitioner as a banking institution listed in the stock market -- are meant to assure full, fair and accurate information for the
protection of investors. Imposing such regulations is a function within the jurisdiction of the SEC.
The RSA 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 a listed corporation, is exempt from complying with the reports
required by the assailed RSA Implementing Rules.
Sec 5(a)(3), RSA: Any security issued or guaranteed by any banking institution authorized to do business in the
Philippines, the business of which is substantially confined to banking, or a financial institution licensed to engage
in quasi-banking, and is supervised by the Central Bank.
It must be emphasized that petitioner is a commercial banking corporation listed in the stock exchange. Thus, it must
adhere not only to banking and other allied special laws, but also to the rules promulgated by Respondent SEC, the
government entity tasked not only with the enforcement of the Revised Securities Act, but also with the supervision of all
corporations, partnerships or associations which are grantees of government-issued primary franchises and/or licenses or
permits to operate in the Philippines
The mere fact that in regard to its banking functions, petitioner 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 petitioner opted to trade its shares in the exchange, then it must abide
by the reasonable rules imposed by the SEC.
Petition denied, CA affirmed.
I. Exempt Transactions
What are the exempt transactions?
1. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or
bankruptcy.
2. Sale of foreclosed securities in order to obtain satisfaction of a mortgage out of the proceeds, whether authorized by a
decree of court or by a power of sale contained in the mortgage agreement.
3. Isolated transaction made by the owner thereof, not made in the course of repeated and successive transactions and
said owner is not the underwriter of the security.
4. Stock dividends declaration.
A distinction should be made between a sale of securities for value and distribution of dividends which does not
generally involve an offer or sale for value. The issuer, when declaring stock dividends, is not distributing property
but simply diluting the shares as they existed before. Stock dividends are exempt from registration because they
are generally not given for value and thus do not constitute sale. The present SEC policy is to exempt stock
dividends from registration requirements, regardless of whether or not the original issues were previously
registered.
5. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other
remuneration is paid or given in connection with the sale of such capital stock.
6. Issuance of bonds to a single purchaser.
7. Transaction pursuant to a right of conversion.
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8.
9.
10.
11.
12.
Example of this transaction is conversion of preferred shares or warrants to common shares upon maturity.
Brokers transactions.
It is immaterial whether or not brokers solicit the transactions. This is intended to allow ordinary after market
trading to occur among investors through brokers and to restrict the registrations requirements to primary
offerings by issuers directly or through underwriters.
Pre-incorporation subscription or subscription to capital increase.
Exchange of securities by the issuer with its existing security holders exclusively, where no commission or
remuneration is paid or given in connection with the transaction.
Private placements or sale of securities by an issuer to fewer than 20 persons during any 12 month-period.
Sale to qualified buyers: B R I P I S
Bank;
Registered investment house;

Insurance company;
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;
Investment company; or
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.
Called qualified buyers because they are institutional investors who are presumed to know the risks of investing
in the securities market, as one of their major business activities is to invest in securities.
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.
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h. Broker's transactions, executed upon customer's 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.
l. The sale of securities to any number of the following qualified buyers:
Bank;
Registered investment house;
Insurance company;
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;
Investment company; or
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.
Transactions exempt under Sec 10 are NOT exempt from anti-fraud, civil liability or other provisions of the Code.
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.
This provision enables the SEC to exempt other transactions for any reason if it finds that the requirement of
registration is not necessary in the public interest or for the protection of investors.
Under the SECs rule making power, it is contemplated that SEC would adopt exemptions for sales to accredited
investors, small or limited offerings, such as offerings to key employees of the issuer, offers to acquire the stocks
of closely held companies and certain types of mergers and reorganizations where the number of shareholders or
other considerations do not warrant registration.
The applicability of exemption should depend on whether the class of persons to whom the securities are being
offered needs protection of the law, such as, whether they have access to the kind of information which
registration would disclose and whether they do not intend to redistribute the securities.
In granting exemptions, the materiality of the amount/transaction involved and the impact of the same to the
companys working capital are also to be considered.
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.
Under the old law, SEC requires an application for exemption and undertakes to pass on each application filed.
Exemption under the new Code is now self-executing, provided that the required notice/confirmation is filed in
accordance with the guidelines prescribed by SEC. Instead of a mere notice to the SEC, an issuer may opt to
apply for confirmation that an exemption under Sec 10.1 is available. In all cases, exemptions falling under Sec
10.2 shall require an application for confirmation or declaration.
31
So if under Sec 10.1, file application for/notice of confirmation of exemption. If under Sec 10.2, file application for
declaration of exemption. Then pay filing fee. Also, provide a written disclosure containing the information required
under the SRC IRR. Ibibigay yung written disclosure dun sa taong pinagbebentahan mo ng securities.
Because the Code is moving from merit based regulation to full disclosure, it is no longer required to issue an
order approving such exemption. Unless a confirmation that such exemption is available is applied for, any person
claiming an exemption under Sec 10 has the burden, if challenged, of establishing that the exemption is available.
A presumption that an exemption is not available may arise from the failure to file a notice.
Nestle Phils v CA and SEC, 13 Nov 1991 (issuance of additional capital stock)
Facts: Nestle Phils authorized capital stock (ACS) was increased from 3million to 6million shares. Nestle underwent the
necessary procedures and filings for the approval of said increase in ACS and was in fact approved by SEC.
Subsequently, Nestle approved resolutions authorizing the issuance of some 300k shares out of its previously authorized
but unissued capital stock, exclusively to its 2 principal stockholders (San Miguel Corp and Nestle S.A.). In a letter to
SEC, Nestle was seeking exemption from registration requirements for its proposed issuance of the additional shares
stating that there was in fact no need to file a petition for exemption and that no commission/remuneration has been given
for the issuance the subject shares. SEC advised Nestle to file the appropriate request for exemption and that the
proposed transaction could be considered as an exemption under Sec 6(b) of the Revised Securities Act (now SRC Sec
10.2).
Issue: Whether the issuance of additional capital stock by Nestle is considered as an exempt transaction.
Held: Yes
The issuance of previously authorized but theretofore unissued capital stock by the corporation requires only Board of
Directors approval. Neither notice to nor approval by the shareholders or the SEC is required for such issuance. In this
case, there would be no opportunity for the SEC to see to it that shareholders (especially the small stockholders) have a
reasonable opportunity to inform themselves about the very fact of such issuance and about the condition of the
corporation and the potential value of the shares of stock being offered. Hence, cannot be considered an exempt
transaction. However, an issuance of previously authorized but still unissued capital stock may, in a particular instance, be
held to be an exempt transaction by the SEC under Section 6(b) so long as the SEC finds that the requirements of
registration under the Revised Securities Act are "not necessary in the public interest and for the protection of the
investors" by reason, inter alia, of the small amount of stock that is proposed to be issued or because the potential buyers
are very limited in number and are in a position to protect themselves. In fine, petitioner Nestle's proposed construction of
Section 6(a) (4) would establish an inflexible rule of automatic exemption of issuances of additional, previously authorized
but unissued, capital stock. We must reject an interpretation which may disable the SEC from rendering protection to
investors, in the public interest, precisely when such protection may be most needed.
J. Commodity Futures Contract
Section 11,SRC. No person shall offer, sell or enter into commodity futures contracts except in
accordance with the 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.
A commodity futures contract means a contract providing for the making or taking delivery at a prescribed time in the
future of a specific quantity and 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. The term commodity means any goods, articles, services, rights and interests,
including any group or index of any of the foregoing, in which commodity interests contracts are presently or in the future
dealt in.
Under the Revised Rules and Regulations on Commodity Futures Trading issued by the SEC and approved by the
Monetary Board of the Central bank, "Commodity Futures Contract" shall refer to an agreement to buy or sell a specified
quantity and grade of a commodity at a future date at a price established at the floor of the exchange.
Onapal Philippines Commodities, Inc v CA and Susan Chua, 1 Feb 1993 (trading contract vs gambling contract)
Facts: Petitioner Onapal was licensed as a commission merchant/broker to engage in commodity futures trading in Cebu
City. Petitioner and private respondent Chua concluded a Trading Contract. Like all customers of the petitioner, private
respondent was furnished regularly with "Commodities Daily Quotations" showing daily movements of prices of
commodity futures traded and of market reports indicating the volume of trade in different future exchanges in Hongkong,
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Tokyo and other centers. Every time a customer enters into a trading transaction with petitioner as broker, the trading
order is communicated by telex to its principal, Frankwell Enterprises of Hongkong. If the transaction, either buying or
selling commodity futures, is consummated by the principal, the petitioner issues a document known as "Confirmation of
Contract and Balance Sheet" to the customer. An order of a customer of the petitioner is supposed to be transmitted from
Cebu to petitioner's office in Manila. From Manila, it should be forwarded to Hongkong and from there, transmitted to the
Commodity Futures Exchange in Japan.
According to Chuas testimony, she was invited by Onapal to invest in the commodity futures trading. She was further told
that the business is "profitable" and that she could withdraw her money anytime. So nag-invest si Chua ng P500k na
nadagdagan pa ng P300k. Later on, gusto na i-withdraw ni Chua yung pera nya pero syempre hindi pumayag ang Onapal
dahil meron pa daw accounts na hanging dun sa transaction.
Chua further testified that she understood the transaction of buying and selling as speculating in prices, and her paying
the difference between gains and losses without actual delivery of the goods to be gambling, and she would like to
withdraw from this kind of business, the risk of which she was not made aware of. Plaintiff further testified that she
stopped trading in commodity futures in September, 1983 when she realized she was engaged in gambling. She was able
to get only P470,000.00 out of her total deposit of P800,000.00. Chua filed case to recover her loss.
CA, affirming trial courts finding, ruled that the trading contract between petitioner and respondent is specie of gambling
hence, null and void.
Issue: Whether the contract entered into by the parties is null and void.
Held: Yes
Summary: The trading contract entered into by the parties is a contract for sale of products for future delivery. So since
contract of sale, dapat may delivery di ba. Yung contract in printed form, valid because it complies with the Rules and
Regulations on Commodity Futures Trading prescribed by SEC. Pero kapag yung transaction nag-deviate na from the
written form, as in this case na wala namang delivery, actual or constructive, of the commodity/goods tapos ang nangyari
lang ay payment and receipt lang nung difference in prices, yung transaction na yun nagiging based on speculation,
parang gambling thus, illegal. Gets nyo?
As a contract in printed form, prepared by petitioner and served on private respondent, for the latter's signature, the
trading contract bears all the indicia of a valid trading contract because it complies with the Rules and Regulations on
Commodity Futures Trading as prescribed by the SEC. But when the transaction which was carried out to implement the
written contract deviates from the true import of the agreement as when no such delivery, actual or constructive, of the
commodity or goods is made, and final settlement is made by payment and receipt of only the difference in prices at the
time of delivery from that prevailing at the time the sale is made, the dealings in futures become mere speculative
contracts in which the parties merely gamble on the rise or fall in prices. A contract for the sale or purchase of
goods/commodity to be delivered at future time, if entered into without the intention of having any goods/commodity pass
from one party to another, but with an understanding that at the appointed time, the purchaser is merely to receive or pay
the difference between the contract and the market prices, is a transaction which the law will not sanction, for being illegal.
The written trading contract in question is not illegal but the transaction between the petitioner and the private respondent
purportedly to implement the contract is in the nature of a gambling agreement and falls within the ambit of Article 2018 of
the New Civil Code (see below).
The facts clearly establish that the petitioner is a direct participant in the transaction, acting through its authorized agents.
It received the customer's orders and private respondent's money. As per terms of the trading contract, customer's orders
shall be directly transmitted by the petitioner as broker to its principal, Frankwell Enterprises Ltd. of Hongkong, being a
registered member of the International Commodity Clearing House, which in turn must place the customer's orders with
the Tokyo Exchange. There is no evidence that the orders and money were transmitted to its principal Frankwell
Enterprises Ltd. in Hongkong nor were the orders forwarded to the Tokyo Exchange. We draw the conclusion that no
actual delivery of goods and commodity was intended and ever made by the parties. In the realities of the transaction, the
parties merely speculated on the rise and fall in the price of the goods/commodity subject matter of the transaction. If
private respondent's speculation was correct, she would be the winner and the petitioner, the loser, so petitioner would
have to pay private respondent the "margin". But if private respondent was wrong in her speculation then she would
emerge as the loser and the petitioner, the winner. The petitioner would keep the money or collect the difference from the
private respondent. This is clearly a form of gambling provided for with unmistakeable certainty under Article 2018. It
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would thus be governed by the New Civil Code and not by the Revised Securities Act nor the Rules and Regulations on
Commodity Futures Trading laid down by the SEC.
After considering all the evidence in this case, it appears that petitioner and private respondent did not intend, in the deals
of purchasing and selling for future delivery, the actual or constructive delivery of the goods/commodity, despite the
payment of the full price therefor. The contract between them falls under the definition of what is called "futures". The
payments made under said contract were payments of difference in prices arising out of the rise or fall in the market price
above or below the contract price thus making it purely gambling and declared null and void by law
(Art 2018: If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the
intention that the difference between the price stipulated and the exchange or market price at the time of the pretended
delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid.)
Petition dismissed. CA affirmed.
K. Registration of Securities (Sections 12 15)

Procedure of Registration of Securities (Sec 12)
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 the respect to such
securities, in such form and containing such information and document as the Commission 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 annex 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 requirements,
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, its 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 contributed to by such
selling shareholders shall 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 the rule diminishing fees in inverse
proportion 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 the rule shall prescribe, reciting that a
registration statement for the sale of such securities has been filed, and that 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.
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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 herein or necessary to make the statement therein not
misleading shall constitute fraud.
The present registration process diverts SECs previous procedure of conducting hearings on the merits of the issues
to be registered to mere compliance with the required full disclosure of material facts. However, concerns about the
registration statement may be brought informally to the attention of SEC and it would be up to the SEC to decide if
there are grounds to refuse registration.
A registration statement filed with the SEC must be declared effective, unless the SEC undertakes to determine
whether to refuse or suspend the registration. If the issuer does not produce a satisfactory registration statement, it
would be incumbent upon the SEC to take steps under Sec 14 allowing amendments to the registration statement.
Extension of 45 days is provided to allow the SEC time to become satisfied with the disclosures and declare the
registration statement effective.
Only the issuer corporation is permitted to file a registration statement. By identifying the issuer as the only registrant,
the responsibility is fixed.
The requirement of a verified board resolution that shall accompany the registration statement affords greater
assurance that directors would undertake a review of the accuracy of disclosures therein prior to filing.
Underwriters may be held liable for failure to ensure that the registration statement and other documents filed in
connection with an offering do not contain any false or misleading information, or for omitting to state any material fact
required to be stated therein or necessary in order to make the information presented not misleading.
For purposes of underwriting securities, the term underwriter is a person who guarantees on a firm commitment
and/or declared best effort basis the distribution and sale of securities by another company. A firm commitment as
distinguished from best efforts commitment refers to a commitment by the underwriter to purchase all securities
underwritten, whether sold or not.
For purposes of registration of securities under this provision, the SEC has the power to prescribe diminishing
registration fees in inverse proportion to the value of the aggregate price of the stock offering (meaning the higher
the stock offering, the lower the registration fees).
The filing requirements and procedure for the registration statements and prospectus for the sale/distribution of
securities pursuant to Secs 8 and 12 of SRC are laid down under Rule 12.1 of SRC IRR.
Rejection and Revocation of Registration of Securities (Sec 13)

13.1. The Commission may reject a registration statement and refuse registration of the security thereunder, or revoke the affectivity of a registration statement and the registration of the security there-under
after the due notice and hearing by issuing an order to such effect, setting forth its finding in respect
thereto, if it finds that:
a. The issuer:
i. Has been judicially declared insolvent;
ii. Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order
of the Commission of which the issuer has notice in connection with the offering for which a
registration statement has been filed;
iii. Has been or is engaged or is about to engage in fraudulent transactions;
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iv. Has made any false or misleading representation of material facts in any prospectus concerning the
issuer or its securities;
v. Has failed to comply with any requirements that the Commission may impose as a condition for
registration of the security for which the registration statement has been filed; or
b. The registration statement is on its face incomplete or inaccurate in any material respect or includes
any untrue statements of a material fact required to be stated therein or necessary to make the
statement therein not misleading; or
c. The issuer, any officer, director or controlling person performing similar functions, or any under writer
has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise,
of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or
other competent or administrative body for violations of securities, commodities, and other related
laws.
For the purposes of this subsection, the term "competent judicial or administrative body" shall include a
foreign court of competent jurisdiction as provided for under Rules of Court.
13.2. The Commission may compel the production of all the books and papers of such issuer, and may
administer oaths to, and examine the officers of such the issuer or any other person connected therewith
as to its business and affairs.
13.3. If any issuer shall refuse to permit an examination to be made by the Commission, its refusal shall be
ground for the refusal or revocation of the registration of its securities.
13.4. If the Commission deems it necessary, it may issue an order suspending the offer and sale of the
securities pending any investigation. The order shall state the grounds for taking such action, but such
order of suspension although binding upon the persons notified thereof, shall be deemed confidential, and
shall not be published. Upon the issuance of the suspension order, no further offer or sale of such security
shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void.
13.5. Notice of issuance of such order shall be given to the issuer and every dealer and broker who shall
have notified the Commission of an intention to sell such security.
13.6. A registration statement may be withdrawn by the issuer only with the consent of the Commission.
SRC gives SEC the authority to refuse permit a registration statement to become effective or revoke the effectivity on
any ground enumerated in Sec. 13. But while SEC has the power to determine as to whether or not securities may be
traded, the Philippine Stock Exchange (PSE) may refuse listing of securities of issuers who do not meet the
qualifications and standard imposed by the exchange.
Why PSE has that power to refuse? Because...
The PSE, as the primary market for securities, has established its name and goodwill, and it has the right to protect
such goodwill by maintaining a reasonable standard or propriety in the entities that choose to transact through its
facilities. It is reasonable for the PSE to exercise its judgment in the manner it deems appropriate for its business, as
long as no rights are trampled upon, and public welfare is safeguarded.
A registration statement may be rejected by SEC after due notice and hearing. An applicant may be allowed to amend
its registration statement by filing with the SEC an amendment thereto in accordance with Sec 14. If during a public
offering, the SEC revokes the effectivity of a registration statement, the SEC shall publish a notice of such revocation
or suspension in a newspaper of general circulation in the Philippines or on the SECs web page along with a
statement that the offering in its current form has been cancelled, and upon receipt of notice, the issuer and all
persons acting on its behalf in the distribution of the subject securities shall immediately terminate the offering and
return any and all payments received from purchasers within 10 days after the notice is first published (SRC IRR).
Pending investigation, an order issued by the SEC suspending an offer and sale of securities, although binding upon
persons notified thereof, are to be treated confidential and shall not be published.
The issuer, at its instance, may apply for voluntary revocation of registration of securities, stating the reason for the
revocation, provided that no party stands to suffer damage thereby, and without prejudice to the filing of claims for
damages. The requirements and procedure for voluntary revocation of registration of securities are laid down under
SRC IRR 13.4.
The Order of Revocation shall not exempt the company form its reporting obligations under Sec 17.2, SRC.
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What are NOT considered as bar to registration or rejection or revocation of a registration statement?
Declaration of insolvency
Only companies that have been declared insolvent by a court may be refused registration. Take note that Sec 10
provides for exemptive relief of securities issued in connection with an insolvency procedure.
An insolvent company should not be denied the opportunity to seek capital if it discloses fully its financial condition. If
the investors are willing to take the risk of investing in an insolvent company, they should not be precluded by the SEC
from doing so.
Claim of violation of law and of fraudulent representation
Conducting business in violation of law is too broad as a ground for revocation. The only violations the SEC should
undertake to determine are those committed in connection with the offering.
Similarly, the fraudulent representation that serves as basis for revocation should be a material fact. If the violation of
law is not material, and therefore does not require disclosure, it should not be a basis for revocation. If the violation of
law is disclosed and investors are willing to invest, nonetheless, that is their choice.
The SEC should not refuse or revoke registration unless it is clear that the type of violation makes the offering such a
threat to public investors that the disclosure of violation for investors to consider is not sufficient. Based on the shift
from merit to full disclosure regulation, the SECs power to deny registration based on reason other than
inadequate disclosure is of limited scope and addresses only investors protection concerns.
Amendments to the Registration Statement (Sec 14)

14.1. If a registration statement is on its face incomplete or inaccurate in any material respect, the
Commission shall issue an order directing the amendment of the registration statement. Upon compliance
with such order, the amended registration statement shall become effective in accordance with the
procedure mentioned in Subsection 12.6 hereof.
14.2. An amendment filed prior to the effective date of the registration statement shall recommence the
forty-five (45) day period within which the Commission shall act on a registration statement. An
amendment filed after the effective date of the registration statement shall become effective only upon
such date as determined by the Commission.
14.3. If any change occurs in the facts set forth in a registration statement, the issuer shall file an
amendment thereto setting forth the change.
14.4. If, at any time, the Commission finds that the registration statement contains any false statement or
omits to state any fact required to be stated therein or necessary to make the statements therein not
misleading, the Commission may conduct an examination, and, after due notice and hearing, issue an
order suspending the affectivity registration statement. If the statement is duly amended, the suspension
order may be lifted.
14.5. In making such examination the Commission or any officer or officers designated by it may
administer oaths and affirmations and shall have access to, and may demand the production of, any books,
records or documents relevant to the examination. Failure of the issuer, underwriter, or any other person
to cooperate, or his obstruction or refusal to undergo an examination, shall be a ground for the issuance of
a suspension order.
Sec 14 allows pre-effective or post-effective amendments to correct inaccurate or incomplete information. Pre- or
post-effective amendments, however, would not become effective automatically. The SEC is empowered to review
each situation to determine whether investor interests are adequately protected by the amendment. The filing of
amendments to a registration statement restarts the clock with respect to the 45 day period between filing and the
time when the SEC, under Sec 12 of SRC, must act on the registration statement.
Disclosures about subsequent developments do not automatically trigger a post-effective amendment. The SEC may
permit the offering to continue where the issuer simply adds the information to the prospectus. However, in some
cases, a suspension order may be issued to prevent fraud which would not be cured by amending the registration
statement. Mere filing of an amendment to the registration does not result to automatic termination of a suspension
order. The SEC is empowered to determine whether the amendments would cure the defect that led to the
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suspension order. The requirements and procedure in filing amendments to registration statements are laid down
under SRC IRR Rule 14.
Suspension of Registration (Sec 15)
15.1. If at any time, the information contained in the registration statement filed is or has become
misleading, incorrect, inadequate or incomplete in any material respect, or the sale or offering for sale of
the security registered thereunder may work or tend to work a fraud, the Commission may require from
the issuer such further information as may in its judgement be necessary to enable the Commission to
ascertain whether the registration of such security should be revoked on any ground specified in this Code.
The Commission may also suspend the right to sell and offer for the sale such security pending further
investigation, by entering an order specifying the grounds for such action, and by notifying the issuer,
underwriter, dealer or broker known as participating in such offering.
15.2. The refusal to furnish information required by the Commission may be a ground for the issuance of
an order of suspension pursuant to Subsection 15.1. Upon the issuance of any such order and notification
to the issuer, underwriter, dealer or broken know as participating in such offering, no further offer or sale
of any such security shall be made until the same is lifted or set aside by the Commission. Otherwise such
sale shall be void.
15.3. Upon issuance of an order of suspension, the Commission shall conduct a hearing. If the Commission
determines that the sale of any security should be revoked is shall issue an order prohibiting sale of such
security.
15.4. Until the issuance of a final order, the suspension of the right to sell, though binding upon the
persons notified thereof, shall be deemed confidential, and shall not be published, unless it shall appear
that the order of suspension has been violated after notice. If, however, the Commission finds that the sale
of the security will neither be fraudulent nor result in fraud, it shall forthwith issue an order revoking the
order of suspension, and such security shall be restored to its status as a registered security as of the date
of such order of suspension.
Suspension of registration is a serious action and should not be undertaken for minor deficiencies in the registration
statement. It should be reserved for significant problems or where fraudulent sales are occurring.
While the SEC is empowered to summarily suspend the registration of securities for the interest of the public, it shall
conduct a hearing upon the issuance of an order of suspension. The required hearing adheres to the rule of due
process.
L. Pre-need Plans (Sec 16)

No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which
the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the
registration of pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to
prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and
recording keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing
trust funds for the payment of benefits under such plans.
Sec 16 is a new provision providing SEC with statutory authority to regulate the pre-need industry and expressly
giving SEC the power to promulgate rules in this area.
Issuances of pre-need plans and the persons involved in the sale and distribution thereof are governed by the New
Rules on the Regulation and Sale of Pre-need Plans and related SEC Circulars adopted by SEC pursuant to Sec 16.
What are pre-need plans?
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 SEC may approve (Sec 3.9 SRC).
A pre-need plan partakes of a financing scheme designed for buyers who pay the plans at stated price on the assumption
and anticipation of future services or monetary consideration at the current stated price.
What is the difference between pre-need plans (PNPs) and insurance contracts (ICs)?
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PNPs are triggered by events that are certain to occur while ICs depend on the occurrence of an unforeseen event.
Do contracts for future enjoyment of privilege/service (ex. Vacation rights, use of resort facilities) require registration?
Yes, according to SEC. Because such contracts are similar to that of PNPs which require registration. While the contracts
executed under the scheme are not strictly considered investment contracts for profit as there is no expectation of
profitable return, the same essentially involves money outlay or commitment by the purchasers to pay a certain amount on
the assumption and anticipation of future delivery of services, and like any other forms of investments, the holder of the
contract is also entitled to protection.
Does SEC regulate pension plans?
Yes but SECs regulatory power is limited to voluntary pension or retirement plans provided by third party entities, where
the purchase of these plans is voluntary on the part of the buyer and his participation is not predicated on employment.
SEC does not regulate or supervise the establishment, management or operation of privately-managed employmentbased pension or retirement plans set up by an enterprise and/or its employees for employees retirement benefits.
M. Reportorial Requirements (Sections 17 and 18)
Periodic and Other Reports of Issuer (Sec 17)
17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof shall file with the Commission: (a)
Within one hundred thirty-five (135) days, after the end of the issuers fiscal year, or such other time as
the Commission may prescribe, an annual report which shall include, among others, a balance sheet, profit
and loss statement and statement of cash flows, for such last fiscal year, certified public accountant, an a
management discussion and analysis of results of operation; and
(b) Such other periodical reports for interim fiscal periods and current reports on significant developments
of the issuer as the Commission may prescribe as necessary to keep current information on the operation
of the business and financial condition of the issuer.
17.2. The reportorial requirements of Subsection 17.1 shall apply to the following:
(a) An issuer which has sold a class of its securities pursuant to a registration under section 12 hereof:
Provided however, That the obligation of such issuer to file reports shall be suspended for any fiscal year
after the year such registration became effective if such issuer, as of the first day of any such fiscal year,
has less than one hundred (100) holder of such class securities or such other number as the Commission
shall prescribe and it notifies the Commission of such;
(b) An issuer with a class of securities listed for trading on an Exchange; and
(c) An issuer with assets of at least Fifty million pesos (50,000,000.00) or such other amount as the
Commission shall prescribe, and having two hundred (200) or more holder each holding at least one
hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such issuer
to file report shall be terminate ninety (90) days after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100) share reduced to less than one hundred (100).
17.3. Every issuer of a security listed for trading on an Exchange a copy of any report filed with the
Commission under Subsection 17.1 hereof.
17.4. All reports (including financial statements) required to be filed with the Commission pursuant to
Subsection 17.1 hereof shall be in such form, contain such information and be filed at such times as the
Commission shall prescribe, and shall be in lieu of any periodical or current reports or financial statements
otherwise required to be filed under the Commission shall prescribe.
17.5. Every issuer which has a class of equity securities satisfying any of the requirements in Subsection
17.2 shall furnish to each holder of such equity security an annual report in such form and containing such
information as the Commission shall prescribe.
To enable stockholders to gain material information about the issuer directly and in advance of the annual
stockholders meeting.
17.6. Within such period as the Commission may prescribe preceding the annual meeting of the holders of
any equity security of a class entitled to vote at such meeting, the issuer shall transmit to such holders an
annual report in conformity with subsection 17.5.
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Shareholders must be able to monitor constantly the performance of the security issuers through certain means
so that they can make a fair assessment of the market value of their securities. The best monitoring instrument is
no other than the issuers report describing its past performance and outlook for the future. Thus, SRC makes it
mandatory for issuers to furnish all stockholders with annual reports.
Full disclosure is now required not only at the time of registration (Sec 8), but also in the ongoing reporting
requirements (Sec 17) throughout the life of the registered/listed company which shall be made available to all
investors. Full disclosure ensures that vital information is available to all investors to help them gauge the risks and
merits of their investments. It puts equal responsibilities on the shoulders of both shareholders and investors alike, by
making them responsible for their own actions.
Three categories of companies that will be the subject of reporting obligation:
1. Companies whose shares have been the subject of a public offering;
2. Those whose securities are listed on an exchange;
3. Those which have a specified level of assets and number of stockholders to cover companies that, without a
public offering, overtime grow into substantial operations and through transfers of stocks acquire a large number
of equity holders. An issuer whose security holders drop below a certain number are relieved of the burden and
expenses of continuing to comply with the required reports.
SEC can adopt abbreviated reporting requirements where it determines that adequate protection already exists based
on the public availability of information or the sophistication of investors.
SRC IRR
Enumerates the required reports for companies subject to reporting obligations under Sec 17 (Rule 17.1).
Companies are required to deny or confirm reports that appear in the media which could create public speculation.
Any statements, misrepresentations or omission of material fact would be a joint responsibility of the issuer, reporting
director, officer and substantial shareholder, and any statement made by an individual who is a director, executive
officer, or a substantial stockholder of the listed firm claims to have made the disclosure in his personal capacity shall
be considered as part of an official filing of such company if the individual does not deny the statement.
Reports by five per centum (5%) Holders of Equity Securities (Sec 18)
18.1. In every case in which an issuer satisfies the requirements of Subsection 17.2 hereof any person who
acquires directly or indirectly the beneficial ownership of more than five of per centum (5%) of such class
or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within ten (10) days
after such acquisition or such reasonable time as fixed by the Commission, submit to the issuer of the
securities, to the Exchange where the security is traded, and to the Commission a sworn statement
containing the following information and such order information as the Commission may require in the
public interest or for the protection of investors:
(a) The personal background, identity, residence, and citizenship of, and the nature of such beneficial
ownership by, such person and all other person by whom or on whose behalf the purchases are
effected; in the event the beneficial owner is a juridical person, the of business of the beneficial owner
shall also be reported;
(b) If the purpose of the purchases or prospective purchases is to acquire control of the business of the
issuer of the securities, any plans or proposals which such persons may have that will effect a major
change in its business or corporate structure;
(c) The number of shares of such security which are beneficially owned, and the number of shares
concerning which there is a right to acquire, directly or indirectly, by; (i) such person, and (ii) each
associate of such person, giving the background, identity, residence, and citizenship of each such
associate; and
(d) Information as to any contracts, arrangements, or understanding with any person with respect to
any securities of the issuer including but not limited to transfer, joint ventures, loan or option
arrangements, puts or call guarantees or division of losses or profits, or proxies naming the persons
with whom such contracts, arrangements, or understanding have been entered into, and giving the
details thereof.
18.2. If any change occurs in the facts set forth in the statements, an amendment shall be transmitted to
the issuer, the Exchange and the Commission.
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18.3. The Commission, may permit any person to file in lieu of the statement required by subsection 17.1
hereof, a notice stating the name of such person, the shares of any equity securities subject to Subsection
17.1 which are owned by him, the date of their acquisition and such other information as the commission
may specify, if it appears to the commission that such securities were acquired by such person in the
ordinary course of his business and were not acquired for the purpose of and do not have the effect of
changing or influencing the control of the issuer nor in connection with any transaction having such
purpose or effect.
The required threshold for triggering the reporting obligation is imposed in the light of the absence of widespread
stock ownership in the Philippines. A holder with less than the required percentage generally has insufficient
ownership to be of any significance. The SEC, however, is given the authority to reduce the percentage if the future
events warrants.
What is beneficial ownership? (SRC IRR Rule 3)

Beneficial owner or beneficial ownership means any person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power, which includes the power to vote, or to direct the
voting of such security; and/or investment returns or power, which includes the power to dispose of, or to direct the
disposition of such security; provided, however, that a person shall be deemed to have an indirect beneficial ownership
interest in any security which is:
i. held by members of his immediate family sharing the same household;
ii. held by a partnership in which he is a general partner;
iii. held by a corporation of which he is a controlling shareholder; or
iv. subject to any contract, arrangement or understanding which gives him voting power or investment power with respect
to such securities; provided however, that the following persons or institutions shall not be deemed to be beneficial
owners of securities held by them for the benefit of third parties or in customer or fiduciary accounts in the ordinary
course of business, so long as such shares were acquired by such persons or institutions without the purpose or
effect of changing or influencing control of the issuer:
a) a broker dealer;
b) an investment house registered under the Investment Houses Law;
c) a bank authorized to operate as such by the Bangko Sentral ng Pilipinas;
d) an insurance company subject to the supervision of the Office of the Insurance Commission;
e) an investment company registered under the Investment Company Act;
f) a pension plan subject to regulation and supervision by the Bureau of Internal Revenue and/or the Office of
the Insurance Commission or relevant authority; and
g) a group in which all of the members are persons specified above.
All securities of the same class beneficially owned by a person, regardless of the form such beneficial ownership takes,
shall be aggregated in calculating the number of shares beneficially owned by such person.
A person shall be deemed to be the beneficial owner of a security if that person has the right to acquire beneficial
ownership, within thirty (30) days, including, but not limited to, any right to acquire, through the exercise of any option,
warrant or right; through the conversion of any security; pursuant to the power to revoke a trust, discretionary account or
similar arrangement; or pursuant to automatic termination of a trust, discretionary account or similar arrangement.
Philippine Veterans Bank v JUSTINA CALLANGAN, in her capacity as Director of the Corporation Finance
Department of the Securities and Exchange Commission and/or the SECURITIES AND EXCHANGE COMMISSION,
3 Aug 2011
Facts: Respondent Callangan sent letter to petitioner Phil Veterans Bank (PVB), informing it that it qualifies as a public
company under Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the SRC. The Bank is thus required to comply with the reportorial requirements
set forth in Section 17.1 of the SRC. PVB responded by explaining that it should not be considered a public company
because it is a private company whose shares of stock are available only to a limited class or sector, i.e., to World War II
veterans, and not to the general public. Callangan rejected PVBs explanation and assessed it a penalty of some 1.9
million pesos for failing to comply with the SRC reportorial requirements. SEC En banc dismissed PVBs appeal to it and
CA affirmend SEC en banc.
Issue: Whether PVB is a public company subject to reportorial requirements under Sec 17.1 of SRC.
41
Held: Yes
From the provisions of Sec 17.2 (c), SRC and 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC, it
is clear that a public company, as contemplated by the SRC, is not limited to a company whose shares of stock are
publicly listed; even companies like the Bank, whose shares are offered only to a specific group of people, are considered
a public company, provided they meet the requirements enumerated under said provisions.
PVB argues that even assuming it is considered a public company pursuant to Sec 17, the Court should interpret the
pertinent SRC provisions in such a way that no financial prejudice is done to the thousands of veterans who are
stockholders of the Bank. Given that the legislature intended the SRC to apply only to publicly traded companies, the
Court should exempt the Bank from complying with the reportorial requirements. (Kasi pag subject ka to reportorial
requirements dapat di ba magfu-furnish ka ng annual report to stockholders. E magastos daw yun sabi ng PVB, about
40m ang magagastos nila sa pag-mail pa lang ng reports sa stockholders nila. Kung gagastos sila ng ganon kalaki,
prejudicial daw yun sa cause of verteranism.)
SC said that contrary to the Banks claim, the Banks obligation to provide its stockholders with copies of its annual report
is actually for the benefit of the veterans-stockholders, as it gives these stockholders access to information on the Banks
financial status and operations, resulting in greater transparency on the part of the Bank. While compliance with this
requirement will undoubtedly cost the Bank money, the benefit provided to the shareholders clearly outweighs the
expense. For many stockholders, these annual reports are the only means of keeping in touch with the state of health of
their investments; to them, these are invaluable and continuing links with the Bank that immeasurably contribute to the
transparency in public companies that the law envisions.
Relevant provisions quoted:
17.2. The reportorial requirements of Subsection 17.1 shall apply to the following:
xxxx
c) An issuer with assets of at least Fifty million pesos (P50,000,000.00) or such other amount as the Commission shall
prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) shares of a
class of its equity securities: Provided, however, That the obligation of such issuer to file reports shall be terminated
ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one
hundred (100) shares is reduced to less than one hundred (100). (emphases supplied)
Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC defines a public company as any
corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty Million Pesos
(P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding
at least one hundred (100) shares of a class of its equity securities.
N. Protection of Shareholder Interest
1. Tender Offer (Sec 19)
19.1 Any person or group of persons acting in concert who intends to acquire at least 15% of any class of
any equity security of a listed corporation of any class of any equity security of a corporation with assets of
at least fifty million pesos (50,000,000.00) and having two hundred(200) or more stockholders at least one
hundred shares each or who intends to acquire at least thirty percent(30%) of such equity over a period of
twelve months(12) shall make a tender offer to stockholders by filling with the Commission a declaration to
that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of
this Code as the Commission may prescribe. Such person or group of persons shall publish all request or
invitations or tender offer or requesting such tender offers subsequent to the initial solicitation or request
shall contain such information as the Commission may prescribe, and shall be filed with the Commission
and sent to the issuer not alter than the time copies of such materials are first published or sent or given
to security holders.
(a) Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer
or request or invitation for tenders shall be made in accordance with such rules and regulations as may be
prescribe.
(b) Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn
by or on behalf of the depositor at any time throughout the period that tender offer remains open and if
the securities deposited have not been previously accepted for payment, and at any time after sixty (60)
days from the date of the original tender offer to request or invitation, except as the Commission may
otherwise prescribe.
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(c) Where the securities offered exceed that which person or group of persons is bound or willing to take
up and pay for, the securities that are subject of the tender offers shall be taken up us nearly as may be
pro data, disregarding fractions, according to the number of securities deposited to each depositor. The
provision of this subject shall also apply to securities deposited within ten (10) days after notice of increase
in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first
published or sent or given to security holders.
(d) Where any person varies the terms of a tender offer or request or invitation for tenders before the
expiration thereof by increasing the consideration offered to holders of such securities, such person shall
pay the increased consideration to each security holder whose securities are taken up and paid for
whether or not such securities have been taken up by such person before the variation of the tender offer
or request or invitation.
19.2. It shall be lawful for any person to make any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made in the light of the circumstances under
which they are made, not misleading, or to engaged to any fraudulent, deceptive or manipulative acts or
practices, in connection with any tender offer or request or invitation for tenders, or any solicitation for any
security holders in opposition to or in favor of any such favor of any such offer, request, or invitation. The
Commission shall, for the purposes of this subsection, define and prescribe means reasonably designed to
prevent, such acts and practices as are fraudulent, deceptive and manipulative.
What is a tender offer? means a publicly announced intention by a person acting alone or in concert with other persons to
acquire equity securities of a public company as defined in SRC Rule 3.
Any person making a tender offer shall make an announcement of his intention in a newspaper of general circulation, prior
to the commencement of the offer; Provided, however, that such announcement shall not be made until the bidder has the
resources to implement the offer in full. A copy of said notice shall be submitted to the Commission on the date of
publication thereof.
What are tender offer materials?
Tender offer materials mean: (i) the bidders formal offer, including all the material terms and conditions of the tender offer
and all amendments thereto; (ii) the related transmittal letter (whereby securities of the target company which are sought
in the tender offer may be transmitted to the bidder or its depository) and all amendments thereto; and (iii) press releases,
advertisements, letters and other documents published by the bidder or sent or given by the bidder to security holders
which, directly or indirectly, solicit, invite or request tenders of the securities being sought in the tender offer.
What is considered as unlawful act in connection with the tender offer rule?
The following acts are prohibited in any tender offer:
a. To employ any device, scheme or artifice to defraud any person;
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not misleading; or
c. To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon
any person.
In what instances is a tender offer required to be made?
SRC Rule 19. Mandatory tender offers:
a. Any person or group of person acting in concert, who intends to acquire 35% or more of equity shares in a public
company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all
holders of such class subject to paragraph (9)(E) of this Rule.
b. Any person or group of person acting in concert, who intends to acquire 35% or more of equity shares in a public
company in one or more transaction w/in a period of 12 months, shall be required to make a tender offer to all
holders of such class for the number of shares so acquired w/in the said period.
c. If any acquisition of even less than thirty five percent (35%) would result in ownership of over fifty one percent
(51%) of the total outstanding equity securities of a public company, the acquirer shall be required to make a
tender offer under this Rule for all the outstanding equity securities to all remaining stockholders of the said
company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent
third party. The acquirer in such a tender offer shall be required to accept any and all securities thus tendered.
d. In any transaction covered by this Rule, the sale of the shares pursuant to the private transaction shall not be
completed prior to the closing and completion of the tender offer. Transactions with any of the seller/s of
43
significant blocks of shares with whom the acquirers may have been in private negotiations shall close at the
same time and upon the same terms as the tender offer made to the public under this Rule. For paragraph
(2)(B), the last sale meeting the threshold shall not be consummated until the closing and completion of the
tender offer.
**The mandatory offer rule also applies to share acquisition meeting the threshold, which is done at the level of the
holding or Parent Corporation controlling a public company (Cemco Holding, Inc. v. National Life Insurance Company of
the Philippines, Inc. 529 SCRA 355 [2007]).
**A public company is defined as a corporation listed on the stock exchange, or a corporation with assets exceeding 50
million pesos and with 200 or more stockholders at least 200 of them holding not less than 100 shares of such
corporation.
Exempt from Mandatory tender offer requirement
A. The mandatory tender offer requirement shall not apply to the following:
i.
any purchase of shares from the unissued capital stock provided that the acquisition will not result to a
fifty percent (50%) or more ownership of shares by the purchaser;
ii.
any purchase of shares from an increase in authorized capital stock;
iii.
purchase in connection with foreclosure proceedings involving a duly constituted pledge or security
arrangement where the acquisition is made by the debtor or creditor;
iv.
purchases in connection with privatization undertaken by the government of the Philippines;
v.
purchases in connection with corporate rehabilitation under court supervision;
vi.
purchases through an open market at the prevailing market price;
vii.
merger or consolidation.
B. Purchasers of shares in the foregoing transactions shall, however, comply with the disclosure and other
obligations under SRC Rule 18.1 and SRC Rule 23.
2012 Bar: The purpose of the Tender Offer Rule is to
a. ensure an even playing field for all shareholders of a company in terms of opportunity to sell their
shareholdings.
b. ensure that minority shareholders in a publicly listed company are protected in the sense that they will equally
have the same opportunity as the majority shareholders in terms of selling their shares.
c. ensure that the shareholders who would also want to sell their shareholdings will have the opportunity for a
better price.
d. All of the above.
2010 Bar: Union Mines, Inc. has total assets of P60 Million with 210 stockholders holding at least 100 shared each. The
company has two principal stockholders, ABC which owns 60% of the shares of stock, and XYZ; which owns 17%. ABC in
turns is owned to the extent of 21.13% by Acme, Inc.; 29.69% by Golden Boy Inc.; 9% by XYZ; and the rest by individual
stockholders.
None of the parties is a publicly-listed company. XYZ now proposes to buy Acmes and Golden Boys shares in ABC,
which would give it, direct control of ABC and indirect control of Union Mines.
Is the proposal acquisition by XYZ subject to the mandatory tender offer rule? Why or why not? What is tender offer and
when is it mandatory?
A: Yes, the proposed acquisition is subject to mandatory tender offer rule. A tender offer is publicly announced intention by
a person (acting alone or in concert with other persons) to acquire shares of a public company. A tender offer is meant to
protect minority stockholders against any scheme that dilutes the share value of their investments. It gives them the
chance to exit the company under the same terms offered to the majority stockholders.
Under the Securities Regulations Code and its implementing rules, a mandatory tender offer is required (i) when at least
35% of the outstanding shares of a public company is to be acquired in one transaction or a series of transaction during
12-month period, or (ii) even if any acquisition is less than 35% threshold but the result thereof is the ownership of more
than 51% of the total outstanding shares of a public company. The mandatory offer rule also applies to share acquisition
meeting the threshold, which is done at the level of the holding or Parent Corporation controlling a public company
(Cemco Holding, Inc. v. National Life Insurance Company of the Philippines, Inc. 529 SCRA 355 [2007]).
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In this case, Union Mines is clearly a public company, since it has total assets of P60 million pesos with 210 stockholders
holding at least 100 shares each. A public company is defined as a corporation listed on the stock exchange, or a
corporation with assets exceeding 50 million pesos and with 200 or more stockholders at least 200 of them holding not
less than 100 shares of such corporation. XYZs acquisition of shares of Acme, Inc. and Golden Boy, Inc., taken
separately, does not reach 35% threshold. If taken collectively, the two acquisitions total only 50%. However, when the
acquisitions are added to XYZs existing shares in Union Mines, they meet the more- than -51% thresholds for mandatory
tender offer.
Cases:
Cemco Holdings, Inc. v National Life Insurance Company, 7 Aug 2007 (Direct vs indirect acquisition)
Facts: Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders UCHC, a non-listed
company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHCs stocks were owned
by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.
In a disclosure letter, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed
resolutions to sell to Cemco BCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in UCHC equivalent to
29.69%.
As a result of petitioner Cemcos acquisition of BCI and ACC shares in UCHC, petitioners total beneficial ownership,
direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC. PSE then inquired
with SEC whether Cemcos transaction is covered by the tender offer rule (TOR). SEC en banc ruled that the TOR is not
applicable. A Share Purchase Agreement was then executed by ACC and BCI, as sellers, and Cemco, as buyer; and the
transaction was consummated and closed.
Respondent National Life, a minority stockholder of UCC filed complaint with SEC and asked it to reverse it earlier ruling.
SEC ruled in favor of National Life and directed petitioner Cemco to make a tender offer for UCC shares to respondent
and other holders of UCC shares similar to the class held by UCHC in accordance with Section 9(E), Rule 19 of the
Securities Regulation Code. On appeal, CA affirmed SECs ruling.
Issue: Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company,
in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the
shares in UCHC, a non-listed company.
Held: Yes, TOR applicable
Petitioner asserts that the mandatory tender offer rule applies only to direct acquisition of shares in the public company.
However, Supreme Court said that the legislative intent of Section 19 of the SRC is to regulate activities relating to
acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a public company is obtained, either through the direct
purchase of its stocks or through an indirect means, mandatory tender offer applies.
For further reading, quoted sa case:
Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity
securities of a public company. A public company is defined as a corporation which is listed on an exchange, or a corporation with
assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such
company. Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender
their shares therein on the terms specified in the offer. Tender offer is in place to protect minority shareholders against any scheme that
dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms,
giving them the opportunity to sell their shares at the same price as those of the majority shareholders.
Under Section 19 of Republic Act No. 8799, it is stated:
Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least
fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of
a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more
stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of
such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the
Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information
45
required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish
all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a
security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial
solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the
Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given
to security holders.
Under existing SEC Rules, the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five
percent (35%). It is further provided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when
the purchase would result in ownership of over 51% of the total outstanding equity securities of the public company
Cattlemens Investment Company v George Fears, 343 F.Supp. 1248 (1972)

Facts: Si Defendant Fears ay chairman of the board of directors, president and controlling stockholder ng National
Pioneer Insurance (Pioneer). Ito namang si Pioneer beneficial owner of 4.86% shares ng plaintiff company na si
Cattlemens. Subsequently, si Fears, in his own name, purchased additional shares of Cattlemens, thereby increasing his
holdings in excess of 5%. (Under U.S. Securities Act, pag nag-offer ka to buy shares resulting to beneficial ownership of
more than 5% shares nung kumpanya, required ka na mag-file muna ng public information and disclosures sa SEC nila.
This is designed to protect the other shareholders. Yung tender offer kasi sa U.S. ginagawang scheme to gain control of a
company, kaya nire-require na mag-file ka muna sa SEC ng disclosure.)
It was alleged that through agents and certain employees of Pioneer, Fears actively engaged in making tender offers for,
or requests or invitations for tenders of, Cattlemen's stocks by telephone calls, use of the mails and personal visits without
complying with the requirements of the law. Hence, plaintiff seeks a judgment decreeing that defendant has violated the
Securities Act and to be enjoined from purchasing additional shares (madami pang prayer, may TRO pa, should not
exercise right to vote, etc.). Defendant, on the other hand, asserted that his actions, as a matter of law, do not constitute
tender offers.
Issue: Ang issue dito e yung ginawa bang solicitations ni Fears, through phone, mails, etc., constitute tender offer as to
say that he should have first filed the appropriate statement/information and disclosure; and because he did not, there
was violation of the Securities Act.
Held: Yes
The statute does not define the phrase "tender for, or request or invitation for tenders of" securities. The Act is, however, a
remedial statute and should be interpreted liberally to carry out the legislative intent.
We think it clear that the purpose of The Congress, in the enactment of the legislation in question, is to provide investors
who hold equity interests in public corporations, material information with respect to the potential impact of any effort to
acquire control of a company, sufficient time within which to make an unhurried investment decision as to whether to
dispose of or retain their securities, and to assure fair treatment of the investors. We deem it abundantly clear that there
is an obligation on persons attempting to gain control of a corporation by means of tender offers to make the
required filings and disclosures.
The activities of the defendant set out in the complaint and not denied by the defendant, i. e. an active and widespread
solicitation of public shareholders in person, over the telephone and through the mails, contain potential dangers which
the statute is intended to alleviate. The defendant, in not complying with the statute, deprived shareholders of information
prescribed by the Rule, which information was material to their investment decisions, and denied to them the fair
treatment provided by other parts of the law.
SRC Rule 19 Tender Offers
1. Definitions
A. Affiliate means any person, controlling, controlled by, or under common control with the issuer.
B. Beneficial owner shall have the same meaning as set forth in SRC Rule 3.
C. Bidder means any person who makes a tender offer or on whose behalf a tender offer is made.
D. Commencement means the date a tender offer is first published, sent or given to security holders.
E. Issuer means any issuer subject to reporting obligations under Section 17.2 of the Code.
F. Issuer Tender Offer means a publicly announced intention by an issuer to reacquire any of its own class
of equity securities, or by an affiliate of such issuer to acquire such securities.
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G. Security holders mean holders of record and beneficial owners of securities that are the subject of a
tender offer.
H. Target company means any issuer of securities that are sought by a bidder pursuant to tender offer.
I. Tender offer means x x x (see above)
J. Tender offer materials mean x x x (see above)
K. Termination means the date after which securities may not be tendered pursuant to the tender offer.
2. Mandatory tender offers (see above)
3. Exempt from Mandatory Tender Offer Requirement (see above)
4. Tender Offer by an Issuer/Buy Back
The thresholds of fifteen percent (15%) or more for a single acquisition or thirty percent (30%) for creeping
acquisition as provided for in Section 19 of the Code are increased to thirty five percent (35%), pending the
passage of the proposed amendments to the SRC.
A.
A reacquisition or repurchase by an issuer of its own securities shall only be made if such issuer has
unrestricted retained earnings in its books to cover the amount of shares to be purchased, and the same is
pursuant to any of the following purposes:
i. to implement a stock option or stock purchase plan;
ii. to meet short-term obligations which can be settled by the re-issuance of the repurchased shares;
iii. to pay dissenting or withdrawing stockholders entitled to payment for their shares under the
Corporation Code;
iv. such other legitimate corporate purpose/s.
In case of acquisition pursuant to subparagraph (i) or (ii) above, the same may be accounted for as
Investment in Marketable Securities, in accordance with International Accounting Standards.
B
Any issuer or any of its affiliates which intend to reacquire its own securities through active and
widespread solicitation from the stockholders in general and in substantial amount of its shares, shall
comply with disclosure and procedural requirements set forth under subparagraphs (C) and (D) below, and
the preceding provisions of this Rule.
C. If an issuer or an affiliate publishes, sends or disseminates its tender offer to security holders by means
of a summary publication in the manner prescribed in this Rule, the summary publication shall disclose
only the following information:
i. The identity of the issuer or affiliate making the tender offer;
ii. The amount and class of securities being sought and the price being offered;
iii. The information required by paragraph 8 of this Rule;
iv. A statement of the purpose of the issuer tender offer; and
v. The appropriate instruction for security holders on how to obtain promptly, at the expense of the
issuer or affiliate making the issuer tender offer, the information required by paragraph 7 of the Rule.
D. Until the expiration of at least ten (10) business days after the date of termination of the issuer tender
offer, neither the issuer nor any affiliate shall make any repurchase, otherwise than pursuant to the tender
offer of:
i. Any security which is the subject of the issuer tender offer, or any security of the same class and
series, or any right to repurchase such securities; and
ii. In the case of an issuer tender offer which is an exchange offer, any security being offered pursuant
to the exchange offer, or any security of the same class and series, or any right to repurchase any such
security.
E. This rule shall not apply to:
i. Calls or redemption of any security in accordance with the terms and conditions of its governing
instruments;
47
ii. Offers to repurchase securities evidenced by a certificate, order form or similar document which
represents a fractional interest in a share of stock or similar security.
5. Any person making a tender offer shall make an announcement of his intention in a
newspaper of general circulation, prior to the commencement of the offer; Provided, however,
that such announcement shall not be made until the bidder has the resources to implement
the offer in full. A copy of said notice shall be submitted to the Commission on the date of
publication thereof.
6. Filing Requirements
A. No bidder shall make a tender offer unless at least two (2) business days prior to the date of the
commencement of the tender offer, such bidder:
i. Files with the Commission copies of SEC Form 19-1, including all exhibits thereto, with the prescribed
filing fees; and
ii. Hand delivers a copy of such SEC Form 19-1, including all exhibits thereto to the target company at
its principal executive office and to each Exchange where such class of the target companys securities
are listed for trading.
B. The bidder shall file with the Commission copies of any additional tender offer materials as exhibit to
SEC Form 19-1 and, if a material change occurs in the information set forth in such SEC Form, copies of an
amendment to such form. Copies of such additional tender offer materials and amendments shall be hand
delivered to the target company and to any Exchange as required above.
C. The bidder shall report the results of the tender offer by filing with the Commission, not later than ten
(10) calendar days after the termination of the tender offer, copies of the final amendments to SEC Form
19-1.
7. Disclosure Requirements with Respect to Tender Offers
A. The bidder shall publish, send or give to security holders in the manner prescribed under paragraph 9 of
this Rule, a report containing the following information:
i. The identity of the bidder including his/its present principal occupation;
ii. The identity of the target company;
iii. The amount of class of securities being sought and the type and amount of consideration being
offered therefor;
iv. The scheduled expiration date of the tender offer, whether the tender offer may be extended and, if
so, the procedures for extension of the tender offer;
v. The exact dates when security holders who deposit their securities will have the right to withdraw
their securities pursuant to this Rule and the manner in which shares will be accepted for payment and
in which withdrawal may be effected;
vi. If the tender offer is for less than all of the securities of the class and the bidder is not obligated to
purchase all securities tendered, the exact date of the period during which securities will be accepted
on a pro rata basis under this Rule and the present intention or plan of the bidder with respect to the
tender offer in the event of an oversubscription by security holders;
vii. The confirmation by the bidders financial adviser or another appropriate third party that resources
available to the bidder are sufficient to satisfy full acceptance of the offer; and
viii. The information included in SEC Form 19-1.
B. If any material change occurs in the information previously disclosed to security holders, the bidder
shall disclose promptly such change in the manner prescribed by this Rule.
8. Dissemination Requirements
A. A bidder or an issuer shall disseminate the tender offer by complying fully with one of the following
methods of dissemination:
i. Long Form Publication. The bidder shall publish in two (2) newspapers of general circulation in the
Philippines on the date of commencement of the tender offer and for two (2) consecutive days
thereafter the information required by paragraph 7 (A) of this Rule; or
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ii. Summary Publication. The bidder shall publish in two (2) newspapers of general circulation in the
Philippines on the date of commencement of the tender offer and for two (2) consecutive days
thereafter the information required by paragraph 7(A)(i) through (viii) of this Rule, including
appropriate instructions for security holders on how to obtain promptly, at the expense of the
bidder, the information included in SEC Form 19-1, and furnish promptly a copy of such form to any
security holder who requests a copy of such information.
B. If a material change occurs in the information published, sent or given to security holders, the bidder
shall disseminate promptly disclosure of such change in a manner reasonably calculated to inform security
holders of such change.
9. Period and Manner of Making Tender Offer
A. The tender offer, unless withdrawn, shall remain open until the expiration of:
i. At least twenty (20) business days from its commencement; provided, however, that an offer should
generally be completed within sixty (60) days from the date the intention to acquire is publicly
announced; or
ii. At least ten (10) business days from the date the notice of a change in the percentage of the class of
securities being sought or in the consideration offered is first published, sent or given to security
holders.
B. Where a mandatory tender offer is required, the bidder is compelled to offer the highest price paid by
him for such shares during the past six (6) months. Where the offer involves payment by transfer or
allotment of securities, such securities must be valued on an equitable basis.
C. In case of a tender offer other than by an issuer, a target company shall not engage in any of the
following transactions during the course of a tender offer, or before the commencement thereof if its board
has reason to believe that an offer might be imminent, except if such transaction is in pursuance of a
contract entered into earlier, or with the approval of shareholders in a general meeting or, where special
circumstances exist, Commission approval has been obtained:
i. Issue any authorized but unissued shares;
ii. Issue or grant options in respect to any unissued shares;
iii. Create or issue, or permit the creation or issue of, any securities carrying rights of conversion into,
or subscription for, shares;
iv. Sell, dispose of or acquire, or agree to acquire, any asset, the value of which amounts to five percent
(5%) or more of the total value of assets prior to acquisition; or
v. Enter into contracts otherwise done in the ordinary course of business.
D. The bidder in a tender offer shall permit securities tendered to be withdrawn:
i. At any time during the period such tender offer remains open; and
ii. If not yet accepted for payment, after the expiration of sixty (60) business days from the
commencement of the tender offer.
E. If the tender offer shall be for less than the total outstanding securities of a class but a greater number
of securities is tendered pursuant thereto, the bidder shall be bound to take up and pay for the securities
on a pro rata basis, disregarding fractions, according to the number of securities tendered by each security
holder during the period such offer remains open.
F. In the event the bidder in a tender offer shall increase the consideration offered after the tender offer
has commenced, such bidder shall pay such increased consideration to all security holders whose tendered
securities are accepted for payment by such bidder, whether or not the securities were tendered prior to
the variation of the tender offers terms.
G. The bidder in a tender offer shall either pay the consideration offered, or return the tendered securities,
not later than ten (10) business days after the termination or the withdrawal of the tender offer.
H. No tender offer may be made unless:
i. The tender offer shall be open to all security holders of the class of securities subject to the tender
offer; and
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ii. The consideration paid to any security holder pursuant to the tender offer shall be the highest
consideration paid to any other security holder during such tender offer.
I. The bidder in a tender offer shall not extend the length of a tender offer without prior clearance from the
Commission and without issuing a notice of such extension by press release or other public announcement,
which notice shall include disclosure of the appropriate number of securities deposited to date and shall be
issued no later than the scheduled original expiration date of the offer.
10. Transactions on the Basis of Material, Non-Public Information
If a person shall become aware of a potential tender offer before the tender offer has been publicly
announced, such person shall not buy or sell, directly or indirectly, the securities of the target company
until the tender offer shall have been publicly announced. Such buying or selling shall constitute insider
trading under Section 27.4 of the Code.
11. Withdrawal/Lapse of Tender Offer
Except with the consent of the Commission, where an offer has been announced but has not become
unconditional in all respects and has been withdrawn or lapsed, neither the bidder nor any person who
acted in concert with it in the course of the offer may, within six (6) months from the date on which such
offer has been withdrawn or lapsed, announce an offer for the target company nor acquire any securities
of the target company which would require such person to make a mandatory tender offer under this Rule
and Section 19.1 of the Code.
12. Prohibited practices
It shall be a fraudulent, deceptive or manipulative act or practice, in connection with any tender offer:
A. to employ any device, scheme or artifice to defraud any person;
B. to make any untrue statement of a material fact or to omit to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they were made, not
misleading; or
C. to engage in any act, practice or course of business which operates or would operate as a fraud or
deceit upon any person.
13. Violation
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.
2. Proxy Solicitations (Sec 20)
20.1. Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations
to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly authorized representative and file
before the scheduled meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended.
No proxy shall be valid and effective for a period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or any authorization, in respect of any security
carried for the account of the customer, to a person other than the customer, without written authorization
of such customer.
20.5. A broker or dealer who holds or acquire the proxy for at least ten percent (10%) or such percentage
as the commission may prescribe of the outstanding share of such issuer, shall submit a report identifying
the beneficial owner of ten days after such acquisition, for its own account or customer, to the issuer of
security, to the exchange where the security is traded and to the Commission.
SEC can set special standards for the form, contents, purpose and the time period for proxies applicable to publiclyheld corporations different from that what is provided in the Corporation Code.
A person soliciting proxies in the case of publicly-held companies is no longer allowed to obtain total discretion to vote
shares up to five years as now allowed in the Corporation Code. Rather, proxies are restricted for use only in a
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particular meeting or for voting on a particular proposal. The rationale behind the restriction that no proxy shall confer
authority to vote to more than one meeting is to prevent situations where the proxy holders would still be voting the
shares which are no longer owned by the persons who executed the proxies. This situation likely occurs in case of
publicly held/listed shares because of the series of subsequent transfers on traded stocks.
Furnishing proxy forms to stockholders is considered as solicitation only if it is intended or calculated to result in the
procurement, withholding or revocation of a proxy. If the act of enclosing a proxy in the notice of the stockholders
meeting is intended solely for the stockholders convenience who will execute the proxies without any undue influence
from the management of the corporation, it may not be treated as solicitation as contemplated under SRC IRR,
provided that the proxy forms so transmitted do not designate any nominee of the management as an alternative
proxy.
Proxy forms issued not in compliance with the requirements of SEC, for all intent and purposes, shall not be
considered valid.
3. Internal Record Keeping and Accounting Controls (Sec 22)

Every issuer which has a class of securities that satisfies the requirements of Subsection 17.2 shall:
22.1. Make and keep books, records, and accounts which, in reasonable detail accurately and fairly reflect
the transactions and dispositions of assets of the issuer;
22.2. Device and maintain a system of internal accounting controls sufficient to provide reasonable
assurance that: (a) Transactions and access to assets are pursuant to management authorization; (b)
Financial statements are provided in conformity with generally accepted accounting principles that are
adopted by the Accounting standards council and the rules promulgated by the Commission with the
regard to the preparation of the financial statements; and (c) Recorded assets are compared with existing
assets at reasonable intervals and differences are reconciled.
4. Transactions of Directors, Officers and Principal Stockholders (Sec 23)
23.1. Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of
any class of any equity security which satisfies the requirements of subsection 17.2, or who is a director or
an officer of the issuer of such security, shall file, at the time either such requirement is first satisfied or
after ten days after he becomes such a beneficial owner, director, or officer, a statement with the
Commission and, if such security is listed for trading on an exchange, also with the exchange of the
amount of all the equity security of such issuer of which he is the beneficial owner, and within ten days
after the close of each calendar month thereafter, if there has been a change in such ownership at the
close of the calendar month and such changes in his ownership as have occurred during such calendar
month.
23.2. For the purpose of preventing the unfair use of information which may have been obtained by such
beneficial owner, director or officer by reason of his relationship to the issuer, any profit realized by him
from any purchase or sale, or any sale or purchase, of any equity security of such issuer within any period
of less than (6) months unless such security was acquired in good faith in connection with a debt
previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of
holding the security purchased or of not repurchasing the security sold for a period exceeding six (6)
months. Suit to recover such profit may be instituted before the Regional Trial Court by the issuer, or by
the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or
refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same
thereafter, but not such shall be brought more than two years after the date such profit was realized. This
Subsection shall not be construed to cover any transaction were such beneficial owner was not such both
time of the owner or the sale, or the sale of purchase, of the security involved, or any transaction or
transactions which the Commission by rules and regulations may exempt as not comprehended within the
purpose of this subsection.
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 the person selling the principal: (a) Does not own the security sold: or (b) If
owning the security, does not deliver not deliver it against such sale within 20 days thereafter, or does not
within five days after such sale deposit in the mails or the unusual channels of transportation; but no
person shall be deemed to have violated this subsection if he proves notwithstanding the exercise of good
faith he was unable to make such delivery in such time, or that to do so would cause undue inconvenience
or expense.
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23.4. The provisions of subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and
the provisions of Subsection 23.3 shall not apply to any sale, of an equity security not then or thereafter
held by him and an investment account, by a dealer in the ordinary course of his business and incident to
the establishment or maintenance by him of a primary or secondary market, otherwise than on an
Exchange, for such security. The Commission may, by such rules and regulations as it deems necessary or
appropriate in the public interest, define and prescribe terms and conditions with respect to securities held
in an investment account and transactions made in the ordinary course of business and incident to the
establishment or maintenance of a primary or secondary market.
This provision is designed to prevent corporate insiders from taking advantage of their access to inside information.
O. Manipulative Practices and Insider Trading

1. Manipulation of Security Prices (SRC Rule 24)
What are the unlawful acts pertaining to manipulation of security?
24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or
indirectly:
a) To create a false or misleading appearance of active trading in any listed security in an Exchange or any
other trading market by effecting any transaction in such security which involves no change in the
beneficial ownership thereof
b. To effect, alone or with others, a series of transactions in securities that raises their price to induce the
purchase of a security, or depresses their price to induce the sale of a security or creates active trading to
induce such a purchase or sale through manipulative devices such as marking the close, painting the tape,
squeezing the float, hype and dump, boiler room operations and such other similar devices.
c. To circulate or disseminate information that the price of any security listed in an Exchange will or is likely
to rise or fall because of manipulative market operations of any one or more persons conducted for the
purpose of raising or depressing the price of the security to induce the purchase or sale of such security.
d. To make false or misleading statement with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale
of any security listed or traded in an Exchange.
e. To effect, either alone or with others, any series of transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security,
unless otherwise allowed by this Code or by rules of the Commission.
What is a wash sale? Occurs when stocks are traded without a genuine change in actual beneficial ownership making it
appear that the stocks are actively traded.
2001 Bar: Suppose A is the owner of several inactive securities. To create an appearance of active trading for such
securities, A connives with B by which A will offer for sale some of his securities and B will buy them at a certain fixed
price, with the understanding that although there would be an apparent sale, A will retain the beneficial ownership thereof.
a) Is the arrangement lawful? No. The arrangement is not lawful. It is an artificial manipulation of the price of securities.
This is prohibited by the Securities Regulation Code.
b) If the sale materializes, what is it called? If the sale materializes, it is called a wash sale or simulated sale.
What is a short sale?
SRC Rule 24.2-2 (a). The term "short sale" shall mean any sale of a security which the seller does not own or any sale
which is consummated by the delivery of a security borrowed by, or for the account of the seller. A person shall be deemed
to own a security if:
(1) he or his agent has title to it;
(2) he has purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it
and has not yet received it;
(3) he owns a security convertible into or exchangeable for it and has tendered such security for conversion or
exchange;
(4) he has an option to purchase or acquire it and has exercised such option; or
(5) he has rights or warrants to subscribe to it and has exercised such rights or warrants; provided, however, that
a person shall be deemed to own securities only to the extent he has a net long position in such securities.
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2. Manipulative and Deceptive Devices (Sec 24.2)
No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive
device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the
purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe
as necessary or appropriate in the public interest for the protection of investors.
3. Regulation of Option Trading (Sec 25)
No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle,
option or privilege in relation to any security registered on a securities exchange. The terms "put", "call", "straddle",
"option", or "privilege" shall not include any registered warrant, right or convertible security.
Stock rights traditionally granted by issuers are not encompassed by this provision. This applies only to options that
are created by an exchange or other market where the clearing organization and/or members guarantee performance
and where offset is available.
Options are 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 in accordance with exchange rules.
Call options are rights to buy; Put options are rights to sell.
Straddle involves the purchase of an equal number of put options and call options on the same underlying security at the
same strike price and maturity date. Each option may be exercised separately, although the combination of options is
usually bought and sold as a unit.
4. Fraudulent Transactions; Insider Trading
What are fraudulent transactions?
Sec 26. It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of
any securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a material fact or any omission to
state a material fact necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading; or
26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a
fraud or deceit upon any person.
2004 Bar: Ms. OB was employed in MAS Investment Bank. WIC, a medical drug company, retained the Bank to assess
whether it is desirable to make a tender offer for DOP company, a drug manufacturer. OB overheard in the course of her
work the plans of WIC. By herself and thru associates, she purchased DOP stocks available at the stock exchange priced
at P20 per share. When WIC's tender offer was announced, DOP stocks jumped to P30 per share. Thus OB earned a
sizable profit. Is OB liable for breach and misuse of confidential or insider information gained from her employment? Is
she also liable for damages to sellers or buyers with whom she traded? If so, what is the measure of such damages?
Explain briefly.
OB is an insider (as defined in Subsection 3.8(3) of the Securities Regulation Code) since she is an employee of the
Bank, the financial adviser of DOP, and this relationship gives her access to material information about the issuer (DOP)
and the latter's securities (shares), which information is not generally available to the public. Accordingly, OB is guilty of
insider trading under Section 27 of the Securities Regulation Code, which requires disclosure when trading in securities.
OB is also liable for damages to sellers or buyers with whom she traded. Under Subsection 63.1 of the Securities
Regulation Code, the damages awarded could be an amount not exceeding triple the amount of the transaction plus
actual damages. Exemplary damages may also be awarded in case of bad faith, fraud, malevolence or wantonness in the
violation of the Securities Regulation Code or its implementing rules. The court is also authorized to award attorney's fees
not exceeding 30% of the award.
2013 Bar: You are a member of the legal staff of a law firm doing corporate and securities work for Coco Products Inc., a
company with unique products derived from coconuts and whose shares are traded in the Philippine Stock Exchange. A
partner in the law firm, Atty. Buenexito, to whom you report, is the Corporate Secretary of Coco Products. You have long
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been investing in Coco Products stocks even before you become a lawyer. While working with Atty. Buenexito on another
file, he accidentally gave you the Coco Products file containing the companys planned corporate financial rehabilitation.
While you knew you had the wrong file, your curiosity prevailed and you browsed through the file before returning it. Thus,
you learned that a petition for financial rehabilitation is imminent, as the company could no longer meet its obligations as
they fell due. Soon After, you mother is rushed to the hospital for an emergency operation, and you have to raise money
for her hospital bills. An immediate option for you is to sell your Coco Products shares. The sale would be very timely
because the price of the companys stocks are still high. Would you sell the shares to raise the needed funds for your
mothers hospitalization? Take into account legal and ethical considerations.
The sale of the shares does not constitute insider trading. Although Atty. Buenexito, as corporate secretary of Coco
Products, Inc., was an insider, it did not obtain the information regarding the planned corporate rehabilitation by a
communication from him. He just accidentally gave the wrong file (Section 3.8 of Securities Regulation Code).
It would be unethical to sell the shares. Rule 1.01 of the Code of Professional Responsibility provide, A lawyer shall not
engage in unlawful, dishonest, immoral or deceitful conduct. A lawyer should not only refrain from performing unlawful
acts. He should also desist from engaging in unfair deceitful conduct to conceal from the buyer of the shares the planned
corporate rehabilitation.
2008 Bar: Grand Gas Corporation, a publicly listed company, discovered after extensive drilling a rich deposit of natural
gas along the coast of Antique. For five (5%) months, the company did not disclose the discovery so that it could quietly
and cheaply acquire neighboring land and secure mining rights to the land. Between the discovery and its disclosure of
the information to the Securities and Exchange Commission, all the directors and key officers of the company bought
shares in the company at very low prices. After the disclosure, the price of the shares went up. The directors and officers
sold their shares at huge profits,
(A) What provision of the Securities Regulation Code (SRC) did they violate, if any ? Explain.
The directors and key officers of the company violated the prohibition against insider trading under Sec. 27 of the
Securities Regulation Code, which declares it unlawful for an insider (which includes directors and officers of a publicly
listed company) to sell or buy its securities, if they know of a fact of special significance with respect to the company or the
security, that is not generally available to the public, before such material information made public through disclosure
proceedings. The directors and key officers are liable to disgorge the profits earned and to pay damages.
(B) Assuming that the employees of the establishment handling the printing work of Grand Gas Corporation saw the
exploration reports which were mistakenly sent to their establishment together with other materials to be printed. They too
bought shares in the company at low prices and later sold them at huge profits. Will they be liable for violation of the
SRC? Why?
The employees are liable for violation of the prohibition against insider trading. They fall within the definition of insider.
Subsection 3.8 of the Securities Regulation Code defines an insider as 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.
2012 Bar: X, who is the Executive Vice President of ABC Corporation, a listed company, can be held liable or guilty of
insider trading if, he
a. bought shares of ABC Corporation when it was planning to acquire another company to improve its asset base, the
news of which increased the price of the shares in the Stock Exchange.
b. bought shares of XYC Corporation, a sister company of ABC Corporation when he learned that XYC Corporation was
about to also list its share in the Philippine Stock Exchange. c. bought shares of ZZZ Corporation when he learned that
ABC Corporation would acquire ZZZ Corporation.
d. All of the above.
SEC v CA and Cualoping Securities Corp and Fidelity Stock Transfers, Inc., 21 Jul 1995 (fraud vs negligence)
Facts: Cualoping is a stockbroker while Fidelity is the stock transfer agent of Philex Mining Corp. In 1988 certificates of
stock of PHILEX representing 1.4 million shares were stolen from the premises of FIDELITY. These stock certificates
consisting of stock dividends of certain PHILEX shareholders had been returned to FIDELITY for lack of forwarding
addresses of the shareholders concerned.
Years later, the stolen stock certificates ended in the hands of a certain Agustin Lopez, a messenger of New World
Security Inc., an entirely different stock brokerage firm. Lopez then brought those certificates to Cualoping for trading and
sale with the stock exchange. The certificates had the proper indorsement signatures which were stamped verified by
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Fidelity and the guaranteed by Cualoping; and thereafter traded with the stock exchange. (So remember yung mga
certificates na yun nanakaw but seemingly or apparently had all the proper indorsement and signatures. So dito
pinapakita na may negligence na on the side of both Cualoping and Fidelity.)
After the confirmation of sale of stocks represented by those stolen certificates, they were delivered to Fidelity for
cancellation of the old and issuance of new certificates in the name of the new buyers. After acquiring knowledge of the
pilferage, FIDELITY conducted an investigation with assistance of the NBI and found that two of its employees were
involved and signed the certificates. After receipt of said stock certificates, FIDELITY rejected the issuance of new
certificates in favor of the buyers for reasons that the signatures of the owners of the certificates were allegedly forged
and thus the cancellation and new issuance thereof cannot be effected.
Fidelity sought the opinion of SEC regarding this matter. Ultimately SEC disposed of the matter saying that both Fidelity
and Cualoping were negligent in the performance of their duties, ordered Fidelity to replace the shares and cause their
transfer in the name of the new buyers, and fined both for violating the Revised Securities Act (Ang basis ng SEC kaya
may penalty is Sec 29a3, w/c says na yung transaction daw operated as a fraud or deceit. Meron ba talagang fraud? Ito
ang issue dito, yung legal propriety of SECs imposition of fine as a penalty.). CA reversed SECs order "without prejudice
to the right of persons injured to file the proper action for damages." SEC filed R45 petition with the SC.
Issue: Whether there was fraudulent transaction warranting the imposition of penalty.
Held: There was no fraud PERO may penalty pa din.
The Revised Securities Act (RSA) is designed, in main, to protect public investors from fraudulent schemes by regulating
the sale and disposition of securities, creating, for this purpose, a Securities and Exchange Commission to ensure proper
compliance with the law. And SEC has aptly invoked the provisions of Sec 29 of RSA.
There is no question that both FIDELITY and CUALOPING have been guilty of negligence in the conduct of their affairs
involving the questioned certificates of stock. To constitute, however, a violation of the RSA that can warrant an
imposition of a fine under Section 29(3), in relation to Section 46 of the Act, fraud or deceit, not mere negligence, on
the part of the offender must be established. Fraud here is akin to bad faith which implies a conscious and
intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is unlike that of the negative
idea of negligence in that fraud or bad faith contemplates a state of mind affirmatively operating with furtive
objectives. Given the factual circumstances found by the appellate court, neither FIDELITY nor CUALOPING, albeit
indeed remiss in the observance of due diligence, can be held liable under the above provisions of the Revised Securities
Act. We do not imply, however, that the negligence committed by private respondents would not at all be actionable; upon
the other hand, as we have earlier intimated, such an action belongs not to the SEC but to those whose rights have been
injured.
So dito na-fine ang Fidelity not for violation of RSA kasi nga wala namang fraud though may negligence. It was fined for
non-compliance of a SEC memo-circular regarding delivery of stock certificates. Under the memo-circular, Fidelity should
notify Cualoping & clearing house of the pilferage of the stock certificates, e inamin naman ng Fidelity na hindi nila yun
na-comply so ayun, penalty.
P. Securities Market Professionals; Broker-Director Rule (Sections 3, 28 31)
Summary muna kasi mahaba ang provisions, w/c will be quoted at the end.
Sec 3 talks of definition of brokers, dealers, etc.
Sec 28 talks of registration requirements and sino-sino ang dapat mag-register.
Sec 29 talks of revocation/refusal/suspension of registration and grounds for those.
Sec 30 is the Broker-Director Rule.
Sec 31 is development of securities market professionals, wala lang to.
Sec 28. Registration of Brokers, Dealers, Salesmen and Associated Persons

The essence of this provision is: No broker shall sell any securities, unless he is registered/licensed with the SEC. This is
to ensure that only individuals with proven integrity, competence and knowledge, who have due regard to the
requirements of law, are involved in stock market trading since such is highly technical.
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When you say broker, it is a person engaged in the business of buying and selling securities for the account of others;
dealer if for his/her own account. If you are engaged in the regular of business of buying/selling securities for your own
account, you are a dealer. If you merely invest in securities w/o the intention of putting up a place of business for that
purpose, you are NOT a dealer.
Issuer is the originator, maker, obligor, or creator of the security.
Associated person of a broker or dealer is an employee therefor whom, 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. The main duty
of an associated person is to supervise and oversee other employees of the broker firm to see to it that they comply with
the SRC and its IRR and he should not involve himself in the actual trading and other trading related activities, because
by doing so he might compromise the overall compliance program of the firm as no one would be checking his trading
activities.
Salesman is a natural person, employed as such as an agent, by a dealer, issuer or broker to buy and sell securities.
Who are required to register?
Broker
Brokers/dealers trading government securities &

other securities exempt from registration
Dealer
Salesmen
Banks
Associated persons
Individuals specifically hired by the issuer to sell its securities and are
paid for doing so by commissions/bonus (market professionals)
Registered brokers/dealers and issuers that employ salesmen for direct sales are prohibited from having unregistered
salesmen or associated persons affiliated with them.
Salesmen and associated persons would not be able to gain registered status, unless a broker/dealer or issuer is
prepared to sponsor and stand their application. This is to ensure that brokers exercise proper supervision over sales
representatives and they (brokers) full responsibility for the actions and representations made by their salesmen.
Salesmans or associated persons registration would be automatically terminated upon cessation of his affiliation w/ a
broker, dealer or issuer. A new application for registration would be required to be submitted when the salesman or
associate person seeks to affiliate with another broker, dealer or issuer.
An unlicensed person may not recover compensation for services as a broker.
The registration requirements and procedures are laid down in SRC IRR Rule 28.1.
The SEC, under Sec 72 of SRC, can provide different standards or regulations for market professionals based on
training experience, financial resources, number and types of clients.
Other requirements include maintenance of a minimum net capital set by SEC and minimum paid-up capital of P100k.
A brokers license issued in the Philippines cannot extend beyond the territorial jurisdiction of the Phils.
Nicolas v CA and Blesilo Buan, 27 Mar 1998 (repercussion of being unregistered)

Facts: Petitioner Nicolas and private respondent Buan entered into a Portfolio Management Agreement (PMA), wherein
Nicolas was to manage the stock transactions of Buan for a period of three months with an automatic renewal clause.
However, upon the initiative of Buan, the agreement was terminated, and thereafter he requested for an accounting of all
transactions made by Nicolas. After termination of the agreement, Nicolas demanded payment of his management fees
and when his demands went unheeded, he filed a complaint for collection money. Trial court ruled in favor Nicolas but was
reversed by CA.
Issue: Whether petitioner was entitled to management fees.
Held: NO (Yung PMA ang nakalagay, management fee is 20% of the profits. Pero sabi ng SC yung evidence ni Nicolas
hindi sufficient to show that there was indeed profit, puro self-serving statements lang daw and yung profil & loss
statement hindi audited at hindi clearly described yung stocks, etc. Pero ang focus lang muna ay yung patungkol sa dahil
hindi sya registered ha.)
Petitioner traded securities for the account of others without the necessary license from the SEC. Clearly, such omission
was in violation of Section 19 of the Revised Securities Act (now Sec 28 of SRC) which provides that no broker shall sell
any securities unless he is registered with the SEC. The purpose of the statute requiring the registration of brokers selling
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securities and the filing of data regarding securities which they propose to sell, is to protect the public and strengthen the
securities mechanism.
American jurisprudence emphasizes the principle that:
x x x, an unlicensed person may not recover compensation for services as a broker where a statute or ordinance
requiring a license is applicable and such statute or ordinance is of a regulatory nature, was enacted in the
exercise of the police power for the purpose of protecting the public, requires a license as evidence of qualification and
fitness, and expressly precludes an unlicensed person from recovering compensation by suit, or at least manifests an
intent to prohibit and render unlawful the transaction of business by an unlicensed person.
Sec 29. Revocation, Refusal or Suspension of Registration of Brokers, Dealers, Salesmen and Associated
Persons
This provision gives SEC the flexibility in selecting remedial action commensurate with the nature and gravity of the
misconduct committed. Not all misconduct may warrant the most extreme remedy of refusal or revocation. Suspension or
conditioning registration with a limitation on certain activities may be more appropriate.
Mere inadvertent violation of the SRC could not be a ground for refusal or revocation. SRC requires that the violation be
committed WILFULLY.
While the provision does not provide for the freezing of corporate assets in case of revocation of the franchise/license, it is
appropriate, under such circumstance, that the revocation order should be accompanied by an order freezing the
corporate assets and appointment of a receiver/liquidator to prevent the dissipation of the assets of the erring broker firm
for the benefit of its customers and creditors.
Sec 30. Transactions and Responsibility of Brokers and Dealers.
The Broker/Director Rule provision is meant to address the widespread affiliations and/or interlocking directors and
officers between stock brokerage firms and listed companies which give opportunities for insider trading. This rule was put
in place to prevent disclosure or dissemination of sensitive and vital inside information obtained during the meetings of
board of directors by reason of their positions, thereby curbing insider trading or the buying or selling of shares on the
back of advance information about a listed company.
SEC interprets officers or positions of trust and responsibility to mean positions that enables the occupant to have
access to material non-public information or inside information.
Sec 31. Development of Securities Market Professionals
This provision together with SRC IRR Rule 31 provides for the specific activities to be done by the SEC to carry out its
role in the securities market development. The SEC, as the regulator, is expected to be the forefront in implementing
various projects geared towards the development and improvement of the capital market in close collaboration with the
Capital Market Development Council, a body composed of different government agencies and representatives from the
industry and private sector.
****
Section 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. 28.1. No
person shall engage in the business of buying or selling securities in the Philippine as a broker or dealer, or
act as a salesman, or an associated person of any broker or dealer unless registered as such with the
Commission. 28.2. No registered broker or dealer shall employ any salesman or any associated person,
and no issuer shall employ any salesman, who is not registered as such with the Commission.
28.3. The Commission, by rule or order, may conditionally or unconditionally exempt from subsection 28.1
and 28.2 any broker, dealer, salesman, associated person of any broker or dealer, or any class of the
foregoing, as it deems consistent with the public interest and the protection of investors.
28.4. The Commission shall promulgate rules and regulation prescribing the qualifications for registration
of each category of applicant, which shall, among other things, require as a condition for registration that:
(a) If a natural person, the applicant satisfactorily pass a written examination as to his proficiency
and knowledge in the area of activity for which registration is sought;
(b) In the case of a broker or dealer, the applicant satisfy a minimum net capital as prescribed by
the Commission, and provide a bond or other security as the Commission may prescribe to secure
compliance with the provisions of this Code; and
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(c) If located outside of the Philippines, the applicant files a written consent to service of process
upon the Commission pursuant to Section 65 hereof.
28.5. A broker or dealer may apply for registration by filing with the Commission a written application in
such forms and containing such information and documents concerning such broker or dealer as the
Commission by rule shall prescribe.
28.6. Registration of a salesman or of an associated person of a registered broker or dealer may be made
upon written application filed with the Commission by such salesman or associated person. The application
shall be separately signed and certified by the registered broker or dealer to which such salesman or
associated person is to become affiliated, or by the issuer in the case of a salesman employed appointed
or authorized solely by such issuer. The application shall be in such form and contain such information and
documents concerning the salesman or associated person as the Commission by rule shall prescribe. For
purposes of this Section, a salesman shall not include any employee of an issuer whose compensation is
not determined directly or indirectly on sales of securities if the issuer.
28.7. Applications filed pursuant to Subsections 28.5 and 28.6 shall be accompanied by a registration fee
in such reasonable amount prescribed by the Commission.
28.8. Within thirty (30) days after the filing of any application under this Section, the Commission shall by
order: (a) Grant registrations if it determines that the requirements of this Section and the qualifications for
registrations set forth in its rules and regulations have been satisfied ; or (b) Deny said registration.
28.9. The names and addresses of all persons approved for the registration as brokers, dealers, associated
persons or salesman and all orders of the Commission with respect thereto shall be recorded in a Register
of Securities Market Professionals kept in the office of the Commission which shall be open to public
inspection.
28.10. Every person registered pursuant to this Section shall file with the Commission, in such form as the
Commission shall prescribe, information necessary to keep the application for registration current and
accurate, including in the case of a broker or dealer changes in salesmen, associated persons and owners
thereof.
28.11. Every person registered pursuant to this Selection shall pay to the Commission an annual fee at
such time and in such reasonable amount as the Commission shall prescribe. Upon notice by the
Commission that such annual fee has not been paid as required, the registration of such person shall be
suspended until payment has been made.
28.12. The registration of a salesman or associated person shall be automatically terminated upon the
cessation of his affiliation with said registered broker or dealer or with an issuer in the case of a salesman
employed, appointed or authorized by such issuer. Promptly following any such cessation of affiliation, the
registered broker or dealer, issuer as the case may be, shall file with the Commission a notice of separation
of such salesman or associated person.
Section 29. Revocation, Refusal or Suspension of Registration of Brokers, Dealers, Salesmen
and Associated Persons. 29.1. Registration under Section 28 of this Code may be refused , or any
registration granted thereunder may be revoked, suspended, or limitations placed thereon, by the
Commission if, after due notice and hearing the Commission determines the application or registrant.
(a) Has willfully violated any provision of this Code, any rule, regulation or order made hereunder, or any
other law administered by the Commission, or in the case of a registered broker, dealer or associated
persons has failed to supervise, with a view to preventing such violation, another person who commits
such violation;
(b) Has willfully made or caused to be made a materially false or misleading statement in any application
for registration or report filed with the Commission or a self-regulatory organization, or has willfully omitted
to state any material fact that is required to be stated therein;
(c) Has failed to satisfy the qualifications or requirements for registration prescribed under Section 28 and
the rules and regulations of the Commission promulgated thereunder;
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(d) Has been convicted, by a competent judicial or administrative body of an offense involving moral
turpitude, fraud, embezzlement, counterfeiting, theft, estafa, misappropriation, forgery, bribery, false oath,
or perjury, or of a violation of securities, commodities, banking, real state or insurance laws;
(e) Is enjoined or restrained by a competent judicial or administrative body from engaging in securities,
commodities, banking, real state or insurance activities or from willfully violating laws governing such
activities;
(f) Is subject to an order of a competent judicial or administrative body refusing, revoking or suspending
any registration, licensed or other permit under this Code, the rules and regulations promulgated
thereunder, any other law administered by the Commission;
(g) Is subject to an order of a self-regulatory organization suspending or expelling him from membership or
participating therein or from association with a member or participant thereof;
(h) Has been found by a competent judicial or administrative body to have willfully violated any provisions
of securities, commodities, banking, real state or insurance laws, or has willfully aided, abetted, counseled,
commanded, induced or procured such violation; or
(i) Has been judicially declared insolvent. For purposes of this subsection, the term "competent judicial or
administrative body" shall include a foreign court of competent jurisdiction and a foreign financial
regulator.
29.2. (a) In case of charges against a salesman or associated person, notice thereof shall also be given the
broker, dealer or issuer employing such salesman or associated person.
(b) Pending the hearing, the Commission shall have the power to order the suspensions of such brokers,
dealers, associated persons or salesmans registration: Provided, That such order shall state the cause for
such suspension. Until the entry of a final order, the suspension of such registration, though binding upon
the persons notified thereof, shall be deemed confidential, and shall not be published, unless it shall
appear that the order of suspension has been violated after notice.
29.3. The orders of the Commission refusing, revoking, suspending or placing limitations on a registration
as herein above provided, together with its findings, shall be entered in the Register of Securities Market
Professionals. The suspension or revocation of the registration of a dealer or broker shall also automatically
suspend the registration of all salesmen and associated persons affiliated with such broker or dealer. The
order of the Commission refusing, revoking, suspending or placing limitations on a registration as herein
above provided, together with its findings, shall be entered in the Register of Securities Market
Professionals. The suspension or revocation of the registration of a dealer or broker shall also automatically
suspend the registration of a dealer or broker shall also automatically suspend the registration of all
salesmen and associated persons affiliated with such broker or dealer.
29.4. It shall be sufficient cause for refusal, revocation or suspension of a brokers or dealers registrations,
if any associated person thereof or any juridical entity controlled by such associated person has committed
any act or omission or is subject to any disability enumerated in paragraphs (a) through (i) of Subsection
29.1 hereof.
Section 30. Transactions and Responsibility of Brokers and Dealers. 30.1 No brokers or dealer
shall deal in or otherwise buy or sell, for its own account or for its own account or for the account of
customers, securities listed on an Exchange issued by any corporation where any stockholders, director,
associated person or salesman, or authorized clerk of said broker or dealer and all the relatives of the
foregoing within the fourth civil degree of consanguinity or affinity, is at the same time holding office in
said issuer corporation as a director, president, vice-president, manager, treasurer, comptroller, secretary
or any office trust and responsibility, or is a controlling of the issuer.
30.2. No broker or dealer shall effect any transaction in securities or induce or attempt to induce the
purchase or sale of any security except in compliance with such rules and regulations as the Commission
shall prescribe to ensure fair and honest dealings in securities and provide financial safeguards and other
standards for the operations of brokers and dealers, including the establishments of minimum net capital
requirements, the acceptance of custody and use of securities of customers, and the carrying and use of
deposits and credit balances of customers.
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Section 31. Development of Securities Market Professionals. The Commission in joint undertaking
with self-regulatory organizations, organizations and associations of finance professionals as well as private
educational and research institute shall undertake or facilitate/organize continuing training,
conferences/seminars, updating programs, research and developments as well as technology transfer at
the latest and advance trends in issuance and trading of securities, derivatives, commodity trades and
other financial instruments, as well as securities markets of other countries.
Q. Exchanges and Other Securities Trading Markets (Sections 32 38)
LOPEZ, LOCSIN, LEDESMA & CO., INC v CA and CMS STOCK BROKERAGE, INC, 8 Dec 1988 (Exchange Rules)
Facts: Private respondent CMS sold to petitioner LLL, on the floor of the Makati Stock Exchange (MSE), among others,
shares in Benguet Consolidated. The sale is evidenced by several exchange contracts. CMS failed to deliver the Benguet
shares to LLL within the stipulated period of 10-20 days due to mere oversight owing to the huge volume of transactions.
In an audit of CMS books four months after, it was discovered that the Benguet shares still remained undelivered and
unpaid. CMS then informed LLL that it would deliver the said shares of stock. LLL, however, refused to accept the late
delivery since its clients for whom the purchases were made elected to cancel the orders. CMS then replied that LLL had
no right to cancel its orders.
The dispute was referred to the Board of Governors of the MSE, which resolved that since both parties violated the MSE
Rules and Regulations, they are left to settle their dispute by any means through applicable laws. CMS thereafter filed a
complaint to compel LLL to accept the shares of stock. Trial court ruled in favor of CMS compelling LLL to accept delivery
and pay for the shares. CA affirmed.
Eto muna bago yung issue. Ang sinsabi nung MSE Rules & Reg, si buying member (LLL), in case of delayed delivery,
meron syang duty to demand delivery from the selling member (CMS). Kung hindi pa din na-deliver after the demand w/in
the period under the Rules, yung letter of demand ibibigay dun sa Floor Trading & Arbitration Committee na sya namang
bibili nung shares for the account nung selling member. Members ang tawag sa kanila, bilang members sila ng MSE, ok?
So etong si LLL hindi nagbigay ng demand letter basta kina-cancel na lang yung sale di ba. Ang contention nila hindi
applicable ang MSE Rules, instead civil law on contracts daw ang maggo-govern. Kasi daw may third parties involved
atsaka the Rules (daw) only refer to delivery of stocks made w/in a reasonable time, e yung exchange contract nila nakaspecify kung kelan dapat ide-deliver. Isa pa, ang sabi ng LLL they cannot be compelled to accept the late delivery since
time is of the essence dahil volatile ang price of stocks. Remember under the Civil Code, we have rescission of contracts.
Sa MSE Rules kasi, walang sinasabi na may right si buying member to rescind the exchange contract.
Issue: Whether the exchange contracts between CMS and LLL are covered by the MSE Rules & Regulations.
Held: Yes syempre ang gago kasi ng LLL, ang haba pa naman ng kaso na to. Dagdag trabaho!
Ang essence lang ng decision ay maga-apply ang Exchange Rules since una, syempre pareho silang members of MSE
so kelangan nila parehong sumunod sa Rules. Pangalawa, ang exchange contract ay affected with public interest, hence,
they have to be enforced. At huli, there are remedies provided in the Rules at hindi kasama dun ang rescission.
To resolve the issues raised by the parties, we first examine the nature and purposes of an exchange
An exchange is a voluntary association or corporation organized for the purpose of furnishing to its members a
convenient and suitable place to transact their business of promoting uniformity in the customs and usages of
merchants, of inculcating principles of justice and equity in trade, of facilitating the speedy adjustment of business
disputes, of acquiring and disseminating valuable commercial and economic information and generally of securing
to its members the benefits of cooperation in the furtherance of their legitimate pursuits.
Like any other association, an exchange has the power to adopt its own constitution, by-laws, rules and regulations so far
as they are not contrary to law or public policy and which will secure to the members exclusive rights and privileges which
the courts have fully recognized.
There is no dispute that the exchange contracts in question were drawn up on the floor of the Makati Stock Exchange
between two (2) member stockbrokers, CMS as the seller and LLL, as the buyer for and on orders of the third parties. As
members of the stock exchange, they are bound by the rules and by-laws of the exchange.
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1. Prohibition on Use of Unregistered Exchange, Regulation of OTC Markets (Sec 32)
32.1. No broker, dealer, salesman, associated person of a broker or dealer, or Exchange, directly or
indirectly shall make use of any facility of an Exchange in the Philippines to effect any transaction in a
security, or to report such transaction, unless such Exchange is registered as such under Section 33 of this
Code.
32.2. (a) No broker, dealer, salesman or associated person of a broker or dealer, singly or in concert with
any other person, shall make, create or operate, or enable another to make, create or operate, any trading
market, otherwise than on a registered Exchange, for the buying and selling of any security, except in
accordance with rules and regulations the Commission may prescribe. (b) The Commission may
promulgate rules and regulations governing transactions by brokers, dealers, salesmen or associated
persons of a broker or dealer, over any facilities of such trading market and may require such market to be
administered by a self-regulatory organization determined by the Commission as capable of insuring the
protection of investors comparable to that provided in the case of a registered Exchange. Such selfregulatory organization must provide a centralized marketplace for trading and must satisfy requirements
comparable to those prescribed for registration of Exchanges in Section 33 of this Code.
An exchange is an organized marketplace or facility that brings together buyers and sellers and executes trades of
securities and/or commodities. This includes any innovative and other trading markets regulated under SRC Sec 37,
such as electronic trading.
Sec 32 is directed to off-exchange trading markets or over-the-counter market (OTC) and gives SEC an authority
to require that all off-exchange trading markets be administered by a self-regulatory organization which should
assume responsibility for the professionals in that market. Unless specifically permitted under the rules or regulations
adopted by the SEC, trading of securities which are listed on an exchange is not permitted off the floor of such
exchange.
An OTC deal means a market for buying and selling of stocks between broker-dealers over the telephone rather than
by going through the stock exchange.
Exchange vs OTC transactions: In the case of an exchange transaction, the broker transacts the customers order in
the exchange floor where the transaction is executed, while in the OTC market, there is no exchange floor, only a
computer and telephone communication network.
2. Registration of Exchanges (Sec 33)

33.1. Any Exchange may be registered as such with the Commission under the terms and conditions
hereinafter provided in this Section and Section 40 hereof, by filing an application for registration in such
form and containing such information and supporting documents as the Commission by rule shall
prescribe, including the following:
(a) An undertaking to comply and enforce by its members with the provisions of this Code, its
implementing rules and regulations and the rules of the Exchange;
(b) The organizational charts of the Exchange, rules of procedure, and a list of its officers and members; (c)
Copies of the rules of the Exchange; and
(d) An undertaking that in the event a member firm becomes insolvent or when the Exchange shall have
found that the financial condition of its member firm has so deteriorated that it cannot readily meet the
demands of its customers for the delivery of securities and/or payment of sales proceeds, the Exchange
shall, upon order of the Commission, take over the operation of the insolvent member firm and
immediately proceed to settle the member firms liabilities to its customers.
33.2. Registrations of an Exchange shall be granted upon compliance with the following provisions:
(a) That the applicant is organized as a stock corporation: Provided, That any registered Exchange existing
prior to the effectivity of this Code shall within one (1) year reorganize as a stock corporation pursuant to a
demutualization plan approved by the Commission;
(b) That the applicant is engaged solely in the business of operating an exchange: Provided, however, That
the Commission may adopt rules, regulations or issue an order, upon application, exempting an Exchange
organized as a stock corporation and owned and controlled by another juridical person from the restriction.
(c) Where the Exchange is organized as a stock corporation, that no person may beneficially own or
control, directly or indirectly, more than five percent (5%) of the voting rights of the Exchange and no
61
industry or business group may beneficially own or control, directly or indirectly, more than twenty percent
(20%) of the voting rights of the Exchange: Provided, however, That the Commission may adopt rules,
regulations or issue an order, upon application from this prohibition where it finds that such ownership or
control will not negatively impact on the exchanges ability to effectively operate in the public interest.
(d) The expulsion, suspension, or disciplining of a member and persons associated with a member for
conduct or proceeding inconsistent with just and equitable principles of fair trade, and for violations of
provisions of this Code, or any other Act administered by the Commission, the rules, regulations and orders
thereunder, or the rules of the Exchange;
(e) A fair procedure for the disciplining of members and persons associated with members, the denial of
membership to any person seeking to be a member, the barring of any person from association with a
member, and the prohibition or limitation of any person from association with member, and the prohibition
or limitation of any person from access to services offered by the Exchange;
(f) That the brokers in the board of the Exchange shall comprise of not more than forty-nine percent (49%)
of such board and shall proportionately represent the Exchange membership in terms of volume/value or
trade and paid up capital, and that any natural person associated with a juridical entity that is a member
for this purpose; Provide, That any registered Exchange existing prior to the affectivity of this Code shall
immediately comply with this requirement;
(g) For the board of the Exchange to include in its composition (1) the president of the Exchange, and (ii)
no less than fifty one percent (51%) of the remaining members of the board to be comprised of three (3)
independent directors and persons who represent the interests of issuers, investors, and other market
participants, who are not associated with any broker or dealer or member of the Exchange for a period of
two (2) years prior to his/her appointment. No officer or employee of a member, its subsidiaries or affiliates
or related interests shall become an independent director: Provided, however, That the Commission may
by rule, regulation, or order upon application, permit the exchange organized as a stock corporation to use
a different governance structure: Provided, further, That the Commission is satisfied that the Exchange is
acting in the public interest and is able to effectively operate as a self-regulatory organization under this
Code: Provided, finally, That any registered exchange existing prior to the affectivity of this Code shall
immediately comply with this requirement.
(h) The president and other management of the Exchange to consist only of persons who are not members
and are not associated in any capacity, directly or indirectly with any broker or dealer or member or listed
company of the Exchange: Provided, That the Exchange may only appoint, and a person may only serve,
as an officer of the exchange if such person has not been a member or affiliated with any broker, dealer, or
member of the Exchange for a period of at least two (2) years prior to such appointment;
(i) The transparency of transactions on the Exchange;
(j) The equitable allocation of reasonable dues, fees, and other charges among members and issuers and
other persons using any facility or system which the Exchange operates or controls;
(k) Prevention of fraudulent and manipulative acts and practices, promotion of just and equitable principles
of trade, and, in general, protection of investors and the public interest; and
(l) The transparent, prompt and accurate clearance and settlement of transactions effected on the
Exchange.
33.3. If the Commission finds that the applicant Exchange is capable of complying and enforcing
compliance by its members, and persons associated with such members, with the provisions of this Code,
and the rules of the Exchange, and that the rules of Exchange are fair, just and adequate, the Commission
shall cause such Exchange to be registered. If, after notice due and hearing, the Commission finds
otherwise, the application shall be denied.
33.4. Within ninety (90) days after the filing of the application the Commission may issue an order either
granting or denying registration as an Exchange, unless the Exchange applying for registration shall
withdraw its application or shall consent to the Commissions deferring action on its application for a
stated longer period after the date of filing. The filing with the Commission of an application for registration
by an Exchange shall be deemed to have taken place upon the receipt thereof. Amendments to an
application may be made upon such terms as the Commission may prescribe.
33.5. Upon the registration of an Exchange, it is shall pay a fee in such amount and within such period as
the Commission may fix.
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33.6. Upon appropriate application in accordance with the rules and regulations of the Commission and
upon such terms as the Commission may deemed necessary for the protection of investors, an exchange
may withdraw its registration or suspend its operations or resume the same.
The SEC has power to determine the number of local exchanges. Currently, the only operating stock exchange is the
Philippine Stock Exchange (PSE.)
Sec 33.2 on ownership/control limitation is designed to curtail the possibility of a single individual or entity or aligned
individuals/entities, directly or indirectly, from controlling the exchange. The mandated ownership limitation is also
intended to ensure greater public participation in line with declared state policy under SRC Sec 2 encouraging widest
participation of ownership in business enterprise. But the SEC is given flexibility to waive the requirement, on a finding
that such ownership/control will not negatively impact on the exchanges ability to effectively operate in the public
interest.
The limitation on brokers of the exchange and increase in the number of independent directors is intended to make
sure that no individual or small group of individuals can dominate the boards decision making; and that the board of
directors will faithfully discharge its fiduciary responsibilities to the stockholders free from the control of any sector of
the market.
Also, Sec 33.2(g) observes a two-year restriction rule, which means that market participants, who had been
associated or affiliated with an exchange regulated or member-brokerage firm during the last 2 years prior to the
election, could not run as independent director. This restriction is sought to ensure that members of the BOD would
act independently and would not be subjected to undue influence member-firms or listed companies. In addition,
managements independence is preserved by providing that exchange president and officials cannot be a member or
associated in any capacity, directly or indirectly, with any broker or dealer or member or listed company of the
exchange.
3. Broker-Dealer Segregation Rule (Sec 34)

Segregation and Limitation of functions of Members, Broker and Dealers. - 34.1. It shall be
unlawful for any member-broker of an Exchange to effect any transaction on such Exchange for its own
account, the account of an associated person, or an account with the respect to which it or an associated
person thereof exercises the investment discretion: Provided, however, That this Section shall not make
unlawful(a) Any transaction by a member-broker acting in the capacity of a market maker;
(b) Any transaction reasonably necessary to carry on an odd-lot transactions;
(c) Any transaction to offset a transaction made in error; and
(d) Any other transaction of a similar nature as may be defined by the Commission.
34.2. In all instances where the member-broker effects a transaction on an Exchange for its own account or
the account of an associated person or an account with the respect to which it exercises investment
discretion, it shall disclose to such customer at or before the completion of the transaction it is acting for
its own account: Provided, further, That this fact shall be reflected in the order ticket and the confirmation
slip.
34.3. Any member-broker who violates the provisions of this Section shall be subject to the administrative
sanctions provided in Section 54 of this Code.
Sec 34 provides for the segregation of the functions of a broker and dealer, making it unlawful for any member of the
exchange to effect any transaction on such exchange for its own account, the account of an associated person
thereof exercises investment discretion. This rule was introduced to prevent front running, a market malpractice
whereby brokers, also acting as dealers, prioritize their own dealer accounts by executing their own orders on a
particular issue ahead of their clients. The prohibition is not absolute as it allows certain exceptions.
A market maker (Sec 34.1a) is a broker authorized to undertake buying and selling activities to provide liquidity in the
market in times of bearish trading. Market making function of a dealer contributes to the maintenance of price
continuity and minimize the effects of any temporary disparity between supply and demand of shares.
4. Power with Respect to Exchanges and Other Trading Market (Sec 36)
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36.1. The Commission is authorized, if in its opinion such action is necessary or appropriate for the
protection of investors and the public interest so requires, summarily to suspend trading in any listed
security on any Exchange or other trading market for a period not exceeding thirty (30) days but not
exceeding ninety (90) days: Provided, however, That the Commission promptly following the issuance of
the order of suspension, shall notify the affected issuer of the reasons for such suspension and provide
such issuer with an opportunity for hearing to determine whether the suspension should be lifted.
36.2. Wherever two (2) or more Exchanges or other trading markets exist, the Commission may require
and enforce uniformity of trading regulations in and/or between or among said Exchanges or other trading
markets.
36.3. In addition to the existing Philippine Stock Exchange, the Commission shall have the authority to
determine the number, size and location of stock Exchanges, other trading markets and commodity
Exchanges and other similar organizations in the light of national or regional requirements for such
activities with the view to promote, enhance, protect, conserve or rationalize investment.
36.4. The Commission, having due regard to the public interest, the protection of investors, the
safeguarding of securities and funds, and maintenance of fair competition among brokers, dealers, clearing
agencies, and transfer agents, shall promulgate rules and regulations for the prompt and accurate
clearance and settlement of securities transactions.
36.5. (a) The Commission may establish or facilitate the establishment of trust funds which shall be
contributed by Exchanges, brokers, dealers, underwriters, transfer agents, salesmen and other persons
transacting in securities, as the Commission may require, for the purpose of compensating investors for
the extraordinary losses or damage they may suffer due to business failure or fraud or mismanagement of
the persons with whom they transact, under such rules and regulations as the Commission may from time
to time prescribe or approve in the public interest.
(b) The Commission may, having due regard to the public interest or the protection of investors, regulate,
supervise, examine, suspend or otherwise discontinue such and other similar funds under such rules and
regulations which the Commission may promulgate, and which may include taking custody and
management of the fund itself as well as investments in and disbursements from the funds under such
forms of control and supervision by the Commission as it may from time to time require. The authority
granted to the Commission under this subsection shall also apply to all funds established for the protection
of investors, whether established by the Commission or otherwise.
SECs regulatory power over exchanges and other trading markets are broad enough to enable it to take decisive
action with respect to unlikely events where immediate action becomes necessary. Under this section, while
suspension is summary in nature, an issuer whose securities are summarily suspended is given a chance to show
that the suspension is unjustified and convince the SEC that the suspension can have a serious adverse effect on the
issuer and shareholders.
The provision also gives the SEC the power to determine, among others, the number of local exchanges and it is
envisioned that there may be more than one local exchanges.
Sec 36.5 is designed to insure that any securities investors protection fund is able to carry out its function. It is
important that the law provides for a legal framework for regulating such funds and protecting against perceived
abuses, including conflict of interest transactions. Extraordinary loss or damage refers to the loss or damage incurred
for reasons other than the usual or ordinary business risks and those which ordinary business prudence cannot
foresee or anticipate.
5. Independent Directors (Sec 38, SRC IRR Rule 38)

Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess
of Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders, at least of two
hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities or
which has sold a class of equity securities to the public pursuant to an effective registration statement in
compliance with Section 12 hereof shall have at least two (2) independent directors or such independent
directors shall constitute at least twenty percent (20%) of the members of such board whichever is the
lesser. For this purpose, an "independent director" shall mean a person other than an officer or employee
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of the corporation, its parent or subsidiaries, or any other individual having a relationship with the
corporation, which would interfere with the exercise of independent judgement in carrying out the
responsibilities of a director.
The principal role of independent directors is to provide independent judgment and outside experience and objectivity,
not subordinate to operational considerations, on all issues which come before the board. The requirement of
independent directors is not absolute as the SEC under SRC Sec 72 is empowered to grant exemptions.
SRC Sec 38 is considered as a special law governing publicly held corporation and Sec 23 of the Corporation Code
as a general law governing all other private corporations, the former prevailing over the latter. The requirement of
independent director can thus be treated as an exception to Sec 23 of the Corpo Code.
2012 Bar: Section 38 of The Securities Regulation Code defines an independent director as a person who must not have
a relation with the corporation which would interfere with his exercise of independent judgment in carrying out the
responsibilities of a director. To ensure independence therefore, he must be - a. nominated and elected by the entire
shareholders;
b. nominated and elected by the minority shareholders;
c. nominated and elected by the majority shareholders;
d. appointed by the Board.
R. Registration, Responsibilities and Oversight of Self-Regulatory Organizations
Section 39. Associations of Securities Brokers, and Dealers, and Other Securities Related
Organizations. 39.1. The Commission shall have the power to register as a self-regulatory organization,
or otherwise grant licenses, and to regulate, supervise, examine, suspend or otherwise discontinue, as a
condition for the operation of organizations whose operations are related to or connected with the
securities market such as but not limited to associations of brokers and dealers, transfer agents,
custodians, fiscal and paying agents, computer services, news disseminating services, proxy solicitors,
statistical agencies, securities rating agencies, and securities information processor which are engaged in
business of: (a) Collecting, processing, or preparing for distribution or publication, or assisting,
participating in, or coordinating the distribution or publication of, information with respect to transactions
in or quotations for any security; or (b) Distributing or publishing, whether by means of a ticker tape, a
communications network, a terminal display device, or otherwise, on a current and continuing basis,
information with respect to such transactions or quotations. The Commission may prescribe rules and
regulations which are necessary or appropriate in the public interest or for the protection of investors to
govern self-regulatory organizations and other organizations licensed or regulated pursuant to the
authority granted in Subsection 39.1 including the requirement of cooperation within and among, and
electronic integration of the records of, all participants in the securities market to ensure transparency and
facilitate exchange of information.
39.2. An association of brokers and dealers may be registered as a securities association pursuant to
Subsection 39.3 by filing with the Commission an application for registration in such form as the
Commission, by rule, may prescribe containing the rules of the association and such other information and
documents as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or
for the protection of investors.
39.3. An association of brokers and dealers shall not be registered as a securities association unless the
Commission determines that:
(a) The association is so organized and has the capacity to be able to carry out the purposes of this Code
and to comply with, and to enforce compliance by its members and persons associated with its members,
with the provisions of this Code, the rules and regulations thereunder, and the rules of the association.
(b) The rules of the association, notwithstanding anything in the Corporation Code to the contrary, provide
that:
(i) Any registered broker or dealer may become a member of the association;
(ii) There exist a fair representation of its members to serve on the Board of Directors of the
association and in the administration of its affairs, and that may any natural person associated with
a juridical entity that is a member shall himself be deemed to be a member for this purpose;
(iii) The Board of Directors of the association includes in its composition: (a) The president of the
association and (b) Person who represent the interests of the issuer and public investors and are
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not associated with any broker or dealer or member of the association; that the president and other
management of the association not be a member or associated with any broker, dealer or member
of the association;
(iv) For the equitable allocation of reasonable dues, fees, and other charges among member and
issuers and other persons using any facility or system which the association operates or controls;
(v) For the prevention of fraudulent and manipulative acts and practices, the promotion of just and
equitable principles of trade, and, in general, the protection of investors and the public interest;
(vi) That its members and persons associated with its members shall be appropriately disciplined
for violation of any provision of this Code, the rules and regulations thereunder, or the rules of the
association;
(vii) That a fair procedure for the disciplining of members and persons associated with members,
the denial of membership to any person seeking membership therein, the barring of any person
from becoming associated with a member thereof, and the prohibition or limitation by the
association of any person with respect to access to services offered by the association or a member
thereof.
39.4. (a) A registered securities association shall deny membership to any person who is not a registered
broker or dealer.
(b) A registered securities association may deny membership to, or condition the membership of, a
registered broker or dealer if such broker or dealer:
(i) Does not meet the standards of financial responsibility, operational capability, training,
experience or competence that are prescribe by the rules of the association; or
(ii) Has engaged, and there is a reasonable likelihood it will again engage, in acts or practices
inconsistent with just and equitable principles of fair trade.
(c) A registered securities association may deny membership to a registered broker or dealer not engage in
a type of business in which the rules of the association require members to be engaged: Provided,
however, That no registered securities association may deny membership to a registered broker or dealer
by reason of the amount of business done by the broker or dealer. A registered securities association may
examine and verify the qualifications of an applicant to become a member in accordance with procedure
established by the rules of the association.
(d) A registered securities association may bar a salesman or person associated with a broker or dealer
from being employed by a member or set conditions for the employment of a salesman or associated if
such person:
(i) Does not meet the standards of training, experience, or competence that are prescribe by the
rules of the association; or
(ii) Has engage, and there is a reasonable likelihood he will again engage, in acts or practices
inconsistent with just and equitable principles of fair trade. A registered securities association may
examine and verify the qualifications of an applicant to become a salesman or associated person
employed by a member in accordance with the procedures establish by the rules of the association.
A registered association also may require a salesman or associated person employed by a member to be
registered with the association in accordance with the procedures prescribed in the rules of the
association.
39.5. In any proceeding by a registered securities association to determine whether a person shall be
denied membership, or barred from association with a member, the association shall provide notice to the
person under review of the specific grounds being considered for denial, afford him an opportunity to
defend against the allegations, and keep a record of the proceedings. A determination by the association
to deny membership shall be supported by a statement setting forth the specific grounds on which the
denial is based.
Section 40. Powers with Respect to Self-Regulatory Organizations. - 40.1. Upon the filing of an
application for registration as an Exchange under Section 33, a registered securities association under
Section 39, a registered clearing agency under Section 42, or other self-regulatory organization under this
Section, the Commission shall have ninety (90) days within which to either grant registration should be
denied. In the event proceedings are instituted, the Commission shall have two hundred seventy (270)
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days within which to conclude such proceedings at which time it shall, by order, grant or deny such
registration.
40.2. Every self-regulatory organization shall comply with the provision of this Code, the rules and
regulations thereunder, and its own rules, and enforce compliance therewith, notwithstanding any
provisions of the Corporation Code to the contrary, by its members, persons associated with its members
of its participants.
40.3. (a) Each self-regulatory organization shall submit to the Commission for prior approval any proposed
rule or amendment thereto, together with a concise statement of the reason and effect of the proposed
amendment
(b) Within sixty (60) days after submission of a proposed amendment, the Commission shall, by order,
approve the proposed amendment. Otherwise, the same may be made effective by the self-regulatory
organization.
(c) In the event of an emergency requiring action for the protection of investors, the maintenance of fair
and orderly markets, or the safeguarding of securities and funds, a self-regulatory organization may put a
proposed amendment into effect summarily; Provided however, That the copy of the same shall be
immediately submitted to the Commission.
40.4. The Commission is further authorized, if after making appropriate request in writing to a selfregulatory organization that such organization effect on its own behalf specified changes in its rules and
practices and, after due to notice and hearing it determines that such changes have not been effected,
and that such changes are not necessary, by the rule or regulation or by order, may alter, abrogate or
supplement the rules of such self-regulatory organization in so far as necessary or appropriate to effect
such changes in respect of such matters as:
(a) Safeguards in respect of the financial responsibility of members and adequate provision against the
evasion of financial responsibility through the use of corporate forms or special partnerships;
(b) The supervision of trading practices;
(c) The listing or striking from listing of any security;
(d) Hours of trading;
(e) The manner, methods, and place of soliciting business;
(f) Fictitious accounts;
(g) The time and method of making settlements, payments, and deliveries, and of closing accounts;
(h) The transparency of securities transactions and prices;
(i) The fixing of reasonable rates of fees, interest, listing and other charges, but not rates of commission;
(j) Minimum units of trading; (k) Odd-lot purchases and sales;
(l) Minimum deposits on margin accounts; and
(m) The supervision, auditing and disciplining of members or participants.
40.5. The Commission, after due notice and hearing, is authorized, in the public interest and to protect
investors:
(a) To suspend for a period not exceeding twelve (12) months or to revoke the registration of a selfregulatory organization, or to censure or impose limitations on the activities, functions, and operations of
such self-organization, if the Commission finds that such a self-regulatory organization has willfully violated
or is unable to comply with any provision of this Code or of the rules and regulations thereunder, or its own
or has failed to enforce compliance therewith by a member of, person associated with a member, or a
participant in such self-regulatory organization;
(b) To expel from a self-regulatory organization any member thereof or any participant therein who is
subject to an order of the Commission under Section 29 of this Code or is found to have willfully violated
any provision of this Code or suspend for a period not exceeding twelve (12) months for violation of any
provision of this Code or any other laws administered by the Commission, or rules and regulations
thereunder, or effected, directly or indirectly, any transaction for any person who, such member or
participant had reason to believe, was violating in respect of such transaction any of such provisions; and
(c) To remove from the office or censure any officer or director of a self-regulatory organization if it finds
that such officer or director has violated any provision of this Code, any other law administered by the
Commission, the rules or regulations thereunder, or the rules of such self-regulatory organization, abused
his authority, without reasonable justification or excuse has failed to enforce compliance with any of such
provisions.
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40.6. (a) A self-regulatory organization is authorized to discipline a member of or participant in such selfregulatory organization, or any person associated with a member, including the suspension or expulsion of
such member or participant, and the suspension or bar from being associated with a member, if such
person has engage in acts or practices inconsistent with just and equitable principles of fair trade or in
willful violation of any provision of the Code, any other law administered by the Commission, the rules or
regulations thereunder, or the rules of the self-regulatory organization. In any disciplinary proceeding by a
self-regulatory organization (other than a summary proceeding pursuant to paragraph (b) of this
subsection) the self-regulatory organization shall bring specific charges, provide notice to the person
charged, afford the person charged with an opportunity to defend against the charges, and keep a record
of the proceedings. A determination to impose a disciplinary sanction shall be supported by a written
statement of the offenses, a summary of the evidence presented and a statement of the sanction imposed.
(b) A self-regulatory organization may summarily:
(i) Suspend a member, participant or person associated with a member who has been or is expelled
or suspended from any other self-regulatory organization; or
(ii) Suspend a member who the self-regulatory organization finds to be in such financial or
operating difficulty that the member or participant cannot be permitted to continue to do business
as a member with safety to investors, creditors, other members, participants or the self-regulatory
organization: Provided, That the self-regulatory organization immediately notifies the Commission of
the action taken. Any person aggrieved by a summary action pursuant to this paragraph shall be
promptly afforded an opportunity for a hearing by the association in accordance with the provisions
of paragraph (a) of this subsection. The Commission, by order, may stay a summary action on its
own motion or upon application by any person aggrieved thereby, if the Commission determines
summarily or after due notice and hearing (which hearing may consist solely of the submission of
affidavits or presentation of oral arguments) that a stay is consistent with the public interest and
the protection of investors.
40.7. A self-regulatory organization shall promptly notify the Commission of any disciplinary sanction on
any member thereof or participant therein, any denial of membership or participation in such organization,
or the imposition of any disciplinary sanction on a person associated with a member or a bar of such
person from becoming so associated. Within thirty (30) days after such notice, any aggrieved person may
appeal to the Commission from, or the Commission from, or the Commission on its own motion within such
period, may institute review of, the decision of the self-regulatory organization, at the conclusion of which,
after due notice and hearing (which may consist solely of review of the record before the self-regulatory
organization), the Commission shall affirm, modify or set aside the sanction. In such proceeding the
Commission shall determine whether the aggrieved person has engaged or omitted to engage in the acts
and practices as found by the self-regulatory organization, whether such acts and practices constitute
willful violations of this Code, any other law administered by the Commission, the rules or regulations
thereunder, or the rules of the self-regulatory organization as specified by such organization, whether such
provisions were applied in a manner consistent with the purposes of this Code, and whether, with due
regard for the public interest and the protection of investors the sanction is excessive or oppressive.
40.8. The powers of the Commission under this Section shall apply to organized exchanges and registered
clearing agencies.
The above provisions adopt the self-regulation approach towards securities market regulation and directs various
securities related organizations (SROs) to develop the capability to operate as an SRO.
An SRO is an organization that has been delegated by the government regulator with the power to primarily enforce its
own rules and regulation on its members and participants. The essence of self-regulation is, in the first instance, to police
the activities of members to assure compliance with applicable requirements and has the primary responsibility to
investigate its members in accordance with its rules. SROs must be managed prudently with the interests of the public in
mind.
While the SRC adopts the method of self-regulation, the SEC retains its oversight powers over SROs because of the
special nature of their role in the economy and to ensure that the interests of the investing public may be fully
safeguarded.
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S. Acquisition and Transfer of Securities and Settlement of Transactions in Securities (Sections 41 47)
Sec 41 & 42 bawal gumamit ng facility ng clearing agency na hindi registered sa SEC at ano ang gagawin para maregister sa SEC.
A clearing agency is any person who acts as intermediary in making deliveries upon payment to effect settlement in
securities transactions. Registration requirements, procedures and required reports for a clearing agency are laid
down under SRC IRR Rule 42.
Sec 43 & 44 pwede ang uncertificated stocks, meaning pwede kahit walang paper certificate of stocks at ano ang best
evidence ng uncertificated stocks
Sec 43 enables a corporation whose securities are registered or listed on a securities exchange to issue uncertificated
shares under the so-called book-entry settlement system.
Uncertificated securities are those evidenced by electronic or similar book-entry records in the clearing agency of
central depositary. Certificated, if evidenced by a stock certificate issued in accordance with Sec 63 of Corpo Code.
While under Sec 63, Corpo Code, the issuer is mandated to issue stock certificates to fully paid shares, the statutory
intent of the requirement is substantially complied with under the book-entry system.
The Philippine Central Depository (PCD) functions as a central settlement depository for securities traded to facilitate
transfer using the book-entry system to record the movements of listed shares.
A transfer agent is one who retains the records of the names and addresses of registered securities owners and who
registers traded securities to the names of the new owners. No person shall act as a transfer agent without being
registered with the SEC in accordance with SRC IRR.
The book-entry transfer of shares under the new system replaces market transfer forms and physical certificates, thus
creating a scripless environment.
Sec 44 establishes a best evidence rule in respect of uncertificated certificates (official records and book entries of a
clearing agency).
Kung uncertificated ang security, pwede pa ding humingi ng certificate of stock (paper) and this is called uplifting the
securities.
Sec 45 pledging (sangla) of security or interest therein. Mainly tungkol ito sa kung paano ide-deliver ang securities na
sinangla and what is deemed delivery so needs to be correlated with Civil Code provisions.
This provision seeks to validate book-entry pledges by reference to some provisions of the Civil Code. What the
beneficial owner may be able to pledge is his beneficial ownership rights only (the legal owner is the PCD).
Existing law does not necessarily require delivery of the stock certificate; any instrument proving the right pledged will
suffice. Thus, under the scripless trading system, securities may be delivered to the creditor for purposes of perfecting
a pledge by putting them into a special pledge account with a registered clearing agency, or with a licensed broker,
or a bank.
Sec 46 intended to ensure that once a security has been registered in the name of the PCD, the transfer cannot be
reversed. Once the security has been transferred within the PCD by book-entries, it will not be able to reverse those book
entry transfers. The claimant, however, can go after the issuer for wrongful registration.
Sec 47 intended to give the SEC sufficient powers to issue rules and regulations which establish the concept of
securities entitlements and otherwise facilitate the use of book-entry transfer mechanism for both certificated and
uncertificated securities within a registered clearing agency. The SEC can use this power to clarify when a person would
be deemed to be a holder of securities. The rights of investors, the use of uncertificated securities, and the legal
recognition of uncertificated securities are governed by the Corpo Code and the Civil Code. The SEC can only codify
investors rights under these laws.
****
Section 41. Prohibition on Use of Unregistered Clearing Agency. It shall be unlawful for any
broker, dealer, salesman, associated person of a broker or dealer, or clearing agency, directly or indirectly,
to make use of any facility of a clearing agency in Philippines to make deliveries in connection with
transaction in securities or to reduce the number of settlements of securities transactions or to allocate
securities settlement responsibilities or to provide for the central handling of securities so that transfers,
loans and pledges and similar transaction can be made by bookkeeping entry or otherwise to facilitate the
settlement of securities transactions without physical delivery of securities certificates, unless such
clearing agency is registered as such under Section 42 of this Code or is exempted from such registration
upon application by the clearing agency because, in the opinion of the Commission, by reason of the
limited volume of transactions which are settled using the clearing agency, it is not practicable and not
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necessary or appropriate in the public interest or for the protection of investors to require such
registration.
Section 42. Registration of Clearing Agencies. - 42.1. Any clearing agency may be registered as such
with the Commission under the terms and conditions hereinafter provided in this Section, by filing an
application for registration in such form and containing such information and supporting documents as the
Commission by rule shall prescribe, including the following:
(a) An undertaking to comply and enforce compliance by its participants with the provisions of this Code,
and any amendments thereto, and the implementing rules or regulations made or to be made thereunder,
and the clearing agencys rules;
(b) The organizational charts of the Exchange (should be clearing agency instead of exchange), its
rules of procedure, and list of its officers and participants;
(c) Copies of the clearing agencys rules.
42.2. No registration of a clearing agency shall be granted unless the rules of the clearing agency include
provision for:
(a) The expulsions, suspension, or disciplining of a participant for violations of this Code, or any other Act
administered by the Commission, the rules, regulations, and orders thereunder, or the clearing agencys
rules;
(b) A fair procedure for the disciplining of participants, the denial of participation rights to any person
seeking to be a participant, and the prohibition or limitation of any person from access to services offered
by the clearing agency;
(c) The equitable allocation of reasonable dues, fees, and other charges among participants;
(d) Prevention of fraudulent and manipulative acts and practices, promotion of just and equitable principles
of trade, and, in general, protection of investors and the public interest;
(e) The transparent, prompt and accurate clearance and settlement of transactions in securities handled
by the clearing agency; and
(f) The establishment and oversight of a fund to guarantee the prompt and accurate clearance and
settlement of transaction executed on an exchange, including a requirement that members each
contribute an amount based on their and a relevant percentage of the daily exposure of the (4) largest
trading brokers which adequately reflects trading risks undertaken or pursuant to another formula set forth
in Commission rules or regulations or order, upon application: Provided, however, That a clearing agency
engaged in the business of securities depository shall be exempt from this requirement.
42.3. In the case of an application filed pursuant to this section, the Commission shall grant registration if
it is finds That the requirements of this code and the rules and regulations thereunder with respect to the
applicant have been satisfied, and shall deny registration if it does not make such finding.
42.4. Upon appropriate application in accordance with the rules and regulations of the Commission and
upon such terms as the Commission may deem necessary for the protection of investors, a clearing
agency may withdraw its registration or suspend its operation or resume the same.
42.5. Section 32 (should be Sec 40 instead of 32) shall apply to every registered clearing agency.
Section 43. Uncertificated Securities. Notwithstanding Section 63 of the Corporation Code of the
Philippines: 43.1. A corporation whose securities are registered pursuant to this Code or listed on securities
exchange may:
(a) If so resolved by its Board of Directors and agreed by a shareholder, investor or securities intermediary,
issue shares to, or record the transfer of some or all its shares into the name of said shareholders,
investors or, securities intermediary in the form of uncertified securities. The use of uncertified securities
in these circumstances shall be without prejudice to the rights of the securities intermediary subsequently
to require the corporation to issue a certificate in respect of any shares recorded in its name; and
(b) If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in
the form of Uncertificated securities and subject to a condition that investors may not require the
corporation to issue a certificate in respect of any shares recorded in their name.
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43.2. The Commission by rule may allow other corporations to provide in their articles of incorporation and
by-laws for the use of uncertificated securities.
43.3. Transfers of securities, including an uncertificated securities, may be validly made and consummated
by appropriate book-entries in the securities intermediaries, or in the stock and transfer book held by the
corporation or the stock transfer agent and such bookkeeping entries shall be binding on the parties to the
transfer. A transfer under this subsection has the effect of the delivery of a security in bearer form or duly
indorsed in blank representing the quantity or amount of security or right transferred, including the
unrestricted negotiability of that security by reason of such delivery. However, transfer of uncertificated
shares shall only be valid, so far as the corporation is concerned, when a transfer is recorded in the books
of the corporation so as to show the names of the parties to the transfer and the number of shares
transferred. However, nothing in this Code shall compliance by banking and other institutions under the
supervision of the Bangko Sentral ng Pilipinas and their stockholders with the applicable ceilings on
shareholding prescribed under pertinent banking laws and regulations.
Section 44. Evidentiary Value of Clearing Agency Record. The official records and book entries of a
clearing agency shall constitute the best evidence of such transactions between clearing agency shall
constitute the best between clearing agency and its participants or members clients to prove their rights,
title and entitlement with respect to the book-entry security holdings of the participants or members held
on behalf of the clients. However, the corporation shall not be bound by the foregoing transactions unless
the corporate secretary is duly notified in such manner as the Commission may provide.
Section 45. Pledging a Security or Interest Therein. In addition to other methods recognized by
law, a pledge of, including an uncertificated security, is properly constituted and the instrument proving
the right pledged shall be considered delivered to the creditor under Articles 2093 and 2095 of the Civil
Code if a securities intermediary indicates by book entry that such security has been credited to a specially
designated pledge account in favor of the pledgee. A pledge under this subsection has the effect of the
delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of such
security or right pledged. In the case of a registered clearing agency, the procedures by which, and the
exact time at which, such bookentries are created shall be governed by the registered clearing agencys
rules. However, the corporation shall not be bound by the foregoing transactions unless the corporate
secretary is duly notified in such manner as the Commission may provide.
Section 46. Issuers Responsibility for Wrongful Transfer to Registered Clearing Agency. - The
registration of a transfer of a security into the name of and by a registered clearing agency or its name of
or by a registered clearing agency or its nominee shall be final and conclusive unless the clearing agency
had notice of an adverse claim before the registration was made. The above provisions which the claimant
may have against the issuer for wrongful registration in such circumstances.
Section 47. Power of the Commission With Respect to Securities Ownership. The Commission is
authorize, having due regard to the public interest and the protection of investors, to promulgate rules and
regulations which:
47.1. Validate the transfer of securities by book-entries rather than the delivery of physical certificates;
47.2. Establish when a person acquires a security or an interest therein and when delivery of a security to
a purchaser occurs;
47.3. Establish which records constitute the best evidence of a persons interests in a security and the
effect of any errors in electronic records of ownership;
47.4. Codify the rights of investors who choose to hold their securities indirectly through a registered
clearing agency and/ or other securities intermediaries;
47.5. Codify the duties of securities intermediaries (including clearing agencies) who hold securities on
behalf of investors; and
47.6 Give first priority to any claims of a registered clearing agency against a participant arising from a
failure by the participant to meet its obligations under the clearing agencys rules in respect of the clearing
and settlement of transactions in securities, in a dissolution of the participant, and any such rules and
regulation shall bind the issuers of the securities, investors in the securities, any third parties with interests
in the securities, and the creditors of a participant of a registered clearing agency.
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T. Margin Requirements and Restrictions on Borrowings (Sections 48 50)
Section 48. Margin Requirements. 48.1. For the purpose of preventing the excessive use of credit for
the purchase or carrying of securities, the Commission, in accordance with the credit and monetary
policies that may be promulgated from time to time by the Monetary Board of the Bangko Sentral ng
Pilipinas, shall prescribed rules and regulations with respect to the amount of credit that may be extended
on any security. For the extension of credit, such rules and regulations shall be based upon the following
standard:
An amount not greater than whichever is the higher of
(a) Sixty-five per centum (65%) of the current market price of the security, or
(b) One hundred per centum (100%) of the lowest market price of the security during the preceding
thirty-six (36) calendar months, but not more than seventy-five per centum (75%) of the current
market price.
However, the Monetary Board may increase or decrease the above percentages, in order to achieve the
objectives of the Government with due regard for promotion of the economy and prevention of the use of
excessive credit. Such rules and regulations may make appropriate provision with respect to the carrying
of undermargined accounts for limited periods and under specified conditions; the withdrawal of funds or
securities; the transfer of accounts from one lender to another; special or different margin requirements for
delayed deliveries, short sales, arbitrage transactions, and securities to which letter (b) of the second
paragraph of this subsection does not apply; the methods to be used in calculating loans, and margins and
market prices; and similar administrative adjustments and details.
48.2. No member of an Exchange or broker or dealer shall, directly or indirectly, extend or maintain credit
is extended and maintain credit or arrange for the extension or maintenance of credit to or for any
customer:
(a) On any security unless such credit is extended and maintained in accordance with the rules and
regulations which the Commission shall prescribe under this Section including rules setting credit in
relation to net capital of such member, broker or dealer; and
(b) Without collateral or any collateral other than securities, except (i) to maintain a credit initially
extended in conformity with rules and regulations of the Commission and (ii) in cases where the
extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of
evading or circumventing the provisions of paragraph (a) of this subsection.
48.3 Any person not subject to Subsection 48.2 hereof shall extend or maintain credit or arrange for the
extension or maintenance of credit for the purpose of purchasing or carrying any security, only in
accordance with such rules and regulations as the Commission shall prescribe to prevent the excessive use
of credit for the purchasing or carrying of or trading in securities in circumvention of the other provisions of
this Section.. Such rules and regulations may impose upon all loans made for the purpose of purchasing or
carrying securities limitations similar to those imposed upon members, brokers, or dealers by Subsection
48.2 and the rules and regulations thereunder. This subsection and the rules and regulations thereunder
shall not apply:
(a) To a credit extension made by a person not in the ordinary course of business;
(b) to a loan to a dealer to aid in the financing of the distribution of securities to customers not through
the medium of an Exchange; or
(c) To such other credit extension as the Commission shall exempt from the operation of this subsection
and the rules and regulations thereunder upon specified terms and conditions for stated period.
Section 49. Restrictions on Borrowings by Members, Brokers, and Dealers. It shall be unlawful
for any registered broker or dealer, or member of an Exchange, directly or indirectly:
49.1. To permit in the ordinary course of business as a broker or dealer his aggregate indebtedness
including customers credit balances, to exceed such percentage of the net capital (exclusive of fixed
assets and value of Exchange membership) employed in the business, but not exceeding in any case to
thousand percentum (2,000%), as the Commission may be rules and regulations prescribe as necessary or
appropriate in the public interest or for the protection of investors.
49.2. To pledge, mortgage, or otherwise encumber or arrange for the pledge, mortgage, or encumbrance
of any security carried for the account of any customer under circumstances: (a) That will permit the
commingling of his securities, without his written consent, with the securities of any customer; (b) That will
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permit such securities to be commingled with the securities of any person other than a bona fide
customer; or (c) that will permit such securities to be pledged, mortgaged or encumbered, or subjected to
any lien or claim of the pledgee, for a sum in excess of the aggregate indebtedness of such customers in
respect of such securities. However, the Commission, having due regard to the protection of investors,
may, by rules and regulations, allow certain transactions that may otherwise be prohibited under this
subsection.
49.3. To lend or arrange for the lending of any security carried for the account of any customer without the
written consent of such customer or in contravention of such rules and regulations as the Commission shall
prescribe.
Section 50. Enforcement of Margin Requirement and Restrictions on Borrowing. To prevent
indirect violations of the margin requirements under Section 48, the broker or dealer shall require the
customer in non-margin transactions to pay the price of the security purchased for his account within such
period as the Commission may prescribe, which shall in no case exceed the prescribed settlement date.
Otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten
(10) trading days following the last day for the customer to pay such purchase price, unless such sale
cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the right
of the broker or dealer to recover any deficiency from the customer. To prevent indirect violation of the
restrictions on borrowing under Section 49, the broker shall, unless otherwise directed by the customer,
pay the net sales price of the securities sold for a customer within the same period as above prescribed by
the Commission: Provided, That the customer shall be required to deliver the instruments evidencing the
securities as a condition for such payment upon demand by the broker.
In Sec 48, the BSP is authorized to set policies and limitations/standards on the amount of credit which may be
extended for the purpose of purchasing or carrying securities. The objective is to restrict excessive use of the nations
credit in the securities markets. While the credit standard/restrictions are set by the BSP, enforcement is the
responsibility of the SEC. Exempt securities are not exempted from the ambit of Sec 48.
In Sec 49, a brokers allowable aggregate indebtedness is defined, limited and/or restricted under SRC IRR Rule 49.1.
A broker who extends credit to a customer shall not, without the written consent of the customer, lend the latters
securities to itself or to anyone else, or vote them as if they were its own.
Sec 50 and SRC IRR Rule 50 sets forth the rules on purchases and sales by customers in cash account to prevent
indirect violations of the margin requirements under Sec 48 and restrictions on borrowings under Sec 49.
Yung Secs 48 50 on margin and borrowing requirements/restrictions provided yan for margin trading. Margin
trading simply means trading on credit, i.e. buying/selling securities na pautang. Paano ito nangyayari? Halimbawa,
ako ang investor. Mago-open ako ng cash account (also called regular account) sa brokererage firm. Yung broker ang
bibili (purchase) o magbebenta (sell) ng securities on my behalf. In case of purchase, a portion of the purchase price
lang ang babayaran ko. Yung broker ang magbabayad nung balance. Si broker naman uutang ngayon sya sa banko
(called settlement banks) para mabayaran yung balance. So may utang ngayon ako sa broker di ba. Obliged ako
ngayon to pay for that securities w/in the period prescribed by the law/rules. Kung hindi sya mababayaran w/in the
period, si broker/dealer has to apply for extension of time to pay sa PSE (if member) or sa SEC (for non-member).
Pag hindi ko yun nabayaran w/in the prescribed period, si broker kelangan i-liquidate o ibenta nya yung shares na
yun or i-cancel nya yung transaction. Sabihin natin na either na-liquidate or na-cancel yung transaction, hindi ngayon
ako pwedeng bumili ng shares uli (subsequent purchase) unless mag-deposit ako ng funds to cover the purchase
price nung gusto kong bilhin na shares. So you see, andaming utang dito. Si broker may utang sa banko, ako naman
may utang sa broker. Kaya may rules on margin trading, to regulate the credit flow kumbaga to avoid giving
undue/excessive credit.
2009 Bar: Under the Securities Regulation Code, what is the margin Trading Rule?
Under the Margin Trading Rule, no registered broker or dealer, or member of an exchange shall extend credit on any
security an amount greater than whichever is higher of:
(a) 65 percent of the current market price of the security, or
(b) 100 percent of the lowest market price of the security during the preceding 36 calendar months, but not more than 75
percent of the current market price (Section 48, Securities Regulation Code). The purpose of the Margin Trading Rule is to
prevent excessive use of credit for the purchase of securities. It is a counter to a brokers desire to generate more sales
by encouraging clients to but securities on credit (Carolina Industries, Inc. vs. CMS Stock Brokerage, Inc. 97 SCRA 734
[1980]).
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Abacus Securities Corp v Ampil, 27 Feb 2006 (purpose of margin requirements; mandatory close-out rule)
Facts: Petitioner Abacus is a broker/dealer of securities listed on the PSE. Respondent Ampil opened a cash account with
petitioner and since then, has actively traded his account. Because of this, respondent accumulated obligations in favor of
petitioner amounting to over P6million. Said amount was not paid w/in the prescribed period and even after demand, such
that petitioner sold the securities to compensate for respondents unsettled obligations. However, there still remains a
balance of some P3million. After demand by petitioner, respondent asked for extension of time to pay to w/c the petitioner
granted. Despite the extension given and after demand, respondent still failed to pay.
Respondent, for his defense, claimed that he was induced by petitioner to trade in a stock security because petitioner
allowed him to offset settlements wherein he was not obliged to pay the purchase price, but waits for him to sell.
(Kumbaga, di ba nga dapat after purchase by the broker, babayaran ni investor. Ang nangyari sa arrangement nila,
pwedeng hindi bayaran ni respondent yung purchase price w/in the prescribed period. Ibebenta nya muna yung shares
tapos yun yung ipambabayad nya, io-offset kumbaga. And this is not what the law says.) Petitioner also allowed
respondent to make subsequent purchases w/o paying for the previous transactions and w/o depositing sufficient funds as
required by law. So respondent claims that there was violation of the law (Revised Securities Act). There being a violation
of law, respondent claims that petitioner cannot recover, it being in pari delicto.
Issue: Whether petitioner can recover from respondent the unpaid obligation despite allegations of violation of the RSA.
Held: Yes, on the first transaction because the agreement was valid (pari delicto doctrine not applicable in this case). No
for subsequent purchases because there was already violation of law.
Despite respondents failure to cover his initial deficiency (for previous purchases), petitioner subsequently purchased and
sold securities for respondents account. Petitioner also did not cancel or liquidate a substantial amount of respondents
stock transactions. This is violation of RSA on margin requirements and borrowing restrictions (for present law, see SRC
Sec 48 & 49 above).
The purpose of the statute on margin is to regulate the volume of credit flow, by way of speculative transactions,
into the securities market and redirect resources into more productive uses. Specifically, the main objective of the
law on margins is explained in this wise:
The main purpose of these margin provisions xxx is not to increase the safety of security loans for
lenders. Banks and brokers normally require sufficient collateral to make themselves safe without the help
of law. Nor is the main purpose even protection of the small speculator by making it impossible for him to
spread himself too thinly although such a result will be achieved as a byproduct of the main purpose.
The main purpose is to give a [g]overnment credit agency an effective method of reducing the aggregate
amount of the nations credit resources which can be directed by speculation into the stock market and
out of other more desirable uses of commerce and industry x x x
A related purpose of the governmental regulation of margins is the stabilization of the economy. Restrictions on
margin percentages are imposed in order to achieve the objectives of the government with due regard for the promotion of
the economy and prevention of the use of excessive credit. Otherwise stated, the margin requirements set out in the RSA
are primarily intended to achieve a macroeconomic purpose -- the protection of the overall economy from excessive
speculation in securities. Their recognized secondary purpose is to protect small investors.
The mandatory close-out rule (Sec 48 & 49) vests upon petitioner the obligation, not just the right, to cancel or
otherwise liquidate a customers order, if payment is not received within three days from the date of purchase. The word
shall as opposed to the word may, is imperative and operates to impose a duty, which may be legally enforced. For
transactions subsequent to an unpaid order, the broker should require its customer to deposit funds into the account
sufficient to cover each purchase transaction prior to its execution. These duties are imposed upon the broker to ensure
faithful compliance with the margin requirements of the law, which forbids a broker from extending undue credit to a
customer.
So in the end, si petitioner violated the RSA, si respondent naman equally guilty kasi sabi ng SC, it cannot be said that
respondent was simply induced by petitioner. Respondent was a knowledgeable investor and he speculated on the
market by taking advantage of the no cash out arrangement with the petitioner. But since the initial trades (yung unanguna nilang agreement) are valid and subsisting obligations, petitioner can recover. But petitioner can no longer recover on
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the subsequent transactions for violation of the law (ito na yung hindi sya nag-liquidate at nag-apply for extension of time
of payment).
U. Liabilities, Sanctions and Prescription of Offenses (Sections 51 78)
Section 51. Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability.
51.1. Every person who, by or through stock ownership, agency, or otherwise, or in connection with an
agreement or understanding with one or more other persons, controls any person liable under this Code or
the rules or regulations of the Commission thereunder, shall also be liable jointly and severally with and to
the same extent as such controlled persons to any person to whom such controlled person is liable, unless
the controlling person proves that, despite the exercise of due diligence on his part, he has no knowledge
of the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
51.2. It shall be unlawful for any person, directly, or indirectly, to do any act or thing which it would be
unlawful for such person to do under the provisions of this Code or any rule or regulation thereunder.
51.3. It shall be unlawful for any director or officer of, or any owner of any securities issued by, any issuer
required to file any document, report or other information under this Code or any rule or regulation of the
Commission thereunder, without just cause, to hinder, delay or obstruct the making or filing of any such
document, report, or information.
51.4. It shall be unlawful for any person to aid, abet, counsel, command, induce or procure any violation of
this Code, or any rule, regulation or order of the Commission thereunder.
51.5. Every person who substantially assists the act or omission of any person primarily liable under
Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless disregard that such act or omission
is wrongful, shall be jointly and severally liable as an aider and abettor for damages resulting from the
conduct of the person primarily liable: Provided, however, That an aider and abettor shall be liable only to
the extent of his relative contribution in causing such damages in comparison to that of the person
primarily liable, or the extent to which the aider and abettor was unjustly enriched thereby, whichever is
greater.
Control, under SRC IRR, is the power to govern the financial and operating policies of an enterprise so as to obtain
benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through
subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be
clearly demonstrated that such ownership does not constitute control.
Section 52. Accounts and Records, Reports, Examination of Exchanges, members, and Others.
52.1. Every registered Exchange, broker or dealer, transfer agent, clearing agency, securities association,
and other self-regulatory organization, and every other person required to register under this Code, shall
make, keep and preserve for such periods, records, furnish such copies thereof, and make such reports, as
the Commission by its rules and regulations may prescribe. Such accounts, correspondence, memoranda,
papers, books, and other records shall be subject at any time to such reasonable periodic, special or other
examinations by representatives of the Commission as the Commission may deem necessary or
appropriate in the public interest of for the protection of investors.
52.2. Any brother, dealer or other person extending credit, who is subject to the rules and regulations
prescribed by the Commission pursuant to this Code, shall make such reports to the Commission as may
be necessary or appropriate to enable it to perform the functions conferred upon it by this Code.
52.3. For purposes of this Section, the term "records refers to accounts, correspondence, memoranda,
tapes, discs, papers, books and other documents or transcribed information of any type, whether written
or electronic in character.
SEC is not compelled to give advance notice of inspection. Every entity or person required to register under the SRC
is required to make available all reports, accounts, correspondence, books, and other records at any time during
periodic or special examinations by the SEC. The SEC may, on its own initiative, conduct periodic or parallel
examinations of PSE member-brokers to validate the PSEs findings.
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Section 53. Investigations, Injunctions and Prosecution of Offenses. 53.1. The Commission may, in
its discretion, make such investigations as it deems necessary to determine whether any person has
violated or is about to violate any provision of this Code, any rule, regulation or order thereunder, or any
rule of an Exchange, registered securities association, clearing agency, other self-regulatory organization,
and may require or permit any person to file with it a statement in writing, under oath or otherwise, as the
Commission shall determine, as to all facts and circumstances concerning the matter to be investigated.
The Commission may publish information concerning any such violations, and to investigate any fact,
condition, practice or matter which it may deem necessary or proper to aid in the enforcement of the
provisions of this Code, in the prescribing of rules and regulations thereunder, or in securing information to
serve as a basis for recommending further legislation concerning the matters to which this Code relates:
Provided, however, That any person requested or subpoenaed to produce documents or testify in any
investigation shall simultaneously be notified in writing of the purpose of such investigation: Provided,
further, That all criminal complaints for violations of this Code, and the implementing rules and regulations
enforced or administered by the Commission shall be referred to the Department of Justice for preliminary
investigation and prosecution before the proper court: Provided, furthermore, That in instances where the
law allows independent civil or criminal proceedings of violations arising from the same act, the
Commission shall take appropriate action to implement the same: provided, finally, That the investigation,
prosecution, and trial of such cases shall be given priority.
53.2. For the purpose of any such investigation, or any other proceeding under this Code, the Commission
or any officer designated by it is empowered to administer oaths and affirmations, subpoena witnesses,
compel attendance, take evidence, require the production of any book, paper, correspondence,
memorandum, or other record which the Commission deems relevant or material to the inquiry, and to
perform such other acts necessary in the conduct of such investigation or proceedings.
53.3. Whenever it shall appear to the Commission that any person has engaged or is about to engage in
any act or practice constituting a violation of any provision of this Code, any rule, regulation or order
thereunder, or any rule of an Exchange, registered securities association, clearing agency or other selfregulatory organization, it may issue an order to such person to desist from committing such act or
practice: Provided, however, That the Commission shall not charge any person with violation of the rules of
an Exchange or other self-regulatory organization unless it appears to the Commission that such Exchange
or other self-regulatory organization is unable or unwilling to take action against such person. After finding
that such person has engaged in any such act or practice and that there is a reasonable likelihood of
continuing, further or future violations by such person, the Commission may issue ex-parte a cease and
desist order for a maximum period of ten (10) days, enjoining the violation and compelling compliance
with such provision. The Commission may transmit such evidence as may be available concerning any
violation of any provision of this Code, or any rule, regulation or order thereunder, to the Department of
Justice, which may institute the appropriate criminal proceedings under this Code.
53.4. Any person who, within his power but without cause, fails or refuses to comply with any lawful order,
decision or subpoena issued by the Commission under Subsection 53.2 or Subsection 53.3 or Section 64 of
this Code, shall after due notice and hearing, be guilty of contempt of the Commission. Such person shall
be fined in such reasonable amount as the Commission may determine, or when such failure or refusal is a
clear and open defiance of the Commissions order, decision or subpoena, shall be detained under an
arrest order issued by the Commission, until such order, decision or subpoena is complied with.
The SECs investigative authority extends to violations of rules and regulations adopted by an exchange or other
SROs. This enables SEC to determine if those organizations are enforcing their rules and decide whether to step in to
assure compliance with them.
Publication of the information referred to in Sec 53.1 should be construed only to mean that the SEC may publish the
information concerning the violation being investigated once such violation has been finally determined or established
to have been violated.
The SEC may conduct investigations without notice to potential targets of initiating complaint.
Under S53.1, jurisdiction over criminal cases involving violations of the provisions of SRC rest upon the regular courts
making the SEC only a support agency insofar as the preliminary investigation and prosecution or the criminal
complaint. The SEC does not prosecute criminal cases itself, but transmits the evidence to the DOJ which decides
whether or not to prosecute the case before the proper court. However, insofar as administrative complaints involving
violations of the Code and the IRR being implemented by SEC is concerned, the latter exercises absolute jurisdiction
thereat. When the evidence obtained during the investigation indicates criminal violations, the matter may be referred
to the DOJ for prosecution and the SEC provides expert help and technical assistance.
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Sec 53.3 provides an express authority for the SEC to issue injunction under certain circumstances. It requires a
showing not only of a violation but also a reasonable likelihood of continuing, further or future violations. Thus,
although past violations give rise to an inference that future violations will be committed, an injunction would not be
appropriate where the inference is rebutted by evidence that a reasonable probability of future violation does not exist.
In order to permit SROs to enforce their rules in the first instance, the SEC may not bring an injunction proceeding,
unless it appears that the SRO has refused or is incapable of acting against the alleged violator.
Section 54. Administrative Sanctions. 54.1. If, after due notice and hearing, the Commission finds
that: (a) There is a violation of this Code, its rule, or its orders; (b) Any registered broker or dealer,
associated person thereof has failed reasonably to supervise, with a view to preventing violations, another
person subject to supervision who commits any such violation; (c) Any registrant or other person has, in a
registration statement or in other reports, applications, accounts, records or documents required by law or
rules to be filed with the Commission, made any untrue statement of a material fact, or omitted to state
any material fact required to be stated their or necessary to make the statements therein not misleading;
or, in the case of an underwriter, has failed to conduct an inquiry with reasonable diligence to insure that a
registration statement is accurate and complete in all material respects; or (d) Any person has refused to
permit any lawful examinations into its affairs, it shall, in its discretion, and subject only to the limitations
hereinafter prescribed, impose any or all of the following sanctions as may be appropriate in light of the
facts and circumstances:
(i)
Suspension, or revocation of any registration for the offering of securities;
(ii)
(ii) A fine of no less than Ten thousand pesos (P10,000.00) nor more than One million pesos
(P1,000,000.00) plus not more than Two thousand pesos (P2,000.00) for each day of
continuing violation;
(iii)
In the case of a violation of Sections 19.2, 20, 24, 26 and 27, disqualification from being an
officer, member of the Board of Directors, or person performing similar functions, of an
issuer required to file reports under Section 17 of this Code or any other act, rule or
regulation administered by the Commission;
(iv)
In the case of a violation of Section 34, a fine of no more than three (3) times the profit
gained or loss avoided as result of the purchase, sale or communication proscribed by such
Section, and
(v)
Other penalties within the power of the Commission to impose.
54.2. The imposition of the foregoing administrative sanctions shall be without prejudice to the filing of
criminal charges against the individuals responsible for the violation.
54.3. The Commission shall have the power to issue writs of execution to enforce the provisions of the
Section and to enforce payment of the fees and other dues collectible under this Code.
Admin sanctions under Sec 54 should be construed to cover untrue statements or misrepresentations, regardless of
whether or not the disclosure or report is required by law or rules to be submitted to the SEC. Misrepresentations
should at all times be prohibited.
Section 55. Settlement Offers. 55.1. At any time, during an investigation or proceeding under this
Code, parties being investigated and/or charged may propose in writing an offer of settlement with the
Commission.
55.2. Upon receipt of such offer of settlement, the Commission may consider the offer based on timing, the
nature of the investigation or proceeding, and the public interest.
55.3. The Commission may only agree to a settlement offer based on its findings that such settlement is in
the public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such
decision may be made without a determination of guilt on the part of the person making the offer.
55.4. The Commission shall adopt rules and procedures governing the filing, review, withdrawal, form of
rejection and acceptance of such offers.
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The acceptance of the settlement offer should not be detrimental to public interest. Any agreement to settle, however,
shall have no legal effect until publicly disclosed. Sec 55 the SEC to resolve corporate conflicts faster rather than
waiting for many years to bring them to trial.
The procedure and requirements for settlement offers are laid down under SRC IRR Rule 55.2.
Section 56. Civil Liabilities on Account of False Registration Statement. 56.1. Any person
acquiring a security, the registration statement of which or any part thereof contains on its effectivity an
untrue statement of a material fact or omits to state a material fact required to be stated therein or
necessary to make such statements not misleading, and who suffers damage, may sue and recover
damages from the following enumerated persons, unless it is proved that at the time of such acquisition he
knew of such untrue statement or omission:
(a) The issuer and every person who signed the registration statement:
(b) Every person who was a director of, or any other person performing similar functions, or a
partner in, the issuer at the time of the filing of the registration statement or any part, supplement
or amendment thereof with respect to which his liability is asserted;
(c) Every person who is named in the registration statement as being or about to become a director
of, or a person performing similar functions, or a partner in, the issuer and whose written consent
thereto is filed with the registration statement;
(d) Every auditor or auditing firm named as having certified any financial statements used in
connection with the registration statement or prospectus.
(e) Every person who, with his written consent, which shall be filed with the registration statement,
has been named as having prepared or certified any part of the registration statement, or as having
prepared or certified any report or valuation which is used in connection with the registration
statement, with respect to the statement, report, or valuation, which purports to have been
prepared or certified by him.
(f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the
registration statement, with respect to that portion of the registration statement which purports to
have been contributed by him.
(g) Every underwriter with respect to such security.
56.2. If the person who acquired the security did so after the issuer has made generally available to its
security holders an income statement covering a period of at least twelve (12) months beginning from the
effective date of the registration statement, then the right of recovery under this subsection shall be
conditioned on proof that such person acquired the security relying upon such untrue statement in the
registration statement or relying upon the registration statement and not knowing of such income
statement, but such reliance may be established without proof of the reading of the registration statement
by such person.
Section 57. Civil Liabilities Arising in Connection With Prospectus, Communications and
Reports. 57.1. Any person who:
(a) Offers to sell or sells a security in violation of Chapter III, or
(b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code, by the
use of any means or instruments of transportation or communication, by means of a prospectus or
other written or oral communication, which includes an untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading (the purchaser not knowing of such untruth or
omission), and who shall fail in the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of such untruth or omission, shall be liable to the person
purchasing such security from him, who may sue to recover the consideration paid for such security
with interest thereon, less the amount of any income received thereon, upon the tender of such
security, or for damages if he no longer owns the security.
57.2. Any person who shall make or cause to be made any statement in any report, or document filed
pursuant to this Code or any rule or regulation thereunder, which statement as at the time and in the light
of the circumstances under which it was made false or misleading with respect to any material fact, shall
be liable to any person who, not knowing that such statement was false or misleading, and relying upon
such statement shall have purchased or sold a security at a price which was affected by such statement,
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for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and
had no knowledge that such statement was false or misleading.
Section 58. Civil Liability of Fraud in Connection with Securities Transactions. Any person who
engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the
Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or
refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a
security, as the case may be, for the damages sustained by such other person as a result of such act or
transaction.
Section 59. Civil Liability for Manipulation of Security Prices. Any person who willfully participates
in any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell
any security at a price which was affected by such act or transaction, and the person so injured may sue to
recover the damages sustained as a result of such act or transaction.
Section 60. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans.
60.1. Any person who engages in any act or transactions in willful violation of any rule or regulation
promulgated by the Commission under Section 11 or 16, which the Commission denominates at the time
of issuance as intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud,
manipulation, fictitious transactions, undue speculation, or other unfair or abusive practices with respect to
commodity future contracts, shall be liable to any other person sustaining damages as a result of such act
or transaction.
60.2. As to each such rule or regulation so denominated, the Commission by rule shall prescribe the
elements of proof required for recovery and any limitations on the amount of damages that may be
imposed.
Section 61. Civil Liability on Account of Insider Trading. 61.1. Any insider who violates Subsection
27.1 and any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or
regulation thereunder, by purchasing or selling a security while in possession of material information not
generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously
with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of
the same class unless such insider, or such person in the case of a tender offer, proves that such investor
knew the information or would have purchased or sold at the same price regardless of disclosure of the
information to him.
61.2. An insider who violates Subsection 27.3 or any person in the case of a tender offer who violates
Subsection 27.4 (a), or any rule or regulation thereunder, by communicating material nonpublic
information, shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the
insider, or person in the case of a tender offer, to whom the communication was directed and who is liable
under Subsection 61.1 by reason of his purchase or sale of a security.
Section 62. Limitation of Actions. 62.1. No action shall be maintained to enforce any liability created
under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the untrue
statement or the omission, or, if the action is to enforce a liability created under Subsection 57.1 (a),
unless, brought within two (2) yeas after the violation upon which it is based. In no event shall an such
action be brought to enforce a liability created under Section 56 or Subsection 57.1 (a) more than five (5)
years after the security was bona fide offered to the public, or under Subsection 57.1 (b0 more than five
(5) years after the sale.
62.2. No action shall be maintained to enforce any liability created under any other provision of this Code
unless brought within two (20 years after the discovery of the facts constituting the cause of action and
within five (5) years after such cause of action accrued.
Section 63. Amount of Damages to be Awarded. 63.1. All suits to recover damages pursuant to
Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court, which shall have
exclusive jurisdiction to hear and decide such suits. The Court is hereby authorized to award damages in
an amount not exceeding triple the amount of the transaction plus actual damages.
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Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness in the
violation of this Code or the rules and regulations promulgated thereunder.
The Court is also authorized to award attorneys fees not exceeding thirty percentum (30%) of the award.
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be jointly and severally liable
for the payment of damages. However, any person who becomes liable for the payment of such damages
may recover contribution from any other person who, if sued separately, would have been liable to make
the same payment, unless the former was guilty of fraudulent representation and the latter was not.
63.3. Notwithstanding any provision of law to the contrary, all persons, including the issuer, held liable
under the provisions of Sections 56, 57, 58, 59, 60 and 61 shall contribute equally to the total liability
adjudged herein. In no case shall the principal stockholders, directors and other officers of the issuer or
persons occupying similar positions therein, recover their contribution to the liability from the issuer.
However, the right of the issuer to recover from the guilty parties the amount it has contributed under this
Section shall not be prejudiced.
Section 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or verification,
motu proprio or upon verified complaint by any aggrieved party, may issue a cease and desist order
without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate
as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the
investing public.
64.2. Until the Commission issue a cease and desist order, the fact that an investigation has been initiated
or that a complaint has been filed, including the contents of the complaint, shall be confidential. Upon
issuance of a cease and desist order, the Commission shall make public such order and a copy thereof
shall be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5) days from receipt
of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the
Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not
later than ten (10) days 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.
Section 65. Substituted Service Upon the Commission. Service of summons or other process shall
be made upon the Commission in actions or legal proceedings against an issuer or any person liable under
this Code who is not domiciled in the Philippines. Upon receipt by the Commission of such summons, the
Commission shall within ten (10) days thereafter, transmit by registered mail a copy of such summons and
the complaint or other legal process to such issuer or person at his last known address or principal office.
The sending thereof by the Commission, the expenses for which shall be advanced by the party at whose
instance it is made, shall complete such service.
Section 66. Revelation of Information Filed with the Commission. 66.1. All information filed with
the commission in compliance with the requirements of this Code shall be made available to any member
of the general public, upon request, in the premises and during regular office hours of the Commission,
except as set forth in this Section.
66.2. Nothing in this Code shall be construed to require, or to authorize the Commission to require, the
revealing of trade secrets or processes in any application, report, or document filed with the Commission.
66.3. Any person filing any such application, report or document may make written objection to the public
disclosure of information contained therein, stating the grounds for such objection, and the Commission
may hear objections as it deems necessary. The Commission may, in such cases, make available to the
public the information contained in any such application, report, or document only when a disclosure of
such information is required in the public interest or for the protection of investors; and copies of
information so made available may be furnished to any person having a legitimate interest therein at such
reasonable charge and under such reasonable limitations as the Commission may prescribe.
66.4. It shall be unlawful for any member, officer, or employee of the Commission to disclose to any person
other than a member, officer or employee of the Commission or to use for personal benefit, any
information contained in any application, report, or document filed with the Commission which is not made
available to the public pursuant to Subsection 66.3.
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66.5. Notwithstanding anything in Subsection 66.4 to the contrary, on request from a foreign enforcement
authority of any country whose laws grant reciprocal assistance as herein provided, the Commission may
provide assistance in accordance with this subsection, including the disclosure of any information filed with
or transmitted to the Commission. If the requesting authority states that it is conducting an investigation
which it deems necessary to determine whether any person has violated, is violating, or is about to violate
any laws relating to securities or commodities matters that the requesting authority administers or
enforces. Such assistance may be provided without regard to whether the facts stated in the request would
also constitute a violation of law of the Philippines.
Section 67. Effect of action of Commission and Unlawful Representations with Respect
Thereto. 67.1. No action or failure to act by the Commission in the administration of this Code shall be
construed to mean that the Commission has in any way passed upon the merits of or given approval to
any security or any transactions or transactions therein, nor shall such action or failure to act with regard
to any statement or report filed with or examined by the Commission pursuant to this Code or the rules
and regulations thereunder to be deemed a finding by the Commission that such statements or report is
true and accurate on its face or that it is not false or misleading. It shall be unlawful to make, or cause to
be made, to any prospective purchaser or seller or a security any representation that any such action or
failure to act by the Commission is to be so construed or has such effect.
67.2. Nothing contained in Subsection 67.1 shall, however, be construed as an exemption from liability of
an employee or officer of the Commission for any nonfeasance, misfeasance or malfeasance in the
discharge of his official duties.
Section 68. Special Accounting Rules. The Commission shall have the authority to make, amend, and
rescind such accounting rules and regulations as may be necessary to carry out the provisions of this
Code, including rules and regulations as may be necessary to carry out the provisions of this Code,
including rules and regulations governing registration statements and prospectuses for various classes of
securities and issuers, and defining accounting, technical and trade terms used in this Code. Among other
things, the Commission may prescribe the form or forms in which required information shall be set forth,
the items or details to be shown in the balance sheet and income statement, and the methods to be
followed in the preparation of accounts, appraisal or valuation of assets and liabilities, determination of
depreciation and depletion, differentiation of recurring and non-recurring income, differentiation of
investment and operating income, and in the preparation, where the Commission deems it necessary or
desirable of consolidated balance sheets or income accounts of any person directly or indirectly controlling
or controlled by the issuer, or any person under direct or indirect common control with the issuer.
Section 69. Effect on Existing Law. The rights and remedies provided by this Code shall be in addition
to any and all order rights and remedies that may now exist. However, except as provided in Section 56
and 63 hereof, no person permitted to maintain a suit for damages under the provisions of this Code shall
recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual
damages on account of the act complained of: Provided, That exemplary damages may be awarded in
cases of bad faith, fraud, malevolence or wantonness in the violation of this Code or the rules and
regulations promulgated thereunder.
Section 70. Judicial Review of Commission Orders. Any person aggrieved by an order of the
Commission may appeal the order to the Court of Appeals by petition for review in accordance with the
pertinent provisions of the Rules of Court.
Section 71. Validity of Contracts. 71.1. Any condition, stipulation, provision binding any person to
waive compliance with any provision of this Code or of any rule or regulation thereunder, or of any rule of
an Exchange required thereby, as well as the waiver itself, shall be void. 71.2. Every contract made in
violation of any provision of this Code or of any rule or regulation thereunder, and every contract, including
any contract for listing a security or an Exchange heretofore or hereafter made, the performance of which
involves the violation of, or the continuance of any relationship or practice in violation of, any provision of
this Code, or any rule or regulation thereunder, shall be void:
(a) As regards the rights of any person who, in violation of any such provision, rule or regulation,
shall have made or engaged in the performance of any such contract, and
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(b) As regards the rights of any person who, not being a party to such contract, shall have acquired
any right thereunder with actual knowledge of the facts by reason of which the making or
performance of such contract was in violation of any such provision, rule or regulation.
71.3. Nothing in this Code shall be construed:
(a) To affect the validity of any loan or extension of credit made or of any lien created prior or
subsequent to the effectivity of this Code, unless at the time of the making of such loan or
extension of credit or the creating of such lien, the person making such loan or extension of credit
or acquiring such lien shall have actual knowledge of the facts by reason of which the making of
such loan or extension of credit or the acquisition of such lien is a violation of the provisions of this
Code or any rules or regulations thereunder, or
(b) To afford a defense to the collection of any debt, obligation or the enforcement of any lien by
any person who shall have acquired such debt, obligation or lien in good faith for value and without
actual knowledge of the violation of any provision of this Code or any rule or regulation thereunder
affecting the legality of such debt, obligation or lien.
Section 72. Rules and Regulations; Effectivity. 72.1. This Code shall be self-executory. To effect the
provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules and
regulations and orders necessary or appropriate, including rules and regulations defining accounting,
technical, and trade terms used in this Code, and prescribing the form or forms in which information
required in registration statements, applications, and reports to the Commission shall be set forth. For
purposes of its rules or regulations, the Commission may classify persons, securities, and other matters
within its jurisdiction, prescribe different requirements for different classes of persons, securities, or
matters, and by rule or order, conditionally or unconditionally exempt any person, security, or transaction,
or class or classes of persons, securities or transactions, from any or all provisions of this Code.
Failure on the part of the Commission to issue rules and regulations shall not in any manner
affect the self-executory nature of this Code.
72.2. The Commission shall promulgate rules and regulations providing for reporting, disclosure and the
prevention of fraudulent, deceptive or manipulative practices in connection with the purchase by an issuer,
by tender offer or otherwise, of and equity security of a class issued by it that satisfies the requirements of
Subsection 17.2. such rules and regulations may require such issuer to provide holders of equity securities
of such dates with such information relating to the reasons for such purchase, the source of funds, the
number of shares to be purchased, the price to be paid for such securities, the method of purchase and
such additional information as the Commission deems necessary or appropriate in the public interest or for
the protection of investors, or which the Commission deems to be material to a determination by holders
whether such security should be sold.
72.3. For the purpose of Subsection 72.2, a purchase by or for the issuer or any person controlling,
controlled by, or under common control with the issuer, or a purchase subject to the control of the issuer or
any such person, shall be deemed to be a purchased by the issuer. The commission shall have the power
to make rules and regulations implementing this subsection, including exemptive rules and regulations
covering situations in which the Commission deems it unnecessary or inappropriate that a purchase of the
type described in this subsection shall be deemed to be a purchase by the issuer for the purpose of some
or all of the provisions of Subsection 72.2.
72.4. The rules and regulations promulgated by the Commission shall be published in two (2) newspapers
or general circulation in the Philippines, and unless otherwise prescribed by the Commission, the same
shall be effective fifteen (15) days after the date of the last publication.
The SECs authority to adopt rules extends to all Sections of the Code, not just where specific order power is set out.
Section 73. Penalties. Any person who violates any of the provisions of this Code, or the rules and
regulations promulgated by the Commission under authority thereof, or any person who, in a registration
statement filed under this Code, makes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements therein not misleading,
shall, upon conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five
million pesos (P5,000,000.00) or imprisonment of not less than seven (7) years nor more than twenty-one
82
(21) years, or both in the discretion of the court. If the offender is a corporation, partnership or association
or other juridical entity, the penalty may in the discretion of the court be imposed upon such juridical
entity and upon the officer or officers of the corporation, partnership, association or entity responsible for
the violation, and if such officer is an alien, he shall in addition to the penalties prescribed, be deported
without further proceedings after service of sentence.
Some Summary
Rules on Civil Liability
If on account of false registration
Sec 56
statement
For manipulation of security practices
Sec 59
On account of insider trading
Sec 61
For recovery of damages on above violations go to Sec 63 (applies also to
Secs 56 61); if looking for penalties for those same violations, go to Sec
73
Section 74. Transitory Provisions. The Commission, as organized under existing laws, shall continue
to exist and exercise its powers, functions and duties under such laws and this Code: Provided, That until
otherwise mandated by a subsequent law, the Commission shall continue to regulate and supervise
commodity futures contracts as provided in Section 11 and pre-need plans and the pre-need industry as
provided in Section 16 of this Code.
All further requirements herein shall be complied with upon approval of this Code: Provided, however, That
compliance may be deferred for such reasonable time as the Commission may determine but not to
exceed one (1) year from approval of this Code: Provided, further, That securities which are being offered
at the time of effectivity of this Code pursuant to an effective registration and permit, may continue to be
offered and sold in accordance with the provisions of the Revised Securities Act in effect immediately prior
to approval of this Code.
xxx
Section 75. Partial Use of Income.
Section 76. Repealing Clause. The Revised Securities Act (Batas Pambansa Blg. 178), as amended,
are hereby repealed. All other laws, orders, rules and regulations, or parts thereof, inconsistent with any
provision of this Code are hereby repealed or modified accordingly.
Section 77. Separability Clause.
Section 78. Effectivity.

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1

SECURITIES REGULATION CODE

Ensure fair and full disclosure about securities and

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SEC Structure (Sections 4 & 6, SRC Rule 4)

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Registered investment house;

Registered investment house;

K. Registration of Securities (Sections 12 15)

Rejection and Revocation of Registration of Securities (Sec 13)

Amendments to the Registration Statement (Sec 14)

L. Pre-need Plans (Sec 16)

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What is beneficial ownership? (SRC IRR Rule 3)

Cattlemens Investment Company v George Fears, 343 F.Supp. 1248 (1972)

3. Internal Record Keeping and Accounting Controls (Sec 22)

O. Manipulative Practices and Insider Trading

Sec 28. Registration of Brokers, Dealers, Salesmen and Associated Persons

Brokers/dealers trading government securities &

Nicolas v CA and Blesilo Buan, 27 Mar 1998 (repercussion of being unregistered)

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2. Registration of Exchanges (Sec 33)

3. Broker-Dealer Segregation Rule (Sec 34)

5. Independent Directors (Sec 38, SRC IRR Rule 38)

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