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ilahang bride nga gi-order kay gi-examine naman nila.

Is that a
January 19, 2017 (NDBajenting)
caveat emptor? It might be caveat, but it is not a caveat
emptor. “Sigurado ka ba mao ning nasa litrato gyud? Mao ba
THE SECURITIES REGULATION CODE gyud ni? Basin gigunting lang nang litrato sa magazine.” Unya
R.A. No. 8799 pag-adto didto, “Unsa man ning ni-a, tiguwang man diay ning
akong giminyo?! Batan-on man tong sa litrato, nganong
Section 1. Title. - This shall be known as "The Securities natiguwang man ni?!” Nadugay man gud padala ang post
Regulation Code." office mao nang natiguwang.
By reading more literature about the subject matter, we do not
The predecessor of the The Securities Regulation Code (The get to know the subject matter when it comes to sale. That is
SRC) is the Revised Securities Act (RSA). So, it used to be only in law. More reading of law makes you know the law
copied from the U.S. federal law, the Securities Act. The more. But in sales, you do not get to know the thing at which
Securities Act for us, securities law, and the Revised Security you are paying for, just because you have read more. You
Act is gone. It is now the SRC. But in the U.S., they still have must examine the thing itself. That is when caveat emptor
the Securities Act. What does it tell us, that the U.S. still has works. The U.S. SC says, “Caveat emptor is limited to tangibles
the Securities Act? And it is just interpretations of law that only. But even then, if it is tangible and it is not open to
keeps it holding along with Supreme Court Decisions. And they examination— it is packed, sealed, you cannot inspect it until
just keep on adding provisions in the Securities Act. But we after you pay for it, there is no caveat emptor principle that is
were not satisfied, we changed the law completely, and so we applied.” So, because securities that are bought and sold are
have the SRC. not subject to the caveat emptor principle, you cannot
examine it. And it is a complex thing that you are buying, you
Q: What is The Securities Regulation Code?
need a law to be protected from the scams and schemes of
A: The SRC is known as the BLUE-SKY LAW. The blue-sky these people <I just changed the word FGN used kay wala sa
law is taken from the decision of the U.S. SC, where the SC dictionary 😊> who often have nothing more to sell than a
affirmed the validity and constitutionality of the Securities Act. few feet from the blue sky. That is what the SC in the U.S.
The Court made a pronouncement which has since been says. Schemes and scams in securities for sale are often
repeated again. The Securities Act is intended to protect the reduced to selling nothing more than a few feet of the blue
investing public. That is the purpose. sky. That is why it is called the blue-sky law.
The Court differentiated that when you buy intangibles, the Sa sunod gani pangutan-on mo, what is the blue-sky law?
regular time-honored principle in sales, known as caveat Ans.: Taken from the pronouncement of the U.S. SC, by which
emptor, does not hold. Caveat emptor, has been translated the SC says, the purpose of the Securities Act, is to protect the
as, “Let the buyer beware!”. You are going to buy a horse, you investing public against schemes and scams that purport to sell
should beware and you should not take the word of the horse nothing more than a few feet from the blue sky.
trader hook, line, and sinker–to mix metaphors. That’s bad
Sa ato pa, wala’y gibaligya. Hangin ra’y gibaligya. Wala’y unod
English. Gamiton nimo sa horse trading ang fish metaphor—
ang gibaligya. But look at this Declaration of State Policy now
that is mixing metaphors.
under The SRC:
Q: Why is caveat emptor no longer applicable?
A: Because there is nothing to be examined. Section 2. Declaration of State Policy. – The State shall
establish a socially conscious, free market that regulates
Unlike the horse—subject matter of the sale, it cannot open itself, encourage the widest participation of ownership in
the mouth and count the teeth to verify the age of the horse enterprises, enhance the democratization of wealth,
you are buying. The horse owners made a warrant that the promote the development of the capital market, protect
horse is not more than three (3) years old. You open the investors, ensure full and fair disclosure about securities,
mouth and when you count and see the teeth, “Oh, so this minimize if not totally eliminate insider trading and other
must be more than 3 years old.” fraudulent or manipulative devices and practices which
create distortions in the free market. To achieve these ends,
What will you examine when you are sold shares of stock?
this Securities Regulation Code is hereby enacted.
There is no referent in the shares of stock. What do you
examine when you are sold the bond? There is nothing to be
examined. You are just given more things to read and the There are so many aims now added to that single pertinent
literature is as good as the referent. aim of protecting investors.

Suppose you are one of the twenty-million Chinese who are for The SRC begins with Section 3, Definition of Terms. It says
all purposes made to live a single life. Why? Because they are definition of terms, but there are no definitions if you take a
living in the rural agricultural part of China that has not left look at this section, which has several paragraphs up to 3.15.
gender in cases of birth, to chance. All the girls who were born There is no definition of security. what do you have? You have
there had been drowned because it should be male children an enumeration of that securities:
that they should have. And it’s only a one (1)-child policy, isn’t
it? So only males. Why do they want males? Because males Section 3. Definition of Terms. - 3.1. "Securities" are
can work in the farm, the female can work in the farm only a shares, participation or interests in a corporation or in a
little. They are put to plow field and do all sorts of heavy work. commercial enterprise or profit-making venture and
Where will they get females to marry? For those who have evidenced by a certificate, contract, instruments, whether
been able to amass a respectable fortune from their written or electronic in character. It includes:
agricultural enterprise, they will have some money to purchase (a) Shares of stocks, bonds, debentures, notes evidences of
a mail-order bride. Where is the mail-order bride coming from? indebtedness, asset-backed securities;
It’s coming from Burma, Cambodia, Laos. And these mail-order
bride brokers come with pictures and resumés of those that (b) Investment contracts, certificates of interest or
are available for marriage and that is what the males in rural participation in a profit sharing agreement, certifies of
China look at. They look at the literature about this bride that deposit for a future subscription;
they are supposed to import and marry. Is that doing the due
(c) Fractional undivided interests in oil, gas or other mineral
diligence following caveat emptor by looking at these
rights;
descriptions and pictures? Because if it is, then dili na nili mauli
(d) Derivatives like option and warrants; Ans.: It is ruling of the U.S. SC in the 1940’s when the SC
pronounced a certain investment contract as a security. So,
(e) Certificates of assignments, certificates of participation, that decided case became the yardstick of when an investment
trust certificates, voting trust certificates or similar contract becomes a security.
instruments
Q: When does an investment contract become a security?
(f) Proprietary or nonproprietary membership certificates in What are the facts of that case?
corporations; and
A: There was this owner of a rather extensive estate in Florida.
(g) Other instruments as may in the future be determined by It was planted with Florida oranges. And this owner, offered to
the Commission. the public that he was subdividing his orchard and he was
3.2. "Issuer" is the originator, maker, obligor, or creator of selling it, one (1) unit would be three (3) acres (3 acres = 1.21
the security. hectare). And then, you buy the 3ac. You have an orchard of
oranges. But then you have a choice. You will give it back to
3.3. "Broker" is a person engaged in the business of buying the owner who will accept, run the orchard for you, and then
and selling securities for the account of others. there will be a profit sharing. You will get a share of the
3.4. "Dealer" means any person who buys sells securities for profits. He alone will be working for you. Then this owner, by
his/her own account in the ordinary course of business. using the postal system, mailed to the different people of New
York, giving them a brochure of what he was selling. You have
3.5. "Associated person of a broker or dealer" is an employee a choice. You want an orchard—mubakasyon ka didto pila ka
therefor whom, directly exercises control of supervisory semana/buwan, layo baya na kaayo. Katilaw ka sa imong
authority, but does not include a salesman, or an agent or a kaugalingon nga orchard oranges. O dili ba, imong ihatag ug
person whose functions are solely clerical or ministerial. balik ug ako’y mutrabaho unya bahinan ka lang nako ug kita.
3.6. "Clearing Agency" is any person who acts as Ang kita ini labaw pa sa bank deposit. Now, he did that
intermediary in making deliveries upon payment effect without first registering these investment contracts that he was
settlement in securities transactions. selling. So, the U.S. Securities and Exchange Commission ran
after him. He was also indicted for violating the postal laws.
3.7. "Exchange" is an organized market place or facility that Because you can only sell securities using the post office only
brings together buyers and sellers and executes trade of after you have registered. If you have not registered, and you
securities and/or commodities. sell these things, it is a violation of the postal laws. It’s a
criminal violation. Then he challenged the accusation of the
3.8. "Insider" means (a) the issuer; (b) a director or officer
SEC. “I am not selling any securities to the public. Those who
(or any person performing similar functions) of, or a person
are buying from me, they are buying real estate. And it is up to
controlling the issuer; gives or gave him access to material
them. They want to make me work at it, and we will just split
information about the issuer or the security that is not
the profits. That is ordinary. That is not a security.” So finally,
generally available to the public; (d) A government
it went to the SC. Pildi man siya sa circuit court. Ang iyang
employee, director, or officer of an exchange, clearing
kumpanya, Howey man ang name. And the SC came out with
agency and/or self-regulatory organization who has access to
a ruling:
material information about an issuer or a security that is not
generally available to the public; or (e) a person who learns An investment contract becomes a security:
such information by a communication from any forgoing
insiders. 1. When there is an enterprise. – That enterprise is
characterized by the investor putting in money to
3.9. "Pre-need plans" are contracts which provide for the that enterprise.
performance of future services of or the payment of future
monetary considerations at the time actual need, for which 2. The one who works that enterprise is another
plan holders pay in cash or installment at stated prices, with person other than the investor and independent
or without interest or insurance coverage and includes life, of the instructions of the investor. – He works on
pension, education, interment, and other plans which the it alone. Alone in the sense that the investor does
Commission may from time to time approve. not participate in the working of the enterprise.

3.10. "Promoter" is a person who, acting alone or with 3. The profits that are realized therefrom are wholly
others, takes initiative in founding and organizing the independent from the exertion or the
business or enterprise of the issuer and receives participation of the investor. – The investor has
consideration therefor. nothing to do, whether or not there is a profit.
He is completely detached, he just relies on this
3.11. "Prospectus" is the document made by or on behalf of other fellow who is out there trying to make a
an issuer, underwriter or dealer to sell or offer securities for profit. And he gets a share of the profits.
sale to the public through registration statement filed with
the Commission. So, if you have that, then you have a security. And
because it is a security, you cannot sell it without first
3.12. "Registration statement" is the application for the registering it with the U.S. SEC.
registration of securities required to be filed with the
Commission. SEC vs. W. J. Howey Co., 328 U.S. 293 (1946), was a case in
3.13. "Salesman" is a natural person, employed as such as an which the Supreme Court of the United States held that the
agent, by a dealer, issuer or broker to buy and sell securities. offer of a land sales and service contract was an "investment
contract" within the meaning of the Securities Act of 1933
3.14. "Uncertificated security" is a security evidenced by U.S.C. § 77b and that the use of the mails and interstate
electronic or similar records. commerce in the offer and sale of these securities was a
violation of §5 of the Act, U.S.C. § 77e. It was an important
3.15. "Underwriter" is a person who guarantees on a firm
case in determining the general applicability of the federal
commitment and/or declared best effort basis the distribution
securities laws. ~ Wikipedia
and sale of securities of any kind by another company.

In one BAR examination, it was asked: What is the Howey Why are we going at such rate to tell this story? Because it is
so close to the most recent decision of the Philippine Supreme
Test?
Court: SEC Chairperson Herbosa, et al. vs. CJH
Development Corporation and CJH Suites Corporation, That’s very interesting, you read the case. This case has no
3rd Division, Peralta, J. November 28, 2016, G.R. No. reference to the Howey test. How did the SC arrive at the
210316. decision that this is a security? No mention at all. Make sure
everybody has read the case. Mugawas ni sa Bar.
CJH is “Camp John Hay” Development Corporation (CJHDC).
This is the corporation that won the right to develop CJH after Remember that the requisites for paying a security is only true
it was bid out. This corporation is controlled by the infamous as to an investment contract— one of the enumerated
Mr. Sobrepeña. Infamous because he is behind the great securities in The SRC.
corporation that collapsed— The College Assurance Plan, Inc.
There are five (5) kinds of securities basically:
(CAP). Pre-need. Daghan kaayong pamilya tawon nga naloko
niana. Nagbayad sa ilang binulan, hangtod nahuman ug bayad, 1. Proprietary interest
wala na’y nahibilin. Nahurot nang kwarta. Who among here is
a CAP child? <Naa’y gi-interview si FGN> Wa pa naandam ang The primary example of proprietary interest is shares
kinainitang bahin sa impyerno aning tawhana. That is just of stock.
robbery. 2. Credit interest
Anyway this is another scam of Sobrepeña. You read this and Utang ba, mutuum. It could be bonds, commercial
you will set your ears on fire. CJHDC entered into a Lease papers, acceptances of receivables, many kinds of
Agreement with the Bases Conversion Development Authority features of credits.
(BCDA), the same body that converted, sold, Fort Bonifacio for
real property development supposed to be to modernize the 3. Participation in interest
armed forces. Pero ambot ha-in na ang kwarta ato. (More Lunod2x ka lang, pusta2x. Wa ka mupalit, ningpusta
segue: You know in Baguio there is a property where the SC ka lang. Kanang investment contracts, certification in
has several cottages. They may hold sessions there during the interest for participation in profit sharing agreement,
summer because it is hot in Manila. So they go to Baguio. And certificate of deposit for a future subscription, etc.
we know that CJH used to be owned by the US Armed Forces
for rest and recreation of its military personnel because morale 4. Derivatives
is essential to the members of the armed forces. That is where Q: What is a derivative?
the officers from the Vietnam war used to go.) CJH was
opened up for bidding. CJHDC bid three condominium units A: A derivative is a security, the underlying asset of
there. And then, it offered the condominium units to the which is another security.
public. But, the public did not take to the sale of the
Explanation: What are you selling? You are selling a
condominiums. So, what happened? Sobrepeña came up with
warrant. A warrant is a right to purchase shares of
a development plan which was to construct condotels. These
stock at a given strike price which is good for a
condotels were offered to the general public by means of two
number of months.
schemes. The first is straight purchase. The other scheme
added an option to avail of a “leaseback” or a “money-back” So let us say, the warrant is good for one (1) year.
arrangement. If you buy a condominium, you can lease it back You buy a warrant today, to buy BDO shares, at a
to the seller. And the seller Sobrepeña would open it up to trade price today which is Php 112.00 per share. And,
foreigners who will be coming to CJH to play golf, recreate, you buy this warrant to be able to buy shares.
take advantage of the cool weather of Baguio. And out of the “Warrant to buy 1,000 BDO shares at Php 112.00
rent, he will deduct the expenses and you will share in the selling price per share.” So, you have a right to buy.
profits. What is the asset value in that security? The asset
value in that security is another security which is
Doesn’t that sound familiar to you? The trouble is, he started
shares of stock of BDO. Ang nagpailawom nga value
selling this without registering these particular contracts with
is another security. Kintahay imong gipugngan na,
the SEC. And the SEC Investigation Department said, “You are
naghuwat ka, at the end of the year, all of a sudden
selling securities without registering the securities as required
you find out that BDO is now Php 140.00 per share.
by The SRC.” So, Sobrepeña fought it out and in fact he got a
Nagtan-aw ka sa imong warrant, malipay ka ba or
decision in favor of CJHDC. CA ruled in his favor. “There is no
maghilak? Malipay ka kay you can buy at Php 112.00
security, etc.” So, SEC Commissioner Herbosa went to SC.
per share which is for sale at Php 140.00 in the
What did SC say? SEC is correct. That is a security! You should market. Naa pa kay ginansya. Ingon ka, “Wala man
have registered before you sold. So, SC castigated the CA for kay ikapalit.” O, kasayon ana. Tawagon nimo ang
lifting the restraining order. The restraining order should have broker. Ang broker muhatag nimo ug kwarta unya
been made permanent. You cannot sell the security. You are bahinan nimo siya sa ginansya. Wa na kay problema
restrained from selling the security because you have not sa pagpangita ug kwarta ana. But come 12 months
registered. Unsa ma’y imong prayer sa korte? “Hununga from now, the price of BDO is only at Php 108.00 per
pagbaligya ini,” matod pa sa SEC. Ang respondent, “Lift the share, unya ang imong warrant Php 112.00. Maunsa
restraining order.” SC Decision: The injunction/restraining man ka? Mas barato pa ug wa kay warrant. Mupalit
order, is made permanent. ka nalang sa stock market at Php 108.00 per share.
Ang imong warrant, gision nalang ‘to nimo kay wa
What’s the dispositive portion? nama’y kapuslanan. You see, derivative is a security
the underlying asset of which is another security.
WHEREFORE, the petition is GRANTED. The Decision of the
Court of Appeals, dated June 7, 2013, and its Resolution 5. Pre-need plans
dated November 28, 2013, in CA-G.R. SP No. 125482 are Now here’s an interesting thing of our SRC. Because
REVERSED and SET ASIDE. The Writ of Preliminary our SRC specifically says that pre-need plans are
Injunction, per CA Resolution dated November 8, 2012, securities. In the US, pre-need plans are not
which was made permanent by its June 7, 2013 Decision, is securities. Dinhi ra na. Why? For God’s sake, I don’t
hereby LIFTED. SEC-CDO Case No. 05-12-006 and the June know. Because pre-need plans are a hybrid security.
7, 2012 Cease and Desist Order of the Securities and Wa pa nimo kinahanglana kanang pre-need plan para
Exchange Commission are REINSTATED. sa patay. Unsa man imong baligya? Kanang paluwag
nimo kung mamatay ka na— imong casket, lubong,
pila ka adlaw nga haya, unsang funeral parlor ka,
ibutang dinha. Duna ba’y rug sa ilawom, naa ba’y securities, in such form and with such substance as the
kandila, naa ba’y listahanan sa mga guests. Those are Commission may prescribe, shall be made available to each
all specified in the pre-need plan. When will you use prospective purchaser.
it? When you are dead. Karon buhi ka pa, that is all
you pay for it. You keep on paying. After you have 8.2. The Commission may conditionally approve the
finished, you have done your part, you wait for your registration statement under such terms as it may deem
own death. Then when you die, the pre-need necessary.
company will perform its part of the bargain, provide 8.3. The Commission may specify the terms and conditions
you with your funeral services. What happens if you under which any written communication, including any
die before finishing the complete payment? Not to summary prospectus, shall be deemed not to constitute an
worry, because there is an insurance feature in the offer for sale under this Section.
pre-need plan. You are insured. If you die, you have
not finished paying, you will be considered to have 8.4. A record of the registration of securities shall be kept in
paid it completely because the insurance pays the Register Securities in which shall be recorded orders
balance. Why is the company that issues this type of entered by the Commission with respect such securities.
plan very generous nga kung mamatay ka, wa pa ka Such register and all documents or information with the
kahuma’g bayad then they will consider it fully paid? respect to the securities registered therein shall be open to
Because the risk of abuse is very little. Ug gusto gyud public inspection at reasonable hours on business days.
ka magpahimulos gyud ana, “Ay, dili nalang ko 8.5. The Commission may audit the financial statements,
mubayad, pakamatay nalang ko.” Pila may mubuhat assets and other information of firm applying for
ana— magpakamatay ka aron mu-take advantage ka registration of its securities whenever it deems the same
sa imong premium? That is too far-fetched. That’s necessary to insure full disclosure or to protect the interest
why they include that as a feature. Who is in charge of the investors and the public in general.
of that? The insurance commissioner because that is
an insurable interest, part of the scheme is insurance. So you have to register, and then you pay the registration fee.
So, they actually issued you a policy that is approved If not, then you have to apply for exemption on registration
by the insurance commissioner, not just the SEC. And and the exemption of registration also has a fee but it is lower
yet, The SRC puts it as a security. than the registration fee. So you are not really completely free
You know, all securities have what they call a of fees. You have a family corporation and the family
secondary market. You can buy and sell security corporation is being formed. So pre-incorporation subscription,
before it matures. Shares of stock, you have the stock you register it with the SEC, the SEC will determine if you can
exchange (PSE). Kini ni-ang pre-need, nahuman na be exempt, you are applying for exemption because it’s only
nimo’g bayad. Can you buy and sell the pre-need plan family you are not selling it to the public. So apply ka, but then
for funeral services? Nakadungog na ba ka ana? Is you find out naa man gihapon diay fee, but it is smaller than
there a market for that? Nakadungog ko nga naa kay the fee required for registration of securities that are offered
plan, unya muingon ka nga ang namatay imo mang for sale to the public.
inahan, gihatag nalang nimo niya, goodbye ka na.
Nagamit na. It’s not bought and sold like shares of Section 10. xxx
stock. There is no secondary market for pre-need
10.2. The Commission may exempt other transactions, if it
plans. And yet, The SRC says it is a security. And it
finds that the requirements of registration under this Code is
includes all kinds of pre-need plans, ha.
not necessary in the public interest or for the
protection of the investors such as by the reason of the
Section 3. xxx small amount involved or the limited character of the public
Section 3.9. "Pre-need plans" are contracts which offering.
provide for the performance of future services of or 10.3. Any person applying for an exemption under this
the payment of future monetary considerations at the Section, shall file with the Commission a notice identifying the
time actual need, for which plan holders pay in cash exemption relied upon on such form and at such time as the
or installment at stated prices, with or without Commission by the rule may prescribe and with such notice
interest or insurance coverage and includes life, shall pay to the Commission fee equivalent to one-
pension, education, interment, and other plans which tenth (1/10) of one percent (1%) of the maximum value
the Commission may from time to time approve. aggregate price or issued value of the securities.
By the way, do you remember FRIA? There are So, what do you need if you do not file for exemption? You
certain entities that are exempt from FRIA, mostly need to file what is called a registration statement. And the
they are government financial institutions which in registration statement is a description of the corporation or
their charter the government is directly liable or is the those behind the corporation, if you are registering it as a
direct guarantor of this financial establishments. corporation, what is the purpose, what are the plans of the
Other entities that are exempt from FRIA are corporation, etc. There is a complete discussion as to the
these pre-need companies! Unsa man na, business side of the corporation and the personalities that are
sagubangon sa gobyerno?! It’s not loan but that is involved.
the fifth kind of security— Pre-need plans.
Q: Are all securities required to be registered?
These are the groupings of securities.
A: NO. There are two (2) kinds of securities that are not
The requirement for registration of securities is found in Sec. required to be registered:
8:
1. exempt securities
Section 8. Requirement of Registration of 2. exempt transactions
Securities.– 8.1. Securities shall not be sold or offered for
sale or distribution within the Philippines, without a EXEMPT SECURITIES
registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the Section 9. Exempt Securities. – 9.1. The requirement of
registration under Subsection 8.1 shall not as a general rule Here is an estate that is being administered by the court. And
apply to any of the following classes of securities: the estate has many earning assets. Suppose the receiver
says, “We need cash to maintain all these different hotels, all
(a) Any security issued or guaranteed by the Government of these earning assets, to pay the taxes because the end of the
the Philippines, or by any political subdivision or agency year is coming and we have to pay real estate taxes.” How can
thereof, or by any person controlled or supervised by, and we make this money? The court now asks the receiver, “How
acting as an instrumentality of said Government. do you propose that the estate earn money?” “It should sell
(b) Any security issued or guaranteed by the government of securities, like a bond! Borrow money from the public at a
any country with which the Philippines maintains diplomatic determined price.”
relations, or by any state, province or political subdivision Q: Now the bond that the estate sells, is an exempt security.
thereof on the basis of reciprocity: Provided, That the Why?
Commission may require compliance with the form and
content for disclosures the Commission may prescribe. A: Because there is already a government entity/authority
overseeing the propriety of the issuance of the shares.
(c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory body. Q: What government authority?
(d) Any security or its derivatives the sale or transfer of A: The court itself. That is why it is an exempt security.
which, by law, is under the supervision and regulation of the
Office of the Insurance Commission, Housing and Land Use Section 10 (d) The distribution by a corporation actively
Rule Regulatory Board, or the Bureau of Internal Revenue. engaged in the business authorized by its articles of
incorporation, of securities to its stockholders or other security
(e) Any security issued by a bank except its own shares of
holders as a stock dividend or other distribution out of surplus.
stock.
So when a private corporation declares stock dividend, it is
Discussion:
issuing a security. And yet, if it is distributed only among
stockholders in a corporation, the public is not involved. You
9 (a) Any security issued or guaranteed by the Government are not afraid of misleading the public because the public is
of the Philippines, or by any political subdivision or agency not at all the buyer. It’s only the stockholders so that is called
thereof, or by any person controlled or supervised by, and an exempt transaction. And so on, you can go down the list in
acting as an instrumentality of said Government. Section 10. <Read Sec. 10 sa codal nalang. Mahaba.>

The government does not have to register its own security. An Now, suppose a registration statement which is actually an
example of a security that the government issues are application for registration is found to be sufficient in form and
treasury bills. Every Monday, the government auctions off substance, the next thing is normally the approval of security
security bills. What are the security bills? IOUs of the treasury but the SEC does not approve the security. Why? The SEC
of the Philippines. Government needs money to run. There are might be misinterpreted as endorsing it for sale. Hala pamalit
payrolls to be met, operation expenses to be incurred but the na mo niini kay approved ni. The SEC only declares a security
government collects taxes at periodic times. Personal income because this registration statement is sufficient in form and
taxes are collected annually, corporate income tax is normally substance, it will declare it as in effect. So now you can sell it
quarterly, and so on. So, they borrow money from the public because it is now in effect. There is no approval of a
by way of treasury bills. They auction these treasury bills. On registration statement. It’s a very small technicality.
Wednesday, they receive and gather all the bids, then they Q: When can the SEC deny registration of security?
open the bids. By Friday, they award the bids. Sometimes,
they pronounce a failure of bidding because they don’t agree A: Under Section 12.
with the interest that the bidders are willing to pay.
12.6. Within forty-five (45) days after the date of filing of the
You know treasury bills are zero interest bills. So how do you
registration statement, or by such later date to which the
derive interest? You derive interest by giving it at a discount—
issuer has consented, the Commission shall declare the
A face value of P 1 Million, if you bid for it, for P 900,000, that
registration statement effective or rejected, unless the
means that the interest you pay is 10%, is it not? P 100,000 is
applicant is allowed to amend the registration statement as
10% of P 1 Million. That is how the no-interest bill is sold at a
provided in Section 14 hereof. The Commission shall enter an
discount.
order declaring the registration statement to be effective if it
But if it is with interest, and the interest is already carried on finds that the registration statement together with all the
the face of it then you make money according to the yield. The other papers and documents attached thereto, is on its face
price at which you pay which is lower or higher than the face complete and that the requirements have been complied
value. That is the yield of a particular security— whether it be with. The Commission may impose such terms and conditions
a bond or a commercial paper, or it be a participation in as may be necessary or appropriate for the protection of the
interest. And it is bought and sold before its maturity in the investors.
secondary market. You buy and sell these securities.
Take note ha, it does not say “APPROVED”. It says,
EXEMPT TRANSACTIONS
“EFFECTIVE or REJECTED.”
Q: What is an example of an exempt transaction?
A: Section 13. Rejection and Revocation of Registration
of Securities. – 13.1. The Commission may reject a
registration statement and refuse registration of the security
Section 10. Exempt Transactions. – 10.1. The
there-under, or revoke the affectivity of a registration
requirement of registration under Subsection 8.1 shall not
statement and the registration of the security there-under
apply to the sale of any security in any of the following
after the due notice and hearing by issuing an order to such
transactions:
effect, setting forth its finding in respect thereto, if it finds
(a) At any judicial sale, or sale by an executor, administrator, that:
guardian or receiver or trustee in insolvency or bankruptcy.
(a) The issuer:
(i) Has been judicially declared insolvent; registration statement. An amendment filed after the effective
date of the registration statement shall become effective only
(ii) Has violated any of the provision of this Code,
upon such date as determined by the Commission.
the rules promulgate pursuant thereto, or any
order of the Commission of which the issuer has 14.3. If any change occurs in the facts set forth in a
notice in connection with the offering for which a registration statement, the issuer shall file an amendment
registration statement has been filed thereto setting forth the change.
(iii) Has been or is engaged or is about to engage 14.4. If, at any time, the Commission finds that the
in fraudulent transactions; registration statement contains any false statement or omits
to state any fact required to be stated therein or necessary to
(iv) Has made any false or misleading
make the statements therein not misleading, the Commission
representation of material facts in any prospectus
may conduct an examination, and, after due notice and
concerning the issuer or its securities;
hearing, issue an order suspending the affectivity registration
(v) Has failed to comply with any requirements statement. If the statement is duly amended, the suspension
that the Commission may impose as a condition for order may be lifted.
registration of the security for which the
14.5. In making such examination the Commission or any
registration statement has been filed; or
officer or officers designated by it may administer oaths and
xxx affirmations and shall have access to, and may demand the
production of, any books, records or documents relevant to
That is the list of causes that may be attributable to the issuer. the examination. Failure of the issuer, underwriter, or any
The issuer could be the corporation that issues the securities. other person to cooperate, or his obstruction or refusal to
undergo an examination, shall be a ground for the issuance
Again, causes of rejection that is attributable to the of a suspension order.
registration statement itself:
How about regulation of pre-need plans?
xxx
(b) The registration statement is on its face incomplete or Section 16. Pre-Need Plans. – No person shall sell or offer for
inaccurate in any material respect or includes any untrue sale to the public any pre-need plan except in accordance
statements of a material fact required to be stated therein or with rules and regulations which the Commission shall
necessary to make the statement therein not misleading; or prescribe. Such rules shall regulate the sale of pre-need plans
by, among other things, requiring the registration of pre-need
And then: plans, licensing persons involved in the sale of pre- need
plans, requiring disclosures to prospective plan holders,
prescribing advertising guidelines, providing for uniform
(c) The issuer, any officer, director or controlling person
accounting system, reports and recording keeping with
performing similar functions, or any under writer has been
respect to such plans, imposing capital, bonding and other
convicted, by a competent judicial or administrative body,
financial responsibility, and establishing trust funds for the
upon plea of guilty, or otherwise, of an offense involving
payment of benefits under such plans.
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 Pre-need plans require disclosure. Disclosure, with respect to
laws. prospective plan holders.

For the purposes of this subsection, the term "competent Because pre-need plans are securities, those who sell it have
judicial or administrative body" shall include a foreign court to be registered as sales persons and they require a license
of competent jurisdiction as provided for under Rules of under the SEC. Unya muingon ka nga, “But why is it that
Court. almost everyone, every housewife is selling a pre-need plan? I
do not think that they have passed a licensing exam by the
SEC.” Ngano man nang daghan mang mamaligya ana nga
So if you have been convicted by the SEC in the U.S. for
securities gud na only registered brokers, dealers, sales
engaging in fraudulent activities, and you are one of the
persons and associates of sales persons are allowed to sell
officers of a corporation that issues a security in the
securities man?
Philippines, you can be denied registration because one of your
officers has been found to have violated the securities law in Ah, these people are not actually selling these plans. They are
another jurisdiction as ruled upon by a foreign court. dicers. Maguwang lang na sila gamay or pareha ra na anang
mga barkers dira sa jeepney. “Dali mo dinhi, sakay mo,
Because you know, this is entered into by the World Trade
paingon ni sa Bankerohan.” Barkers man na sila. Kanang sales
Organization— cooperation between security exchanges all
person, mao na’y paghatag nimo sa downpayment, sila na’y
over the world.
mupirma that binds the pre-need companies. And then they
So, amendment of registration statement is by permission of sign the policy and give it to you. That is when the sale is
the SEC. consummated. These housewives who are dicing these pre-
need plans do not actually sell. Sale happens when the policy
Section 14. Amendment to the Registration is issued to you, and binding the pre-need issuer.
Statement. – 14.1. If a registration statement is on its face Let us now cross over to stock markets, rules with respect to
incomplete or inaccurate in any material respect, the stock markets.
Commission shall issue an order directing the amendment of
the registration statement. Upon compliance with such order, Q: What are the percentages that you must remember that
the amended registration statement shall become effective in requires certain duties, especially reportorial duties with
accordance with the procedure mentioned in Subsection 12.6 respect to shares of stock traded in the stock market?
hereof.
A: You have to remember four (4):
14.2. An amendment filed prior to the effective date of the
 5%
registration statement shall recommence the forty-five (45)
day period within which the Commission shall act on a  15%
 30% man beneficial owner niini?” Maayo lagi ug siya gyud nipalit.
Ug dili siya?
 50%+1.
I’ll give you an example: Credit Suisse, is suddenly given a
If you buy up to 5% of the outstanding shares of a corporation
corpus of funds to spread indirect investments in five (5) Asian
listed in the stock market, you have the duty under Section 18
countries which it thinks are the safest investments, in view of
to report by means of a sworn statement containing the
what is happening in Europe. So, “Ibutang ko ni sa Korea,
following information:
Japan, Singapore, Malaysia, unya mubutang sad ko sa
Pilipinas.” Credit Suisse is already a manager of a fund.
Section 18. Reports by five per centum (5%) Holders Unsaon man niya pagpalit diri sa Pilipinas nga wala man siya’y
of Equity Securities. – 18.1. In every case in which an [seat (?)] diri sa Pilipinas? Mu-contact siya ug stockbroker sa
issuer satisfies the requirements of Subsection 17.2 hereof Pilipinas. “Buy me the following: 1 Million shares in Meralco, 1
any person who acquires directly or indirectly the beneficial Million shares in San Miguel, 1 Million in PLDT.” Sisiw ra man
ownership of more than five of per centum (5%) of such na sa ila nang kwartaha. Pagpalit ana, let us say that is 5%
class or in excess of such lesser per centum as the already of the outstanding capital stock of these companies.
Commission by rule may prescribe, shall, within ten (10) days So, the broker has to report. Who is your beneficial owner? He
after such acquisition or such reasonable time as fixed by the has to do it within five (5) days. Pag report niya, kinsa ma’y
Commission, submit to the issuer of the securities, to the beneficial owner ana? Unya, “Wa man ko kaila kinsa’y
Exchange where the security is traded, and to the beneficial owner niini kay ang nagpalit niini, broker man sad sa
Commission a sworn statement containing the following Credit Suisse didto sa Zurich.” So inig report niya, ang broker.
information and such order information as the Commission Muadto nasad ka ato nga Credit Suisse broker, “Kinsa man
may require in the public interest or for the protection of ning imong principal nga gidala?” “Kining CFE Fund, it is a fund
investors. that is traded in the stock exchange in Zurich. This particular
(a) The personal background, identity, residence, and fund.” “Kinsa man beneficial owners anang fund?” “Daghan.”
citizenship of, and the nature of such beneficial ownership by, Kining CFE Fund ga-manage ni ug mga funds of some of the
such person and all other person by whom or on whose biggest retirement funds in the world. And it is managing part
behalf the purchases are effected; in the event the beneficial of the so-called CalPERS. Unsa man nang CalPERS? California
owner is a juridical person, the of business of the beneficial Public Employees' Retirement System, which is something like
owner shall also be reported; USD 280 Billion. Ang ilang mga analysts mutan-aw man sa
mga funds. Ha-i man nga fund ang gwapo ug returns? Ibutang
(b) If the purpose of the purchases or prospective purchases nila, “Mao ni kwarta, kamo magdala niini. Bati gani ang return,
is to acquire control of the business of the issuer of the bawion namo.” Unya pakang2x man na because the rule in
securities, any plans or proposals which such persons may investment is, you never put all your eggs in one basket. Imo
have that will effect a major change in its business or gyud balansehon. You are not expected nga sige ka ug
corporate structure; kadaog. You are expected not to lose. Dako man kaayo imong
(c) The number of shares of such security which are fund, kinahanglan pugngan nimo nga dili mawala. So, it must
beneficially owned, and the number of shares concerning be international imong butangan. Tan-awa na sa Bloomberg. “I
which there is a right to acquire, directly or indirectly, by; (i) am overweight in the Pacific because it is more prosperous
such person, and (ii) each associate of such person, giving than EU.” Nagkagidlay naman ang EU. So, overweight sila diri.
the background, identity, residence, and citizenship of each Kung muisa nasad diri sa EU, basin diay ang Asia nasad
such associate; and mulup-og. Bakwi dayon na nila, gawas nasad na nila ilang
kwarta butang nasad sa EU.
(d) Information as to any contracts, arrangements, or
understanding with any person with respect to any securities Unya ang source pa gyud tu-a outside the Philippine
of the issuer including but not limited to transfer, joint jurisdiction. Mapugos ba na nimo ug reveal kung kinsa nang
ventures, loan or option arrangements, puts or call beneficial owner? Very difficult. Muingon nalang ka ug broker
guarantees or division of losses or profits, or proxies naming ka sa Pilipinas, “Ayaw nalang pugsa. Ug pugson na nimo,
the persons with whom such contracts, arrangements, or tingali ug mang-withdraw na sila.” Once there is a massive
understanding have been entered into, and giving the details withdrawal of these investments, then the price of the stocks
thereof. will be affected. Daghan mubaligya. Pagtan-aw nimo sa
volume sa buying and selling daghan kayo gusto mubaligya
xxx pero wala’y buyer diri. Mao na nang muubos na nang presyo.
Significant trading is done electronically. If you are
You have to report to the SEC who the beneficial owner is of
managing a fund, naa kay targets: Mao ni ang breakeven
the shares of stock of the 5% of the outstanding capital stock
price, Mao ni imong reasonable return price. Unya imo nang i-
of the corporation bought. In other words, the law does not
program sa computer. Muabot na gani nga muginansiya ka,
assume that the name that is carried on in the books of the
desired return nimo which is not spectacular, baligya ka.
corporation as owning those shares is itself the beneficial
Automatic sad na connected sa broker imong program. The
owner. Somebody else may be a beneficial owner. And you
broker electronically will tell the exchange he is selling.
must disclose.
Kung individual stockholder ang mu-participate sa stock
Now, if you are Juan Dela Cruz, you bought these shares and
exchange telepono ra imo, kanang smartphone, unsa man na
you are also the beneficial owner, you are not just the titular
bisan asa makatrade man ko. Mapildi gihapon ka anang mga
owner, you are also the beneficial. Then you must state that in
makina. Pag-abot sa ilang numero, paaak! Baligya dayon. Ug
the disclosure which you file with the SEC within ten (10) days
ang price padulong na sa ubos, pag-abot sa breakeven,
after such acquisition or such reasonable time as fixed by the
baligya na. Unsa ma’y chance nimo individual anang pre-
Commission.
programmed, automatic trading? Mao nang mga dagkong
Now it is five (5) days according to the rules of the PSE. funds.
Because the PSE is a self-regulatory organization (SRO). Its
BlackRock, USD 3 trillion in assets under management. Pinco,
rules are more stringent than the SRC. You must reveal within
almost USD 2 trillion in bonds under management. Singapore
five (5) days who the beneficial owner is. What happens if you
Government Sovereign funds, over USD 200 billion worth of
cannot tell who the beneficial owner is? How come you cannot
investments. Mao na imong mga kalaban sa stock market.
tell?! Pangutan-on diay nimo kanang nagpapalit nimo, “Kinsa
Even the thought of stock certificates, that is passé. Stock A: You are willing to buy everybody, according to the last price
ownership now are represented by electronic evidence. If you at which you bought shares of stock to each 50% +1.
still resort to stock certificates, it increases the cost of buying
That is a general offer. So, what do you have to remember?
and selling securities. And many are allergic to that, mutaas
man ilang breakeven. Unya kung dagko kaayo dili ka gusto  5% - disclosure of beneficial owner
nga mutaas imong breakeven. That is why the SEC wants to
know who these beneficial owners are so you will know who  15% - tender offer
you are up against.  30% - tender offer
Sunod, 15%. Nganong kinahanglan man nimo mahibal-an ang  50% + 1 – general offer
15%? Because of Section 19.
Note: Under the 2015-2016 TSN, FGN used 35% and not
Section 19. Tender Offers. – Any person or group of 30%. He based it on the 2015 SRC Rules:
persons acting in concert who intends to acquire at least
15% of any class of any equity security of a listed 19.2. Mandatory Tender Offers
corporation or of any class of any equity security of a 19.2.1. Any person or group of persons acting in concert, who
corporation with assets of at least fifty million pesos intends to acquire fifteen percent (15 %) of equity securities in
(50,000,000.00) and having two hundred(200) or more a public company in one or more transactions within a period
stockholders at least one hundred shares each or who of twelve (12) months, shall file a declaration to that effect
intends to acquire at least thirty percent(30%) of such equity with the Commission.
over a period of twelve months(12) shall make a tender
offer to stockholders by filing with the Commission a 19.2.2. Any person or group of persons acting in concert, who
declaration to that effect; and furnish the issuer, a intends to acquire thirty five percent (35%) of the outstanding
statement containing such of the information required in voting shares or such outstanding voting shares that are
Section 17 of this Code as the Commission may prescribe. sufficient to gain control of the board in a public company in
Such person or group of persons shall publish all request or one or more transactions within a
invitations or tender offer or requesting such tender offers
period of twelve (12) months, shall disclose such intention and
subsequent to the initial solicitation or request shall contain contemporaneously make a tender offer for the percentage
such information as the Commission may prescribe, and shall
sought to all holders of such securities within the said period.
be filed with the Commission and sent to the issuer not alter
than the time copies of such materials are first published or If the tender offer is oversubscribed, the aggregate amount of
sent or given to security holders. securities to be acquired at the close of such tender offer shall
be proportionately distributed across selling shareholders with
xxx
whom the acquirer may have been in private negotiations and
other shareholders. For
Gusto gani ka mupalit ug at least 15% of the outstanding
capital stock (OCS) of the listed corporation, you must make a purposes of SRC Rule 19.2.2, the last sale that meets the
tender offer. Mupahibaw ka na sa SEC, unya ang SEC threshold shall not be consummated until the closing and
mudirecho sa PSE nga naay mupalit up to 15%. So therefore, completion of the tender offer.
even the small stockholders, they will make a tender offer. xxx
“Kami sad. Mubaligya mi at a price.” Ug daghan kaayo, mag
ilog ang mubaligya. It will be rationed proportionately. Unya
ikaw, 2% ra ka sa OCS unya gusto ka mubaligya atong nangita
ug 15%, kuhaon nila ang 2% sa 15% [total ata] mao ra nang January 29, 2017 (KVTan)
mahalin gikan sa imong 2%. <murag gina-illustrate lang ni
FGN unsaon pag proportion> So we were into the percentages(?) rules—that is my own
categorization. Section 18, 5%. Section 19, 15%, 30% and
Q: Why is that the rule? 50%+1. Remember, 30% is either creeping or in one
transaction there is such a this as an accumulation of 30% of
A: To make the availability of opportunity open to all
the corporatiion in a creeping manner. That means, small
stockholders. Even the smallest minority stockholder is given a
percentages.
chance. That is why you are asked to make a tender offer.
If within 1 year, you reach 30%, then you are covered by the
Gusto ka mupalit atong 15%. What if those people who want
tender offer rule. You reached 30%.
to buy 15% already arranged it with somebody? Naa na sila’y
natawagan na stockholder nga dako, nagkasabot na sila sa Section 19. Tender Offers. – Any person or group
presyo, mao man nang ginatawag na over-the-counter deal. of persons acting in concert who intends to acquire
Unya dili man na ipalakra dinha nga nagkasabot sila sa presyo. at least 15% of any class of any equity security of a
Ug mupalit sila, dili 15%. 14.5% ra ang ilang paliton so dili sila listed corporation of any class of any equity security
mahulog sa Section 19. Unya maghuwat nasad sila ug isa ka of a corporation with assets of at least fifty million
tuig. pesos (50,000,000.00) and having two
Then they come up with the next rule: If you are a person or a hundred(200) or more stockholders at least one
joint interest and you acquire 30% or above of the OCS of a hundred shares each or who intends to acquire at
listed company, whether you acquire it by creeping, ginagmay least thirty percent(30%) of such equity over a
over a period of 12 months, you must make a tender offer. period of twelve months(12) shall make a tender
Pahibal-on nimo tanan nga 30% imong gusto kuhaon so that offer to stockholders by filling with the Commission
everybody has a chance. What will the investors do? If they a declaration to that effect; and furnish the issuer,
want 30%, less than 30% ilang paliton, 29.5% aron dili sila a statement containing such of the information
maigo niining 30% rule. Unya muhuwat nasad sila ug one (1) required in Section 17 of this Code as the
year. Commission may prescribe. Such person or group
of persons shall publish all request or invitations or
Karon ug mupalit ka’g 50% + 1, the new rule is you must tender offer or requesting such tender offers
make a general offer. subsequent to the initial solicitation or request shall
contain such information as the Commission may
Q: What is a general offer?
prescribe, and shall be filed with the Commission
and sent to the issuer not alter than the time issue. And the SC says, YES. What matters is that you reach
copies of such materials are first published or sent the percentages of control that are mentioned in the Securities
or given to security holders. Regulation Code. Now if you reach it directly or indirectly, you
are covered by the tender offer rule.
(a) Any solicitation or recommendation to
the holders of such a security to accept or Now, if the corporation controlling interest recommends or
reject a tender offer or request or does not recommend the tender offer, the same must be done
invitation for tenders shall be made in under the so-called proxy solicitation rules. In other words, you
accordance with such rules and must send out a proxy statement. And the proxy statement,
regulations as may be prescribe. the rule is that it must be in writing, signed by the stockholder
or his duly authorized representative, and filed before the
(b) Securities deposited pursuant to a scheduled meeting with the Corporate Secretary.
tender offer or request or invitation for
tenders may be withdrawn by or on behalf Unless otherwise provided in the proxy, it shall be valid only for
of the depositor at any time throughout the meeting for which it is intended. No proxy shall be valid
the period that tender offer remains open and effective for a period longer than 5 years at one time.
and if the securities deposited have not And then, no broker or seller shall give any proxy, consent, or
been previously accepted for payment, any authorization, in respect of any security carried for the
and at any time after sixty (60) days from account of the customer, to a person other than the customer,
the date of the original tender offer to without the written authorization of such customer.
request or invitation, except as the
Commission may otherwise prescribe. Section 20. Proxy solicitations. - 20.1. Proxies
must be issued and proxy solicitation must be
(c) Where the securities offered exceed
made in accordance with rules and regulations to
that which person or group of persons is
be issued by the Commission;
bound or willing to take up and pay for,
the securities that are subject of the 20.2. Proxies must be in writing, signed by the
tender offers shall be taken up us nearly stockholder or his duly authorized representative
as may be pro data, disregarding fractions, and file before the scheduled meeting with the
according to the number of securities corporate secretary.
deposited to each depositor. The provision
20.3. Unless otherwise provided in the proxy, it
of this subject shall also apply to securities
shall be valid only for the meeting for which it is
deposited within ten (10) days after notice
intended. No proxy shall be valid only for the
of increase in the consideration offered to
meting for which it is intended. No proxy shall be
security holders, as described in paragraph
valid and effective for a period longer than five (5)
(e) of this subsection, is first published or
years at one time.
sent or given to security holders.
20.4. No broker or dealer shall give any proxy,
(d) Where any person varies the terms of
consent or any authorization, in respect of any
a tender offer or request or invitation for
security carried for the account of the customer, to
tenders before the expiration thereof by
a person other than the customer, without written
increasing the consideration offered to
authorization of such customer.
holders of such securities, such person
shall pay the increased consideration to xxx
each security holder whose securities are
taken up and paid for whether or not such Remember, I told you that there are people who buy shares of
securities have been taken up by such stock that are listed in the stock market no longer bother to
person before the variation of the tender require a certificate of stock because that is additional cost. So
offer or request or invitation. they have the shares of stock LONG. They call it. It is held by
the broker. The broker is holding the street certificate. The
19.2. It shall be lawful for any person to make any transferor has endorsed it in blank and they keep it and it is
untrue statement of a material fact or omit to state meant to be for the client of the broker who made the order.
any material fact necessary in order to make the
So if that client also orders now to sell it, all he has to do is
statements made in the light of the circumstances
negotiate the certificate of stock. Just deliver it to the next
under which they are made, not mis-leading, or to
transferor because it is already endorsed in blank.
engaged to any fraudulent, deceptive or
manipulative acts or practices, in connection with Now, if you are the broker, you have so many of these long
any tender offer or request or invitation for certificates, can you exercise the tender offer? And the
tenders, or any solicitation for any security holders Securities Regulation Code is explicit. The broker CANNOT do
in opposition to or in favor of any such favor of any anything with the shares in his possession that are long for the
such offer, request, or invitation. The Commission benefit of the client without the client ordering so.
shall, for the purposes of this subsection, define
and prescribe means reasonably designed to So, the client must be informed. It is the client who makes the
prevent, such acts and practices as are fraudulent, decision and not the broker.
deceptive and manipulative. And then there is rule:
Now, I pointed out to you this case of SEMCO Holdings Inc. xxx
vs National Life Insurance (529 SCRA 355)(2007).
Remember, it is a listed company—Union Cement. But between 20.5. A broker or dealer who holds or acquire the
its mother holding corporation, there is an in-between holding proxy for at least ten percent (10%) or such
corporation. Because the holding corporation holds several percentage as the commission may prescribe of the
other cement factories. There is a holding corporation. outstanding share of such issuer, shall submit a
report identifying the beneficial owner of ten days
Suppose, you do not buy the shares of stock of the listed after such acquisition, for its own account or
company but you but the shares of stock of the holding customer, to the issuer of security, to the exchange
company, are you covered by the tender offer rule? That is the
where the security is traded and to the Who is an insider? That is the issue. And the answer is found
Commission. in Section 3.8. Layo kaayo! In the definition.

So the proxy is for the broker or dealer. If he has more than Section 3. Definition of Terms. - xxx
10% or such percentage as the commission may prescribe of
3.8. "Insider" means
the outstanding share of the issuer, then he must make that
disclosure—that he has more than 10% of the outstanding (a) the issuer;
capital stock of the issuer as proxy. He is exercising proxy.
(b) a director or officer (or any person performing
Why is that necessary? Because the broker might make money similar functions) of, or a person controlling the
out of being a proxy without the knowledge of the true owner issuer;
or beneficial owner.
(c) a person whose relationship or former
If there is a proxy fight, what will prevent the proxy from relationship to the issuer for a security that is not
telling the rivals, “I am holding the proxy for 10% of the generally available gives or gave him access to
outstanding capital stock. You want me? Then you have to material information about the issuer or the security
come across.” But actually, he is not the beneficial owner. So that is not generally available to the public;
the proxy is required to inform the Philippine Stock Exchange,
the Commission, and also the issuer. He must inform so that xxx
the Commission (if it wants to) can inquire from the owner. So a relationship or the person in a relationship or former
“Did you grant a proxy?” The owner might not know. relationship so that he has access to material information.
So alright. That is the tender offer rule. xxx
Alright. (d) A government employee, director, or officer of an
We go now to the prohibitions of fraud and manipulation and exchange, clearing agency and/or self-regulatory
insider trading. organization who has access to material information
about an issuer or a security that is not generally
This is the general rule or premise of the Stock Market: All available to the public; or
transactions are to be open and listed. Why? So that
everybody will know what is going on. The price of the shares (e) a person who learns such information by a
of stock may go up or may go down. But it is disclosed there. communication from any forgoing insiders.
And everybody who has shares of stock can make a decision
That is an insider. So there are 5 possibilities on how you can
as to whether or not to hold, to sell, acquire more shares, to
be an insider.
sell the shares (get rid of it), or to buy (acquire more shares).
That is the basic decision of an investor—BUY, SELL, or HOLD. You know ha. You are familiar with that The Shadow knows.
That is the insider. He knows and nobody else knows. And then
What influences that? The price. And the price is listed.
he profits by trading on that information.
Because all transactions are listed. And that is how you know
the movement of the price for the shares of stock. What is the duty of that insider when trading? That is what
Section 27 defines.
Now, if the shares of stock go up and there is no known
reason for it, then the stock market—their officials—might ask Section 27. Insider’s Duty to Disclose When
the issuer. “Why is your stock moving up or down? Is there any Trading. – 27.1. It shall be unlawful for an insider to
information that you wish to divulge to the public to explain sell or buy a security of the issuer, while in
this unusual movement of the shares of stock? Because they possession of material information with respect to
do not know any reason.” And then they will ask the issuer and the issuer or the security that is not generally
then they will suspend the trading for probably an hour or two available to the public, xxx
hours. And then, the issuer must give an explanation.
You cannot trade while you possess that and it has not yet
The issuer will say, “We do not know. Frankly speaking, we do been disclosed.
not know of any reason. It might be a movement that is
international in character over which no one is in control.” Now xxx unless: xxx
if the issuer can point that out as a reason, then it might give
This is now a matter of defense. The following enumeration is
that as an explanation. Or if he does not know, then he tells
how you defend against the charge of insider trading.
them that he does not know. Or maybe, he has plans to do
something which he has not yet divulge. And now is the (a) The insider proves that the information was not
occasion to divulge it to the public. gained from such relationship; or
The whole idea is that disclosure (making known to the public) (b) If the other party selling to or buying from the
is the best way to arrive at the reasonable regular market price insider (or his agent) is identified, the insider
of the security. Secrecy does not work towards establishing the proves:
correct market price. It must be disclosure. You must make
disclosure. (I) that he disclosed the information to the other
party, or
Now, if you are traded in the stock market and you are the
issuer and you had knowledge that will affect the price of the (ii) that he had reason to believe that the other
shares of stock of which you are the issuer and you do not party otherwise is also in possession of the
disclose it and you have already profitted from it from buying information.
and selling it to the general public and you know the material A purchase or sale of a security of the issuer made
information that has an influence on the decision of the by an insider defined in Subsection 3.8, or such
investors to either buy, sell, or own, then that means that you insider’s spouse or relatives by affinity or
are engaged in INSIDER TRADING. consanguinity within the second degree, legitimate
So you make a transaction. Possessing ann information that or common-law, shall be presumed to have been
you alone possess. Everybody does not know it. And then you effected while in possession of material nonpublic
profit from it. Then that is irregular. And that is punished by information if transacted after such information
the Securities Regulation Code. That is called insider trading. came into existence but prior to dissemination of
such information to the public and the lapse of a received that information that is material will likely trade, buy,
reasonable time for market to absorb such or sell, and profit. That is another violation.
information: xxx
You know how they discovered insider trading? Most stock
So that is a rule on presumption of evidence. If you are exchanges now have programs that monitor transactions in a
defined as an insider under the SRA and there is this existing big data way. For each issue, there is a tracking device that all
material information not yet disclosed and you do some their transactions are translated into a graph.
trading—buying or selling of a security—while that information
Now, when that information that is material is finally out and
is already in existence but not yet disclosed, then you are
everyone scambles for a share to buy that particular issue
PRESUMED to be engaged in insider trading. Unless, you prove
because the benefits are already known to the public, then
otherwise. Disputable presumption but the presumption
there will be a spike is it not? Because the price goes up since
already arises.
everybody wants to buy.
[Segue: Sigi mo anag hinumdom anang disputable
Now what the authorities do after the big spike is that they
presumptions. Naa na may lista ana sa Rules of Court.
look for the little spike. And when they look for the little spikes,
Maghinumdom ka na kay substantive law also adds disputable
they even look for the antecedent spikes. Kay pila ra guy
presumption.]
kwarta sa usa ka tao kung naa ba syay kwarta if he relies on
What is the effect of a disputable presumption? The burden of material information.
proof shifts. It shifts to the insider now to prove that he is not
[Segue: Just like Mr. Boisky who is a mergers and acquisitions
engaged in an irregularity.
lawyer in Wallstreet in one of the investment banks. When he
A cashier who holds cash, who is bonded, and has a worked on a merger and acquisition, he just kept it to himself.
responsibility for cash or money of the employer. If he is given He knew he was under ethical principles that he should
a cash count and his cash and checks to not equal his receipts, maintain secrecy. In fact, he is the one who draws up the non-
then shortage na. It gives rise to a disputable presumption. disclosure agreements.
What is the disputable presumption? Na nangawat na siya. The
Now, but once he knows that it is about to be consumated,
burden shifts! It must be he now who must prove that there
what does he do? He goes out of his office and walks down in
was no absconding or converting of the funds for personal use.
the sidewalks of New York and goes to the public telephone
And that is not an exception to the order of trial.
booths. Dala syag daghang coins. Muhulog sya. Unya mu-long
Unsa may order of trial? The complainant proves his case distance call sya sa iyahang banker sa Zurich, Switzerland.
first—the one who suffered the cause of action. He proves Muingon sya, “Paliti ko aning shares traded in Wallstreet. Buy
first. Nganong kini naman nuong defendant ang mu-prove nga me a couple of thousand!”
wala sya nakasala?! Kay na-prove na man sa compalinant nga
He says that to his New York banker who contacts a banker in
pag-ihap niya, kuwang. Bali dayon! Shift na!
the stock exchange and trades his name. Wala man silay
Mao sad ni. Naa ganiy material non-public information in kalibutan nga naa na diay tong merger so normal ra tong
existence and it is proven that you made trades during the price. After he has done that with the conclusion (the merger
existence of that information and before it was made known, was concluded), of course, the price went up! And that is when
wa na. The presumption is you engaged in insider trading, he unloads. Nakaginansya na sya. He made money.
unless you can prove otherwise.
Now, nganong nadakpan man sya? There was no trace. He
Now, for purposes of this Section, and here is the definition just walks down to a public payphone. Wala may mag
now, “material nonpublic” information means: eavesdrop dira kay daghan man kaayog manawag. Maskin
kinsa! Why was he caught? He was caught because after he
xxx Provided, however, That this presumption shall made a trade in a small bank, there was even a bigger bank
be rebutted upon a showing by the purchaser or because his bank began to follow him. Katong iyahang sugoon
seller that he was aware of the material nonpublic nga bank, nakabantay man. Kada mu-trade ning tawhana,
information at the time of the purchase or sale. musipa man ang presyo sa iyahang paliton. So ang bangko na
27.2. For purposes of this Section, information is mas dako ang kwarta, edi mas dako ang spike! Dira sya nakit-
"material nonpublic" if: an! Nisipa man ang iyahang transaction. Mao man ang naa sa
iyahang ngalan. Nakit-an man to. That was the end of him.
(a) It has not been generally disclosed to the public Pagkahuman, nibuhat syag libro—Insider Trading by Boisky.]
and would likely affect the market price of the
security after being disseminated to the public and [Note: Continuation of Section 27:
the lapse of a reasonable time for the market to xxx 27.4. (a) It shall be unlawful where a tender
absorb the information; or offer has commenced or is about to commence for:
(b) would be considered by a reasonable person
(i) Any person (other than the tender
important under the circumstances in determining
offeror) who is in possession of material
his course of action whether to buy, sell or hold a
nonpublic information relating to such
security.
tender offer, to buy or sell the securities of
27.3. It shall be unlawful for any insider to the issuer that are sought or to be sought
communicate material nonpublic information about by such tender offer if such person knows
the issuer or the security to any person who, by or has reason to believe that the
virtue of the communication, becomes an insider as information is nonpublic and has been
defined in Subsection 3.8, where the insider acquired directly or indirectly from the
communicating the information knows or has tender offeror, those acting on its behalf,
reason to believe that such person will likely buy or the issuer of the securities sought or to be
sell a security of the issuer whole in possession of sought by such tender offer, or any insider
such information. of such issuer; and
xxx (ii) Any tender offeror, those acting on its
behalf, the issuer of the securities sought
So, that is another violation. You relay material information or to be sought by such tender offer, and
that is nonpublic with the realizatiion that that person who any insider of such issuer to communicate
material nonpublic information relating to profile issuers give advance investor briefings to the large
the tender offer to any other person where investors which they do not yet gve out to the general public.
such communication is likely to result in a Only later after they have given them in this advance briefings
violation of Subsection 27.4 (a)(I). to they make the public know of the genral content of that
briefing.
(b) For purposes of this subsection the term
"securities of the issuer sought or to be sought by Alright.
such tender offer" shall include any securities Now, the Securities regulation Code also anathemizes
convertible or exchangeable into such securities or MANIPULATIVE PRACTICES. Promotions on fraud and
any options or rights in any of the foregoing manipulative practices.
securities.
Manipulative practices are making it appear that there are
Now question: What is the so-called Technical Insider certain transactions that are issued—that is being bought and
trading? This refers to the practice by which prominent sold—in the exchange when actually there is none of this that
issuers gather together their large investors, before they make is happening. Why is that? In order to mislead the market—the
public, crucial information or plans of the issuer as to the investing public.
business and they sound(?) out these investors. So they know
ahead. And knowing ahead, they can communicate ahead to You go into transactions to make the public believe that there
their brokers to buy, sell, or hold the particular security. is this particular transaction that is issued like a share of stock
when there is none.
Now, there have been two cases brought to the Supreme Court
in the United States but the Court has refused to rule. In other Like for instance, a WASH SALE. What is a wash sale? You call
words, the court has not accepted those two cases. your broker and say, “Mr. Broker A, buy me San Miguel at 52.
1000 shares at this price.”
[Segue: You know, the US Supreme Court accepts only a given
number of cases each year. By the second sunday of October, Muingon man ang broker, “O mas taas man lagi ni kaysa
you know the exact number of cases that they will deal with market kuan dinha?”
for the year from October to the end of September. They have “Basta buy me!”
a number of cases that they will accept. And then throughout
that year, they will be accepting a number of cases for the next Unya mutawag na sad ka after how many minutes and call
year. And they are given only a number of cases. Di man sila Broker B and tell him, “Sell my San Miguel common shares at
mu-accept.] this price.”
So there is still no ruling as to this Technical insider trading. So kay out of the ordinary man tong price, una man to.
Mamaligya ka ana, unya gitukog diri, mulakra na ang
Apple. Mag-investors' conference sila kung kanus-a nila i- transaction. Kinsa may nibaligya? Ikaw. Kunsay nipalit? Ikaw.
release ang ilahang information. Mga alas-5 sa hapon just Wash sale! There is no beneficial transfer of ownership.
before the close of the business day. But in the morning, they
already have a briefing with their chosen investors. And the Nganong nag gasto-gasto man jud ka ana? Nibayad ka sa
briefing is closed-door. Apple even asks feedback from their broker's fee, bayad sad ka sa broker's fee kay imong gusto
large investors. So their large investors have time to ipakita sa kadaghanan nga naay nipalit sa gibaligya nga ingon
communicate with their brokers. So in a way, they are given ana nga presyoha. Unya kanang mga nagbantay ra sa stock
advance information. market, muingon na silag “Uy! This guy might know something
that I don't know.” Mamantay na na siya. Unya kay usbon na
“Mao ni ang mga features sa latest Iphone. Nagduda pa mu og sad nimo—buy this, sell this. “O naa na sad! Nag anam na nig
wala pa ni nakasabot kung unsay mga color ani nia.” And then kadaghan. Ah~ ako na lang nig sugdan kay tingali mag
they will compare on how are they doing in the competition. maulahi ko.” Naa may ana nga mga investor. Wala na. Na-dali
Now sometimes, it also works the other way. Like for example na sila sa simulated transactions. That is called a wash sale.
in the last conference, Apple believed that it sold more Iphones A wash sale happens when despite the transaction of buy and
during that given quarter than any quarter so far. Mas daghan sell, there is actually no real transfer of beneficial ownership.
silag nabaligyag Iphone. But then the investors there, they did
not buy more shares. What is more, they sold their own Again, there is such a thing as MATCHED ORDER.
shares. Because they say, that is already a handwriting on the
Karon duha na mo ka tao ha. A and B. unya magsabot mo,
wall. All the other sellers of smartphones that are not Apple-
“Bai, alas-10 ha sa buntag pag abri jud sa market. Ikaw
based combined were already multiples higher than Apple. So
mubaligya ka sa imong San Miguel at this price. Ako kay
Appple is beginning to be history. It is not leading the trend in
mupalit sad ko sa imong San Miguel at this price. Mao ning
other countries.
gidaganan sa imong shares. Dungan ta ha. Unya 20 minutes
So what happened? The large investors sold. Nag una sila. Two later, ako nasad ang mubaligya unya ikaw na sad ang mupalit.
days later, the stocks begin to climb because the ordinary Mao gihapon ha. Patas-an ra nato gamay ang presyo by
investors did not read it the same way that those that had 50centavos. Unya after 30minutes na sad, balik na sad ta.
advance briefing had understood it. So nisaka na sad ang Usbon na sad nato ang role.”
presyo.
That is called a matched order. In order to buy by one is
That was their argument—that there is no such thing as matched to another to sell. And then the buyer afterwards will
technical insider trading. We give the information to large be the one to sell. And katong ni-sell mao tong mupalit na sad.
investors because we consider them as distinctly different from Puli-puli lang sila. Drama ba!
the general run of the public investors. Lain na silag paghuna-
Mulakra man didto. “Uy murag natulog man ning particular nga
huna mao na unahon namo silag hatag ug information. And
issue kaning shares of stock. Unya karon kay daghan na man
many times, they do not agree with the general investing
kaayog transactions?” Mao na. It is a manipulative transaction.
public.
Unya kay daghan man na kaayog mga klase. Naay mga
So, it is not so clear on whether or not there exists the so- practice nga PUT, Hold, Struggle. Naa may mga variants ana.
called technical insider trading. Mao nay xxx sa mga tao.
I am telling you this because this might be asked. What is The best example, in order to understand that in street
technical insider trading? It is a system in which very high language, is naglakaw ka sa dalan sa sidewalk. Naay tao dinha
nga naglingkod nga naay gamay la mesa. Unya naay tulo ka 4. Banks and quasi-banks required by the General
thimble. Unya naa silay liso sa apple. Ilaha nang duwaan. Hain Banking Law to have independent directors.
man ang liso sa tulo? Ikaw nitan-aw ka kay nidumog na man
Remember the theory here. The theory here is that the lesser
ang mga tao. Naa dayon mupusta. 100 pesos! Tuod, nasakpan
you have a connections or financial interest in the corporation,
niya. Unya kay sunod na sad. Unya kay ikaw nakakita jud ka
the more objective you are for doing the right thing for the
kung hain jud. Nia dapita diri. Unya katong nipusta layo man
corporation. In other words, your role there is to defend and
gibutang. Ana ka nga ayaw dira kay naa ra diri. Ah~ didto man
protect the general investing public.
jud sya. So pildi sya! Gibira ang iyahang 100. Karon kay ikaw
murag nag apil na ka sa imong huna-huna. “Ako na ni ron!” Remember in the Corporation code, the more stake you have
Kita ka nga tua didto. Nipusta ka na. 200 imong pusta kay in the corporation, the less fraud you will more likely to
kakita man ka nga tua didto. Pagtan-aw didto kay wa man! commit.
Hain man diay to nga kakita man jud ka na naa dinha? The
hand is quicker than the eye. Tua na diay to sa iyahang kuko! So if a director has dealings with the corporation, if he is 2/3
Wa na didto. he can ratify it even if some of the formalities are not followed.
Why? Because he is more likely not to harm the corporation
Kaingon nimog fair and square ni nga game. Klaro ni. Kaingon because he has a big investment in the corporation. That is the
nimo. Wa ka kahibaw nga ang kato diay una nga nipusta, bata- theory behind that which is now superceded or has to live with
bata diay to niya nga magpretend. Mao tong manipulative this other theory that because you are an independent director,
transaction. Kakita na ka dinha. Unya nikuyog ka sa you will work more likely for the benefit of the corporation.
kadaghanan. Pagkahuman ana, hurot na imong kwarta kay
kining kalibutan naay naloko og naa sad nangloko. Alright.

There are many manipulative practices in the stock exchange. Next thing we'll take up is MARGIN TRADING.
And they have criminal and also civil liabilities. What is margin trading? Margin trading is investing in the stock
Alright. market, entering into trasactions in the stock market, from the
broker. In other words, the broker, the one who executes your
The next thing we'll take up is INDEPENDENT DIRECTORS. order to buy or sell securities, lends you money to be able to
conduct your buying or selling.
The Securities regulation Code requires that corporations
coevered by the securities regulation code must now have Question: Is that prohibited? The answer is NO. There is no
independent directors at least 10% of the directors in no case prohibition from the broker lending money to the client (who
less than 2 directors. Independent directors. has been a faithful client of his) in order to execute his buying
and selling of securities.
Who is an independent director? We go back to the definition
under Section 38: Is there a limit? Yes there is a limit. What is the limit? It
consists of a formula. You cannot engage in margin trading if it
Section 38. Independent Directors. – Any
exceeds the following amounts:
corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess  65 percentum of the current market price of the
of Fifty million pesos (P50,000,000.00) and having security that you put with the broker
two hundred (200) or more holders, at least of two
Muhulam ka gud sa imong broker pero ang imong collateral is
hundred (200) of which are holding at least one
the shares of stock that you have bought but you are
hundred (100) shares of a class of its equity
entrusting to your broker long position. You have not taken the
securities or which has sold a class of equity
certificate of stock. So he holds the endorsed in blank
securities to the public pursuant to an effective
certificates. So that is your security that you can pay the
registration statement in compliance with Section
broker. But the rule is that it should not exceed the money
12 hereof shall have at least two (2) independent
that they lent 65% of the current market price of the securities
directors or such independent directors shall
you left behind with the broker.
constitute at least twenty percent (20%) of the
members of such board whichever is the lesser. For The trouble is the price of the securities that you have is also
this purpose, an "independent director" shall mean moving up and down as the trades go on. And so there is also
a person other than an officer or employee of the another limit. And the other limit is:
corporation, its parent or subsidiaries, or any other
individual having a relationship with the  it should not exceed also 100 percentum of the lowest
corporation, which would interfere with the market price of the security during the preceding 36
exercise of independent judgement in carrying out calendar months but not more than 75% of the
the responsibilities of a director. current market price.
So 100% of the lowest market price in the trading of the last
So here, the less you have to do with the corporation, the
36 months nor more than 75% of the current market price.
better qualified you are to be an independent director.
So there is a formula that is involved.Margin trading is nnot
Now, who are covered by this requirement?
prohibited but there is a limit.
1. Listed corporations in the stock exchange;
Alright.
2. those with assets in excess of P50Million and having
Who are required to register?
200 or more holders, at least 200 of which are
holding at least 100 shares of a class of equity(?) 1. Brokers, dealers of securities;
securities –these are also required even if not listed to
have independent directors. At least 2 in the board or What is the difference between a broker and a dealer? A
20% of the members of such board whichever is broker is a person engaged in the business of buying and
lesser. selling securities for the account of others. A dealer is one who
buys and sells securities for his or her own account in the
3. If you are a corporation and you have sold seurities ordinary course of business.
required to be registered with the Securities and
Exchange Commission, you are required to engage Like for instance, if you are an investment company. You have
the services of an independent director/s. several funds. One purely equity funds, another a mestizo
equity bond, and another engaged only in sovereign credit
securities. So you buy and sell or your own account because That must also be registered. That must be reviewed by the
you are the manager of the fund. SEC that that is not a distortion of the registration statement.
If you are given a dealer's license to buy and sell securities, So, who and what should be registered:
you cannot at the same time be given a license to buy and sell
1. The issuer;
securities for the account of others.
2. the broker, the dealer, the associated person, the
What is the reason why you cannot be given two licenses—to
salesman;
buy and sell for your account and to buy and sell for your
clients? Because the temptation is very strong. That if you 3. the brochure, prospectuus, and exchanges;
made a mistake for your own account, then ipasa na nimo sa
imong client unya walay kalibutan ang imong client. There are three kinds of exchanges:

Kay nagkagidlay na man ka ining shares of stock nga imong 1. stock exchange;
gipalit. Tawagon dayon nimo ang imong kliyente, “Have you 2. Credit exchange – in other words, you have the Bond
heard of what is happening in San Miguel?” “No I have not. market, or Money Market
Why?” “Ulahi kaayo ka. Ubos pa na karon pero tan-awa
mutaas ra nag kalit.” “Ah~ mao ba?” “Dia raba ning naghulat In money market, they buy and sell commercial papers.
sa ako. O mupalit ka ini?” Mupalit sya. Pero wala na jud nisaka. Commercial papers are IOUs that mature within 1 year and it
Ang loss asa man? Paingon didto sa imong client. Ang gain? is unsecured. Bonds are those that mature after a year (that is
Niara nimo. short term), after 5 years (that is medium term), 10 years or
more )that is long term bonds). So that is the bond market.
Naa na gani mu-gain sa imong client, ingnan dayon nimog They have to be registered also. The money market has to be
“Wala ba ka mahadlok anang imong gikuptan?” O paliton na registered in the securities and exchange commission.
sad nimo. Mao na naa nga the law prohibits you from having a
dealer's and a broker's license. You cannot be broker and These are the two markets where you can go to to raise
dealer at the same time. capital. They have their own officers, own board, and mosty
they register to be an SRE—Self-regulating exchange.
2. Associated person of a broker or dealer, is an
employee, and he must be licensed. In othe words, like in the Philippine Stock Exchange, we say
here that the minimum acquisition that you have when you
Broker na gani ka, kinahanglan nga mu-pass kag exam. Unya must make a tender offer is 15%. If you are going to buy 15%
unsa man ning exam? Securities Regulation Code ang of the outstanding capital stock of the issuer, then you must
examination. Unsa may test? True or false ang test! Walay make a tender offer. The Philippine Stock exchange says that if
daghan storya-storya. You will die or swim on whether or not you must buy as much as 10%, you must already make a
you know it or you don't. tender offer.
Tan-awa ra gud. Broker's exam. Naa may mga samples. Di Mao nang mubasa gani ka sa business section muingon kag,
man ka makahuhag exam kung wala kay ihatag nga proof nga “Unsa man ni si father nga muingon mag 15%? nganong 10%
ningtuon ka. Unya unsaon man nimo pagkahibaw nga naay ra man ni diri?” Philippine Stock Exchange na na as a self-
proof nga ningtuon jud ka? Mu-attend kag seminar. Mubayad regulating enterprise. The rule in the Securities regulation code
kag seminar sa gatudlo ining Securities Regulation Code. And it is 15%.
must be from an accredited source. Set-ups in Makati or in
Manila that are approved by the SEC. You attend their Nganong gitugutan man na sa SEC?nalipay ang SEC kay mas
seminars. Tagaan ka nilag samples sa questions. Kapasar gani strikto ang Philippine Stock exchange kaysa sa balaod mismo.
ka, you are given a license. And every now and then, you have Ah~ sa mutuo ra!
to undergo updating seminars. Tan-awa nang Singapore. 15% ang ilahang kinamub-an.
Who is a salesman? He is also licensed. A natural peson Nganong gwapo man kaayo ang Singapore? Kay ang board sa
employed as such or as an agent by the dealer, issuer, or Singapore Stock Exchange is not made up of brokers. Diri sa
broker to buy or sell securities. atoa, big boy club! Kung makasala sila, muingon ra silag “Ah~
pareha ra bitaw ta. Puros ra man ta brokers diri sa board.”
Now, what is a prospectus? Remember, we have a registration Wala pa man jud na masulbad. Kanang naa sa board, mga
statement. A registration statement is actually an application to dagkkong brokers. Masayop sila, appeal dayon na sila. “These
register a security and that is where you apprise all the facts securities have been fined!” unya kay mahilot ra diay. Dili
that the securities regulation code requires you to apprise the mapatuman ug fine kay puros man sila brokers.
securities and exchange commission in order to have your
security registered. Dili gyud unta ingon ana. A stock exchange, if you really want
it to be self-regulatory and with teeth to punish the wicked and
But because the regsitration statement is so complicated and reward the faithful, it must have a governing body that is not
so technical—baga kaayo—it is not an appropriate material to made up of the old boys club—non-brokers! Independent and
convince the general public to buy your security. not brokers.
So out of that regsitration statement, you come up with a 3. So, another kind of exchange is the FUTURES
prospectus. It is a document made by or on behalf of an issuer, exchange.
underwriter, or dealer to sell or offer securities for sale to the
public through a registration statement filed with the What is a futures exchange? They sell futures contracts. And
Commission. there can be currency futures (a selling of foreign currencies),
or there can be agricultural commodities futures (like fresh
Kanang prospectus, mao na nang naay mga litrato dinha. Naay orange juice, pork belies). Pork bellies is a question of futures
mga graphs, pie charts. Makit-an na nimo. Kani imong original contract because pork bellies is where bacon is made from and
investment unya musaka na, unya kani ang imohang gain. it is one of the essentials for breakfast for some people
Long term, short term, medium term. Mao na nang naay..awit especially in the United States. What else? Grains is a subject
na na. Ang kanang regsitration statement, mao nang real of futures contract as well as rice, corn, and soybean, palm oil,
mcoy. That has all the facts there. Pero kanang prospectus, and many things.
mao nang diluted regsitration statement suitable for popular
consumption. Baligya nimo ang security, kini ang imong What is the purpose of futures contracts? When somebody
basahon. says “I commit myself to sell you a million pounds of cocoa at
this price: 66 cents per bushel of cocoa.” Kinsa man say
mupalit ana? If you are a corporation and your lifeblood is time, during an investigation or proceeding xxx
cocoa, then you want predictability in your price. Because in
retail, it is a fixed price. Di ka gusto nga muabot ang panahon When there is an investigation of the security, it is just
nga mangita pa kag cocoa. You want a fixed price. So you stopped. And then there is a confidential investigation.
want to protect your self. Six months from now, you would like xxx under this Code, parties being investigated
to know what the price is. So mupalit kag contrataha na at 66. and/or charged may propose in writing an offer of
Mao na may presyo ron. settlement with the Commission.
Pag-abot sa six months from now, ang baligya sa cocoa is 40 xxx
cents na man lang. Muunsa man ka? Salamat sa Diyos! Imo na
nang gision kay di na na nimo gamiton kay mas barato man Gi-imbestigar ka kay daghan kag bakak sa imong registration
ang baligya sa ercado sa cocoa. statement unya kay nadala sa brochure nimo. Dili tinuod ang
imong gipanulti. Nganong dili man tinuod? Kay giingon man
nimo nga graduate ka sa Wharton. Unya kay wala man diay
Pero kung 6 months from now kay ang baligya na kay $1 per ka. Nistudy ka sa Wharton pero undergrad ka lang. Unya
bushel, samot kag pasalamat sa Ginoo! 66 ray akoa. Mao nay nahagbong ka, nibalhin ka sa Colgate University.
akoang Hershey's cholocate! 66 cents ra gihapon kay 66 cents [Segue: Muingon kag “Binuang man ka Father.” Naa baya juy
ra may ang bushel. Colgate University. Naa na sa California. Usa na sa mga
So what is the purpose of futures exchange? It is not to raise universities nga walay SAT. so tua didto tanan mga Arabo,
capital. It is to manage risks. To protect you against risk. Koreano. Magtagbo-tagbo mo. Mag sign language mo aron
kasabot. Wala may english.]
Nangutang ka karon og dollar denominated loans. Ngano man?
Kay ang peso mahal man kaayo. Niutang ka pero naay Now, if you make such untruthful statement, then you can be
interest—11% or 12% interest rate. Paghuwam nimo sa dollar subject to an investigation. Is there a way out of the
kay 2.5% ra may interest. Kadakog diperensya! Muingon kag, investigation? Yes. You can make a settlement offer.
“Muhuwam kog dollar unya pailisan na lang nakog peso sa The nice thing about this settlement offer is that it is a no-fault
akong negosyo.” Daw bi ug mubayad ka ana 2 years from now offer. It does not mean that it is an admission of guilt when
unya kung musaka ang exchange rate. Karong exchange rate you offer an amount to settle the investigation.
baya kay 49.92. So karon, muingon kag “Two years from now,
mupalit kog futures contract nga mobaligya sa nakog dollar at Unya muingon ka, “Binuang ra man ka. Ug mapalit diay nimo
49.92 ang rate karon sa paghulam nako aron mas gwapo.” ang imong hiwi nga binuhatan unya unsa na man na? Is that
constitutional?” kwarta ra man ni tanan. These are all property
Pero pag-abot 2 years from now kay niubos man. Nahimog 42 matters. No person shall be deprived of life, liberty, or property
ra man. Lipay ka dba? Pero kung niabot nag 60, ah~ labaw without due process of law. Property ra gani, dali ra kaayo na!
kang lipay. Kabtangan ra man na. Ang mawala kwarta. Ang ipuli kay
[Segue: Mao man nang nahimo sa Union Cement mao nang kwarta ra sad. Mao nang settlement offer is allowed.
nabaligya na sa Holcim. Huwam sila. Barato lage. They did not [Segue: Mind you that lately, the sums that are offered in the
hedge their bets or loans bisag katunga lang. Additional cost United States are no laughing matter. Kana! Name me any
pero protektado ka, diba? Wala man sila. Pero ilahang bank and they have made settlement offers that are huge! Into
earnings. Wala may earnings kay nibaba man ang economy. So billions of dollars! Why? Because they have experienced
unsaon man nila? Naglisod silag breakeven sa operation. Hain prolonged securities and corporated cases. The most famous
pa tong pagbayad nila sa ilahang loans nga dollar of which is IBM vs Securities and Exchange Commission. It
denominated. So no choice! Baligya! Gilamoy sila sa mga lasted for 25 years. And in the end it was settled because it
dagko sa 3 biggest cement conglomerates in the world. Mga had become so unmanageable. 7 storeys of building full of
walay kaluoy na sila.] records! 5 judges already died, one after the other taking over
So three kinds of exchanges. You have to register an the case. And what was it? It was a charge of monopilies and
exchange. You have to register the officers of the exchange. illegal combinations of trade on the part of IBM—how IBM tried
And if there is something wrong with your registration, who is to corner the main frame of computer market. Ang nabulahan
liable? AH~ those who have signed the registration statement? ra kay ang mga abogado nga nigraduate sa Harvard, Yale, and
Who is made to sign? The issuer, the chief executive officer, all these big lawfirms. That is the reason why there is this
the chief operating officer, the chief financial officer, and the settlement offers.]
external independent auditors. They are held liable. Karon When you make an offer, the SEC will consider general welfare,
liable ka na. etcetera. And then he will decide. There will be negotiations.
Di na ka makaingon nga, “So many pages! I could not And then you pay.
understand!” NO! Because there is already verificatiion. What [Segue: Kanang subprime mortgage, almost all banks were
is verification? The petition must be verified. Memoryahon na involved in irregularities. And they have paid billion dollars to
ninyo: pay off. From the point of view of the bank, uncertainty is our
“That I am the complainant/petitioner of the above-titled worst enemy because Wallstreet will find us. The Stock
case;” exchange will find us. When the investor sees it nga naa pa
diay ni nagbitay nga kaso, wala na sila kahibaw ana. Pilay net
“That I have read the petition; I have caused it to be profit nila karon pero kuhaon ra diay sa gobyerno. Dili sila
prepared; I have read it and understood its contents; and that mupalit sa ilahang stocks kay magkaanam nag kaubos. Kung
its contents are true to the best of my knowledge?” NO! That it ilaha tong giprenda aron makautang silag capital, edi bayad ka
is true to MY OWN PERSONAL KNOWLEDGE. That is the na lang ug settlement offer aron mahuman tanan! Uncertainty
correct verification. Mao na. CEO ka. Di na man ka mahimo ka is eliminated.
mu-escape nga mupirma-pirma ka ra.
Karon muingon ka kanang ilahang net profit 2billion pero
Now, what is a SETTLEMENT OFFER? Section 55. Remember, nibayad pa silag 1billion settlement. Unsa na lang man na?
a security that has already began to be sold can be recalled Well, they are saving for the future. They are settling it now to
and investigated if something comes up that makes it solve the problem of uncertainty. That is why they pay very
unworthy of public dissemination. high.]
Section 55. Settlement Offers. – 55.1. At any So, pangutan-on unya mo: What is a settlement offer? Parties
to an investigation of any charge may propose an offer of jurisdiction, or the appropriate RTC. All intra-corporate cases
settlement with the Securities and Exchange Commission. pending in the SEC were to be transferred to the appropriate
Upon receipt of such offer, the Commission may consider the sala of the RTC. Congress thereby recognized the expertise
offer based on the finding, the nature of its investigation or and competence of the RTC to take cognizance of and resolve
proceeding, and the public interest. Any agreement to settle cases involving intra-corporate controversies.
shall have no legal effect until publicly dislosed. Such decision
What are these cases? It is not enumerated in the SRC, it is
may be made without a determination of guilt on the part of
enumerated in PD 902-A.
the person making the offer.

55.2. Upon receipt of such offer of settlement, the Sec. 5.


Commission may consider the offer based on (a) Devices or schemes employed by or any acts, of
timing, the nature of the investigation or the board of directors, business associates, its
proceeding, and the public interest. officers or partnership, amounting to fraud and
55.3. The Commission may only agree to a misrepresentation which may be detrimental to
settlement offer based on its findings that such the interest of the public and/or of the
settlement is in the public interest. Any agreement stockholder, partners, members of associations
to settle shall have no legal effect until publicly or organizations registered with the
disclosed. Such decision may be made without a Commission;
determination of guilt on the part of the person
So, short cut term for this particular class of cases is
making the offer.
devices or schemes. More properly, this is referred to
55.4. The Commission shall adopt rules and by the newspapers and media as the pyramiding
procedures governing the filing, review, withdrawal, scheme. If you have a pyramiding scheme, it is not
form of rejection and acceptance of such offers. under the jurisdiction of the ordinary courts but the
specific sala designated by the SC as an Intra-
It is a no fault offer. Dili ka ni-admit nga ikaw ang nisayop kay corporate court. Why Pyramiding scheme? Because of
ning offer ka. Because offers are encouraged. Settlement its structure and its essence. You begin with one
offers are encouraged. person, entity, board, or partnership, or what have
Alright. So we are finished with the Securities Regulation Code. you. They offer a fantastic return on investment like
On thursday, we will take up PD 902-A and the jurisdiction of 2% every month. You ask them what is this business,
the intracorporate court. what is this venture? They say, it’s secret. If we will
tell you we will not be paying the amount that we
promised you. But guaranteed, you will earn two
January 26, 2017 (ALLora) percent a month. That is 24% interest on the
principal. They will not tell you. So you put in your
money, there are three of you then you get the first
SECURITIES AND EXCHANGE
month interest, 2%. So you tell your friends and so
COMMISSION REORGANIZATION
they follow you and so they will also put their money
P.D. 902-A and so it grows. You begin with one, then there are
three, then three more and very soon you have the
The Securities and Exchange Commission has of course makings of the pyramid. What used to characterize
redefined their powers more properly describe and define in pyramiding schemes was that there was nothing of
the Securities Regulation Code. But what is important about PD value involved. If there is nothing of value involved
902-A is Section 5 of the Reorganization decree. Why? Because then it is a pyramiding scheme. There is no product.
Section 5 of the decree is referred to by the Securities And so they differentiate pyramiding scheme from a
Regulation Code and it is referred only to transfer jurisdiction networking scheme, like Amway or Herbalife. You
of these cases that were more properly under the Securities have a direct selling organization, you become a
and Exchange Commission to the new designated sala of the member of the organization and you paid a handsome
RTC as the Intra-corporate court. So the Securities Regulation fee. You go to a training and then you sell their
code mandates that the SC should designate a particular sala products directly to the consumer and you convince
as an Intra-corporate court. others to sell for you and you have an overriding
commission over anyone who sells for you and you
Section 5.2 of Republic Act of the Securities Regulation also have an overriding commission from whoever
Code (RA8799): sells because of the one you convince and so on.
5.2. The Commission’s jurisdiction over all Pretty soon you will also have a pyramid.
cases enumerated under Section 5 of Presidential What is the difference between a pyramiding scheme
Decree No. 902-A is hereby transferred to the Courts of and a networking scheme? In a networking scheme
general jurisdiction or the appropriate Regional Trial there is a product whether a service or good that has
Court: Provided, that the Supreme Court in the exercise a commercial value. In a pyramiding scheme there is
of its authority may designate the Regional Trial Court nothing involved. The scheme works as long as there
branches that shall exercise jurisdiction over these are more and more people enrolling into the scheme.
cases. The Commission shall retain jurisdiction over Everybody will continue to receive his interest as long
pending cases involving intra-corporate disputes as there are newcomers. As long as the newcomers
submitted for final resolution which should be resolved stop, then the well dries up and then it is discovered
within one (1) year from the enactment of this Code. that there is actually no commercial undertaking. It is
The Commission shall retain jurisdiction over pending just an empty scheme.
suspension of payments/rehabilitation cases filed as of
30 June 2000 until finally disposed. It has not yet been challenged in the Philippines
because the SEC came out with an opinion 4 years
ago that the difference between a networking scheme
and pyramiding scheme is precisely the presence or
Section 5.2 of Rep. Act No. 8799, transferred the erstwhile
absence of commercial good or service with a
exclusive and original jurisdiction of the SEC over cases
commercial value. Now, however in the US the SC has
involving intra-corporate controversies to the courts of general
arrived at a conclusion that unless Herbalife overhauls (b) Controversies arising out of intra-corporate or
its system it is engaged in a pyramiding scheme. partnership relations, between and among
Why? Because the SC says even if there is a stockholders, members, or associates; between
commercial product if the originator of the scheme any or all of them and the corporation,
earns more out of membership fees of those who join partnership or association of which they are
rather than the sale of the product itself then it is still stockholders, members or associates,
a pyramiding scheme. Please take note of that, It has respectively; and between such corporation,
not come yet in the PH. Google it Herbalife life partnership or association and the state insofar
pyramiding scheme because that is the finding of the as it concerns their individual franchise or right
[US] SC last year. (Chika about Herbalife, there is to exist as such entity; and
really nothing there. IT is not HERBAL!)
This is an intra-corporate controversy. The question is
In the PH since this is review, the moment a how will you determine whether or not a controversy
pyramiding scheme opens they usually make use of is intra-corporate? Just because the parties involved
the bank. They open an account where all the in the controversies are stockholders and officers of
contributions are placed. And they tell their investors the corporations - Stockholders complaining against
to open an account also in the same bank and that is the officers or directors of the corporation - does it
where the company or corporation will place their make the controversy intra-corporate?
interest every month. That is what happens to
Legacy. You place your money with a particular
The latest case is RAUL C.
outfit(?) they tell you to open your account in any of
COSARE, Petitioner, v. BROADCOM ASIA, INC. et
these 14 rural bank. If you do that you are engage in
al L-201298 February 5 2014.
money laundering. So it gets complicated. You are
not only involved in a pyramiding scheme which is First, the case answers when is an individual
already a violation of the SRC, you are also at odds considered a corporate officer as distinguish from an
with the law because you are laundering money ordinary employee.
which is dirty. Money that comes from proceeds of
“…there are two circumstances which must
the crime. You are in fact engage in estafa, you are
concur in order for an individual to be
fooling people, you are engage in fraud. You are
considered a corporate officer, as against an
using the bank to launder the money. You are doing
ordinary employee or officer, namely: (1)
something criminal two ways: defrauding and
the creation of the position is under the
washing dirty money(laundering dirty money) and
corporation’s charter or by–laws; and (2)
there are two penalties that you have to contend
the election of the officer is by the directors
with.
or stockholders. It is only when the officer
Another name more used internationally is a PONZI claiming to have been illegally dismissed is
SCHEME. Mr Ponzi an Italian gentleman who came classified as such corporate officer that the
to the US and who started this scheme in NY and he issue is deemed an intra–corporate dispute
was so convincing that half of the police precincts in which falls within the jurisdiction of the trial
NY deposited with him the payroll. This guy, just courts.”
before the ship hit the fan he left NY and went back
So if the position is provided for in the corporation
to Italy and it was because of him that the law on
code like President, Secretary, Treasurer, VP Asst.
extradition was enacted.
Secretary, Chairman, then there is compliance with
So this is the first class of cases now under the this first requisite. Or the position is provided for in
jurisdiction of the Intra-corporate court. Who grants the corporation’s articles of incorporation or it is
jurisdiction? It is the law that grants jurisdiction. What provided for in the By-laws of the corporation, then
is the role of the SC here? The role of the SC is to you are an officer.
designate a specific sala or branch of the court that
Then the second requirement is:
will be the proper court to entertain these particular
cases. It is not the court that determines jurisdiction (2) the election of the officer is by the
it is the law. What happens when an intra-corporate directors or stockholders.
case such as a pyramiding scheme lands in an
ordinary RTC branch not an intra-corporate RTC Remember in the stock and profit Corporation it is the
branch? Is the judgment valid? This is where your board of directors that appoint the officers. In a non-
remedial law will be tested because it is the court that stock non-profit corporation it is the members of the
has jurisdiction. A branch is just another expression of corporation that directly elect the officers. There must
the same court. If it does not fall within the intra- be an appointive or elective action. Appointive action
corporate court it is valid but it is not licit. it is illicit if it is the BOD, stock and profit corporation. Elective
but it is still valid. Which means you will have to face position by the members of the corporation if it is a
the SC for disciplinary action. Why would you assume non-stock non-profit corporation.
jurisdiction over this controversy when it supposed to Then Cosare goes ahead and quotes an earlier
belong to the intra-corporate court? You, an ordinary decided case by the SC, MEDICAL PLAZA MAKATI
branch you should recognize that you don’t have CONDOMINIUM
jurisdiction. It is with the intra-corporate court. So the CORPORATION, Petitioners, v. ROBERT H.
decision, the judgment, is valid but it is not allowed, it CULLEN, November 11, 2013. Then Cosare says
is illicit and the court will discipline you if you are the there are two tests to determine whether or not the
judge. A branch is not the court, RTC of Judicial controversy is intra-corporate.
district Number 11 that is where the RTC is in the hall
of justice in Davao City. There are many branches, The first test is the so-called relationship test.
that is still part of the court. An intra–corporate controversy, which falls
Second class of cases: 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, The third class of cases that are now transferred to the intra-
partnership or association and the public; (2) corporate court
between the corporation, partnership or
association and the state in so far as its (c) Controversies in the election or appointments
franchise, permit or license to operate is of directors, trustees, officers or managers of
concerned; (3) between the corporation, such corporations, partnerships or
partnership or association and its associations.
stockholders, partners, members or officers;
and (4) among the stockholders, partners or
associates, themselves.29 Settled Election controversies within the corporation - whether it be
jurisprudence, however, qualifies that when the election of directors or trustees or the appointment of
the dispute involves a charge of illegal officers of the corporation. Election controversies belong to the
dismissal, the action may fall under the intra-corporate court.
jurisdiction of the LAs upon whose
What is the latest case? It’s the case of GSIS by Winston
jurisdiction, as a rule, falls termination
Garcia vs. Rosete that is the leading case. Remember this
disputes and claims for damages arising
was annual meeting of MERALCO for the election of its BOD
from employer–employee relations as
and Winston Garcia he moves to have the election postponed
provided in Article 217 of the Labor Code.
to give him more material time to examine the proxies of the
Consistent with this jurisprudence, the mere
Lopez Group. Because according to Garcia the Lopezes do not
fact that Cosare was a stockholder and an
have the necessary votes to command the majority of the
officer of Broadcom at the time the subject
outstanding shares and choose who will sit as directors. Are
controversy developed failed to necessarily
your proxies in accordance with law or are you just making up
make the case an intra–corporate dispute.
these proxies? The Lopezes said, “No”. Manolo Lopez was the
Between the corporation, partnership or association president and chairman of MERALCO, said we will not
and the state in so far as its franchise, permit or postpone, there is a cut-off date and the cut-off date is 1
license to operate is concerned; So that second month before the meeting you did not bring this up you should
instance tells you that the petition for cancellation of have examined it before. Then what did Garcia say? He said I
union registration is an intra-corporate controversy am questioning the proxies and the question of proxy is under
and it belongs to the jurisdiction of the special sala of the original and exclusive jurisdiction of the SEC under the
the RTC which is the is the intra-corporate court. Securities Regulation Code, which is true. The SRC says The
SEC has the proper authority to determine the form and
Third relationship: between the corporation, sufficiency of proxy. The SEC has the authority to do so.
partnership or association and its stockholders, Whereby in the afternoon of the meeting PGM Garcia produced
partners, members or officers; a restraining order issued by the SEC, purportedly issued by
Fourth relationship: among the stockholders, partners the SEC. The trouble with this restraining order it was just
or associates, themselves. Stockholder vs. signed by one (1) member of the SEC. The one who signed it
stockholder, stockholder vs. officer, director vs. says he is signing for others, they gave me authority. He
director, among themselves. If these parties have this admits that the SEC is a collegial body that is why he says, “I
relational connection or disconnection then the first am signing for the others not just for me.” But still Anthony
requisite is complied. Rosete the Secretary of MERALCO Corp refused to pay heed to
the restraining order issued by SEC. so Winston Garcia went to
Second test is the nature of the controversy the CA and the CA says this is an election contest, this is a
test. controversy of the election so it falls under letter (c) and the
Under the nature of the controversy test, one that has jurisdiction is not the SEC but the intra-corporate
the incidents of that relationship must also court. So GSIS went to the SC on the question of law. Who has
be considered for the purpose of jurisdiction, The SEC or RTC? GSIS/Garcia claims that this is an
ascertaining whether the controversy itself is issue about proxies and when it is proxies it is the SEC. The
intra–corporate. The controversy must not camp of the Lopezes say this is an issue of election
only be rooted in the existence of an intra– controversies and proxies are just a side issue, an ancillary
corporate relationship, but must as well issue therefore the one that has jurisdiction is the intra-
pertain to the enforcement of the parties’ corporate court not the SEC. Who is Correct? The SC said it is
correlative rights and obligations under the the intra-corporate court that has jurisdiction. It is true that
Corporation Code and the internal and intra– the SEC has jurisdiction as to the sufficiency, the proper form
corporate regulatory rules of the corporation. of the proxy but if the proxy controversy is just part of the
If the relationship and its incidents are larger controversy of the election then the SEC does not have
merely incidental to the controversy or if the proper forum and mechanism to look into all the issue that
there will still be conflict even if the will arise. It is only the court and it is the special designated
relationship does not exist, then no intra– sala of the RTC that has jurisdiction.
corporate controversy exists.
From First exam TSN:
In other words jurisdiction should be determined by
considering both the relationship of the parties as well GSIS VS. CA
as the nature of the question involved w/n the FACTS: Meralco raises the substantial point that nothing in the
corporation code or the corporation law is to be used SRC empowers the SEC to annul or invalidate improper proxies
to resolve the dispute. So that is the nature of the issued in contravention of Section 20. It cites that the penalties
controversy test. defined by the SEC itself for violation of Section 20 or AIRRSRC

Two requisites to make it an intra-corporate Rule 20 are limited to a reprimand/warning for the first
controversy: offense, and pecuniary fines for succeeding offenses. Indeed,
if the SEC does not have the power to invalidate proxies
1. Relationship test solicited in violation of its promulgated rules, serious questions
2. Nature of controversy test may be raised whether it has the power to adjudicate claims of
violation in the first place, since the relief it may extend does
not directly redress the cause of action of the complainant Presidential Decree No. 902A.
seeking the exclusion of the proxies.
That the proxy challenge raised by GSIS relates to the election
ISSUE: w/n the SEC has authority to pass upon the question of the directors of Meralco is undisputed. The controversy was
on proxy solicitation in relation to election controversies engendered by the looming annual meeting, during which the
stockholders of Meralco were to elect the directors of the
HELD: NO. Section 6(g) of Presidential Decree No. 902-A,
corporation. GSIS very well knew of that fact.
which states:
SEC. 6. In order to effectively exercise such jurisdiction, the So Garcia lost, because he lost that is how Ramon Ang
Commission shall possess the following powers: representing Danding–Cojuangco failed to acquire the
necessary shares of stocks to control the BOD of MERALCO.
xxx
The Lopezes remain and then the Lopezes entered into an
(g) To pass upon the validity of the issuance and use of agreement with the Pangilinan Group. And that is when
proxies and voting trust agreements for absent stockholders or Pangilinan slowly gain control of MERALCO. Why could you not
members; control (sorry inaudible)? You have to connect this when we
are talking about percentages that you have to remember. If
xxx you have 5% of the outstanding capital stock of the
As promulgated then, the provision would confer on the SEC corporation you must declare the xxx beneficial interest xxx. If
the power to adjudicate controversies relating not only to you acquire 15% then you must make a tender offer. You
proxy solicitation, but also to proxy validation. Should the cannot just buy the 15% from one group you must give a
proposition hold true up to the present, the position of GSIS chance to the other group to make a tender offer. Pangilinan
would have merit, especially since Section 6 of Presidential first bought 9% because the PSEX(?) rule is more stringent
Decree No. 902-A was not expressly repealed or abrogated by than the SRC rule the PSEX rule is if you acquire 10%, you
the SRC. Yet a closer reading of the provision indicates that must already make a tender offer. So Pangilinan first bought
such power of the SEC then was incidental or ancillary to the 9% and he let 1 year passed. With his 9% and with Lopez and
"exercise of such jurisdiction." Note that Section 6 is the proxies of Lopez they held a twilight zone control for 1
immediately preceded by Section 5, which originally conferred year. And then they went to 29% then in the third year they
on the SEC "original and exclusive jurisdiction to hear and jump to 49%. So much so that Pangilinan has something like
decide cases" involving "controversies in the election or 48%, the Lopezes have something like 4%.
appointments of directors, trustees, officers or managers of So if a person has been a treasurer for 20 years; that means
such corporations, partnerships or associations." The cases every year he is appointed by the board. But on the 21st year
referred to in Section 5 were transferred from the jurisdiction the board does not appoint him. Can he say that my security
of the SEC to the regular courts with the passage of the SRC, of tenure has been violated so therefore he goes to the labor
specifically Section 5.2. Thus, the SEC’s power to pass upon arbiter and files an illegal dismissal case. Does the labor arbiter
the validity of proxies in relation to election controversies has have jurisdiction? Time and again there is a long list of cases
effectively been withdrawn, tied as it is to its abrogated where the SC says that the labor arbiter does not have
jurisdictional powers. jurisdiction. Why? If the labor arbiter has jurisdiction, then
Shares of stock in corporations may be divided into voting labor arbiter would have the power to review the power of the
shares and non-voting shares, which are generally issued as BOD. He would have to look into the activities of the BOD. The
"preferred" or "redeemable" shares.45 Voting rights are labor arbiter does not have a forum of general jurisdiction it
exercised during regular or special meetings of stockholders; only has jurisdiction as to the labor code. And the labor code is
regular meetings to be held annually on a fixed date, while not involved there, it is the corporation code, the mechanics of
special meetings may be held at any time necessary or as the meeting. So the labor arbiter does not have jurisdiction.
provided in the by-laws, upon due notice.46 The Corporation Is that true of all cases and actions of the board? Are there no
Code provides for a whole range of matters which can be exceptions? There are at least 2 exceptions?
voted upon by stockholders, including a limited set on which
even non-voting stockholders are entitled to vote on.47 On any 1. Gregorio Araneta University Foundation vs.
of these matters which may be voted upon by stockholders, Teodoro, 167 scra 79, 1988
the proxy device is generally available.48 Under Section 5(c) of
2. Salafranca vs. Phil-am Life 300 scra 469, 1990
Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election- In Gregorio Araneta University vs. Teodoro, you have a
related controversies is specifically confined to "controversies VP of the university for administration. For more than 10 years
in the election or appointment of directors, trustees, officers or he was voted by the Board to act as VP. The board xxx from
managers of corporations, partnerships, or associations." the regular ranks of the professors of the university, they
Evidently, the jurisdiction of the regular courts over so-called made him an administrator. All of a sudden the board changed
election contests or controversies under Section 5(c) does not its mind. Goodbye we don’t need you anymore. So he went to
extend to every potential subject that may be voted on by the labor arbiter and of course the university moved to
shareholders, but only to the election of directors or trustees, dismiss. The labor arbiter insists that he has jurisdiction and
in which stockholders are authorized to participate under ruled that Teodoro was illegally dismissed. Upon review by the
Section 24 of the Corporation Code.49 This qualification allows SC the SC said LA is correct. Why does the labor arbiter have
for a useful distinction that gives due effect to the statutory jurisdiction here? According to the SC his security of tenure
right of the SEC to regulate proxy solicitation, and the was violated. The university was well within its authority not to
statutory jurisdiction of regular courts over election contests or elect as the continuing VP for administration but the university
controversies. The power of the SEC to investigate violations of had no authority to fire. They should have returned him to his
its rules on proxy solicitation is unquestioned when proxies are status as regular faculty because he had already gained tenure
obtained to vote on matters unrelated to the cases as a faculty and he was made an officer. By just
enumerated under Section 5 of Presidential Decree No. 902-A. unceremoniously severing his relationship with the university
However, when proxies are solicited in relation to the election that is a violation of his Security of Tenure. That is the first
of corporate directors, the resulting controversy, even if it exception.
ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy The second exception is Salafranca vs Phil-am Life 300
within the original and exclusive jurisdiction of the trial courts scra 469 1999. We are talking here about the head of
by virtue of Section 5.2 of the SRC in relation to Section 5(c) of security of a homeowner’s association of Phil-am life
subdivision along Edsa. They wanted to get rid of this head credit. However there is another road – financial
because he was getting old and he could not discipline the rehabilitation. You pray to the court “approve this
unruly youth of the subdivision. The subdivision did not like the plan to rehabilitate me financially, there is this
head of security. The parents decided a way to get rid of the financial investor that is willing to come in.” So
head of security, they amended the bylaws of the homeowners you will be under court receivership. You
association. They made a provision to make the job of the implement the plan and once the plan is
head of security to be appointed by the BOD. The next annual implemented what happens? The final order in a
meeting they appointed a new head of security and they told financial rehabilitation case is an order to dismiss.
Salafranca goodbye. He files an illegal dismissal case. It is Now you can live as a regular corporation
upheld by the LA but then the NLRC overturns the LA. So it because you are now been restored. Who has
goes up to the SC. Salafranca challenges the ruling of the jurisdiction? The FRIA court designated by the
NLRC. SC says he had already security of tenure, it had vested SC.
in him and you cannot by the sheer rubric of amending the
There you have it, these last class of cases has
bylaws of the constitution circumvent the law and deprive of
been overtaken by FRIA law which we will take
his right to security of tenure. It had vested in him, regular na
when we come to Special laws. We will take up
siya. That is why the SC overturned the NLRC and ordered the
General Banking Law 2000, AMLA, FRIA, Secrecy
reinstatement of Salafranca. Of course by then Salafranca was
of Bank Deposits, Truth in Lending Act which has
too old he was awarded backwages and separation benefits
now been amended to Transparency in Credit.
instead of reinstatement. So those are the two exceptions
(Transcriber’s note: Father did not anymore
The first has already been asked in the Bar, the second has
discuss the second kind)
not yet been asked. Who knows in your time and day it may
be asked, remember Salafranca and Teodoro!
The final class of cases is: February 23 (RDatukon)
(d) Petitions of corporations, partnerships or
THE NEW CENTRAL BANK ACT
associations to be declared in a state
of suspension of payments in cases where the R.A. No. 7653
corporation, partnership or association
possesses sufficient property to cover all its Monetary policy is not the province of the legislature. Why?
debts but foresees the impossibility of meeting Because it is so defined in the Constitution. The sole monetary
them when they respectively fall due or in propriety central monetary authority shall be lodged in an
cases where the corporation, partnership or independent and accountable body in the discharge of its
association has no sufficient assets to cover its mandated responsibilities concerning money, banking and
liabilities but is under the management of a credit and in line with these policies its main function of
Rehabilitation Receiver or Management responsibilities the central monetary authority established
Committee. under this act while being a government owned corporation
shall enjoy fiscal and administrative authority.

TWO kinds of cases: Section 1. Declaration of Policy. - The State shall maintain a
1. Petitions Suspension of payment by corporations central monetary authority that shall function and operate as
an independent and accountable body corporate in the
You actually go to court with the list of your discharge of its mandated responsibilities concerning money,
assets and a list of liabilities when they become banking and credit. In line with this policy, and considering its
due. You tell the court it is not that I have an unique functions and responsibilities, the central monetary
offer(?) it is because I have difficulty getting cash authority established under this Act, while being a
from my assets. But I have more assets than my government-owned corporation, shall enjoy fiscal and
liabilities; the only problem is my assets are not administrative autonomy.
ripening at the same time as my liabilities. That is
why I pray the court to grant me an order Section 2. Creation of the Bangko Sentral. - There is
suspending my obligations until the assets turn to hereby established an independent central monetary authority,
cash so I can meet my obligation. The order to which shall be a body corporate known as the Bangko Sentral
suspend is not so that I will escape my liabilities; ng Pilipinas, hereafter referred to as the Bangko Sentral.
the order of suspension is to help me answer and
paid my liability. Before, that was under the SEC. Question: Has the Bangko Sentral receive money from General
Now it is transferred to the intra-corporate court Appropriations? Is it included in the General Appropriations
by the SRC but the SRC has been overtaken by Act? It is not. Why? It has its own capital. It is a bank! The law
FRIA (2010). provides that it shall have 50 Billion pesos as authorized capital
stock of which 10 billion is already released and the
So the one that has jurisdiction of these kinds of subsequent amounts have been release. So it has its own
petitions are the specially designated sala again money. It is truly independent fiscally and administratively.
of the RTC which is the insolvency court/the
bankruptcy court/the financial rehabilitation Now does the BSP make money? Yes. Sometimes, it makes
court. It is still RTC but it is again a specially money. Where does the net profits of the BSP go? It goes to
designated sala. In most cities I have heard the the Treasury. Its dividends because it enters into financial
intra-corporate court is also at the same time is transactions. It has the authority to buy and sell bonds to
designated as the FRIA court I don’t know here originate credit instruments, it keeps some or good portion of
whether that is true. the banks deposit liabilities and in turn, it can lend it and make
money. But its purpose in the open market transactions is not
When you don’t have sufficient assets to meet to make money, it is to aid certain policy targets of the
your liabilities, you are bankrupt. Kung kulang na monetary system of the Philippines or its banks. It works to
imong ibayad sa imong bayronon, unsa na? The strengthen the stability of the peso as to its currency so it
court will divided your money in accordance with might engage in meeting the demands of foreign currency if
the principles of concurrence and preference of there is an excessive demand so it will sell foreign currency.
Where did it get its foreign currencies? From the remittances (a) the Governor of the Bangko Sentral, who shall be
of Filipinos who are overseas workers. They will send in foreign the Chairman of the Monetary Board. The Governor of
currency, the BSP will exchange it in pesos. So it has a the Bangko Sentral shall be head of a department and
reserved foreign currency they call it Foreign Currency his appointment shall be subject to confirmation by
Reserves and that should there be a demand of foreign the Commission on Appointments. Whenever the
currencies, the BSP can meet the demands so that the peso Governor is unable to attend a meeting of the Board,
will not suffer in depreciation. There is always a monetary he shall designate a Deputy Governor to act as his
purpose when the BSP participates in open market alternate: Provided, That in such event, the Monetary
transactions. But its purpose is really not to make money, its Board shall designate one of its members as acting
purpose is to stabilize the peso or to make the peso Chairman;
convertible, to reduce the cost of money, to keep low the
interest of loans and lending, to control money supply so that (b) a member of the Cabinet to be designated by the
inflation will be held _, so that the consumer’s price index will President of the Philippines. Whenever the designated
be at the acceptable level and it is deemed fast thermometer Cabinet Member is unable to attend a meeting of the
as to the cost of living in the Philippines. It is in fact one of the Board, he shall designate an Undersecretary in his
determinations of the regional tripartite wages and productivity Department to attend as his alternate; and
board for determining whether or not the minimum wage will (c) five (5) members who shall come from the private
be adjusted upwards in order to meet the consumer price sector, all of whom shall serve full-time: Provided,
index. however, That of the members first appointed under
So that is the job of the monetary board/ BSP – monetary the provisions of this subsection, three (3) shall have
policy. It is distinguished from fiscal policy which is the job of a term of six (6) years, and the other two (2), three
Congress. Fiscal policy is obtaining money for the purpose of (3) years.
running the government. You need money to run the No member of the Monetary Board may be
government. Your basic source is taxation. Taxation is a matter reappointed more than once.
of law. BIR cannot collect tax if there is no law providing for
the collection. So that is part of fiscal policy. Then, there is the You can go through the qualifications of the Monetary Board
expenditure part of fiscal policy. You have the appropriations members. The big difference of the Old Central Bank and the
law that delineates how much goes to the judiciary, the New Bangko Sentral is that the majority overwhelming
executive, the lower house and the senate; how much are they majority of the Monetary Board is now civilian based. There
allowed to spend and for what. That is fiscal policy that is are only 2 government officials in the Monetary Board. The 5
separate and distinct from monetary policy. Monetary policy others are appointed from the private sector.
has to do with the strength of the peso, its convertibility
compared to other countries, it has to do with managing 3 Stages of Distress of Banks
inflation, it has to do with the cost of credit,the cost of Remember:
borrowing is reflected in interest. It is the Bangko Sentral that
is in charge with monetary policy, banking and credit, inflation CONSERVATORSHIP, RECEIVERSHIP, LIQUIDATORSHIP
and policies suggested to government with respect to full
If a bank is placed under conservatorship, the bank still
employment.
continues to function as a bank and a conservator is
Why should the monetary policy be placed in an independent appointed. The appointment is only for one (1) year after one
monetary authority? If it is not independent, then you will have (1) year the conservator makes a recommendation before the
a country like Zimbabwe. What happened to Zimbabwe? They monetary board whether to revert the bank to its own
just printed money because the dictator directed their independence and carry out its business as usual or to make
monetary authority to print more money so he can buy more the bank go to receivership or liquidatorship. That is upon the
votes which practically happened during Marcos’ time. recommendation of the conservator.
The Monetary Board is to the BSP as the board of directors is If the conservator makes that recommendation that it is
to a corporation. The Monetary Board runs the BSP, the BOD accepted before the 1 year period has ended, the conservator
runs the corporation. But what is the difference? The nonetheless receives the entire compensation for one (1) year.
difference between the two is that the Monetary Board can Why is that rule? So that the conservator will not unduly
issue circulars that have the force and effect of law. It can prolong his stay with the bank just for the sake of pay. The
bring down or bring up deposit liabilities of banks and the pay of the conservator is maximum ¾ of the pay of the CEO of
banks must follow it otherwise the BSP can close the bank for the bank. *note – 2/3 ang nasa law Hahaha*
disobeying a directive. So it is a governmental agency. It is not
What is the ground for conservatorship?
an ordinary BOD and yet being a governmental agency it does
not share in the inherent right of the government to be That the bank continues to maintain its operations in a way the
immune from suit. The Republic/Government/State is immune bank or quasi bank is in a state of inability or unwillingness to
from suit as a general rule you cannot sue the state. But the maintain a condition of liquidity deemed adequate to protect
BSP can be sued and it is often been sued. Why? Because its the interest of depositors and creditors. That is the underlying
ordinary activities bring it down to an ordinary citizen when it cause why a conservator is appointed to rule the bank. A
engages in the financial markets. The way it engages the conservator can countermand any action or resolution of the
financial market it is like an ordinary participant in the market board.
buys and sells financial instruments, bonds, treasury bills,
credit acceptance, etc. Then, the conservator is supposed to maximize the assets of
the bank and supposed to fight the claimants of the bank that
What is the composition? are exaggerated or have no basis at all and he reports to the
Monetary Board.
Section 6. Composition of the Monetary Board. - The powers
and functions of the Bangko Sentral shall be exercised by the Section 29. Appointment of Conservator. - Whenever, on the
Bangko Sentral Monetary Board, hereafter referred to as the basis of a report submitted by the appropriate supervising or
Monetary Board, composed of seven (7) members appointed examining department, the Monetary Board finds that a bank
by the President of the Philippines for a term of six (6) years. or a quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed
The seven (7) members are:
adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator with such with the proper RTC for assistance in the liquidation of the
powers as the Monetary Board shall deem necessary to take bank. Is this any RTC? It is by considered opinion that it is not
charge of the assets, liabilities, and the management thereof, just any RTC, it must be the RTC designated by the SC to take
reorganize the management, collect all monies and debts due care of Insolvency and Rehabilitation proceedings under FRIA
said institution, and exercise all powers necessary to restore its of 2010 because they are more competent salas of the RTC to
viability. The conservator shall report and be responsible to the deal with liquidation.
Monetary Board and shall have the power to overrule or
Why can the BSP not preside over liquidation? Why does the
revoke the actions of the previous management and board of
receiver have to file an ex parte petition with the RTC?
directors of the bank or quasi-bank.
Because the BSP is not a court of general jurisdiction. A bank
The conservator should be competent and enters to many contracts in fact the contract of deposit is
knowledgeable in bank operations and management. The mutuum, a loan, it is a nominate contract and the jurisdiction
conservatorship shall not exceed one (1) year. of that is regular courts. A bank can enter into a contract of
lease, a contract of sale and many other contracts that are
The conservator shall receive remuneration to be fixed under the jurisdiction of the regular courts. So how can the
by the Monetary Board in an amount not to exceed two-thirds BSP act on these various contracts or purposes of liquidation
(2/3) of the salary of the president of the institution in one (1) when it is not a court of general jurisdiction? That is why the
year, payable in twelve (12) equal monthly payments: receiver must endorse the liquidation process to the regular
Provided, That, if at any time within one-year period, the courts.
conservatorship is terminated on the ground that the
institution can operate on its own, the conservator shall In liquidation, the general flow of procedure is towards the
receive the balance of the remuneration which he would have convertibility of assets into cash so that cash will be applied to
received up to the end of the year; but if the conservatorship the valid and just obligations of the bank in accordance with
is terminated on other grounds, the conservator shall not be concurrence and preference of credit provisions. The bank is
entitled to such remaining balance. The Monetary Board may liquidated because it does not have enough assets to meet its
appoint a conservator connected with the Bangko Sentral, in liabilities and for purposes its reputation in the banking
which case he shall not be entitled to receive any industry could no longer be resurrected.
remuneration or emolument from the Bangko Sentral during
So the Court liquidates, how? It is by public auction. There is a
the conservatorship. The expenses attendant to the
receiver to do that, a receiver in liquidation. The monies that
conservatorship shall be borne by the bank or quasi-bank
are realized are not enough to meet the just obligations of the
concerned.
bank so the court who has jurisdiction over the concurrence
The Monetary Board shall terminate the and preference of credits ranks the creditors of the banks and
conservatorship when it is satisfied that the institution can it apportions according to the concurrence and preference of
continue to operate on its own and the conservatorship is no credits on how much will go to each creditor. There is one
longer necessary. The conservatorship shall likewise be creditor whose credit must be satisfied in full whether or not
terminated should the Monetary Board, on the basis of the the others are paid and that is the Government. The
report of the conservator or of its own findings, determine that obligations of taxes of the bank must be met because
the continuance in business of the institution would involve sovereign claims cannot be compromised in favour of private
probable loss to its depositors or creditors, in which case the proprietary claims.
provisions of Section 30 shall apply.
Section 30. Proceedings in Receivership and Liquidation. -
What is Receivership? Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank
There is only one receiver that may be appointed and that is or quasi-bank:
the Philippine Deposit Insurance Corporation (PDIC). Once the
bank is placed under receivership, the bank ceases to open its (a) is unable to pay its liabilities as they become due
doors to the public and it no longer functions as bank. It is in the ordinary course of business: Provided, That this
closed. shall not include inability to pay caused by
extraordinary demands induced by financial panic in
When is receivership decreed? Grounds – the banking community;
(1) When the bank is unable to pay its liabilities as they (b) has insufficient realizable assets, as determined by
became due on the ordinary course of business. the Bangko Sentral, to meet its liabilities; or
(2) When the bank has insufficient realizable assets as (c) cannot continue in business without involving
determined by the BSP to meet its liabilities. probable losses to its depositors or creditors; or
(3) When the bank cannot continue in business without (d) has willfully violated a cease and desist order
involving probable losses to its depositors or creditors. under Section 37 that has become final, involving acts
(4) When the bank has wilfully violated the cease and or transactions which amount to fraud or a dissipation
desist order issued. of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for
What is the job of the receiver? The receiver’s job is to prior hearing forbid the institution from doing
maximize the assets, files suits to recover assets unjustly business in the Philippines and designate the
withdrawn or taken from the bank and the receiver is given Philippine Deposit Insurance Corporation as receiver
not later than 90 days from take over, he is to report to the of the banking institution.
monetary board whether the bank or quasi bank can be
rehabilitated or not. Once the Monetary Board accepts the For a quasi-bank, any person of recognized
recommendation of the receiver that the bank can no longer competence in banking or finance may be designed as
be rehabilitated, then all the MB shall do is to notify in writing receiver.
the BOD of the bank of its findings and direct the receiver to The receiver shall immediately gather and take charge
proceed with the liquidation of the institution. of all the assets and liabilities of the institution, administer the
So then, you have the third aspect of distressed bank and that same for the benefit of its creditors, and exercise the general
is LIQUIDATION. Remember, the BSP does not liquidate banks powers of a receiver under the Revised Rules of Court but shall
because the first thing the receiver has to do is to file ex parte not, with the exception of administrative expenditures, pay or
commit any act that will involve the transfer or disposition of Sentral may, if public interest so requires, award to an
any asset of the institution: Provided, That the receiver may institution, upon such terms and conditions as the Monetary
deposit or place the funds of the institution in non-speculative Board may approve, the banking franchise of a bank under
investments. The receiver shall determine as soon as possible, liquidation to operate in the area where said bank or its
but not later than ninety (90) days from take over, whether branches were previously operating: Provided, That whatever
the institution may be rehabilitated or otherwise placed in such proceeds may be realized from such award shall be subject to
a condition so that it may be permitted to resume business the appropriate exclusive disposition of the Monetary Board.
with safety to its depositors and creditors and the general
public: Provided, That any determination for the resumption of Why is that allowed? Because banking is a necessary and
business of the institution shall be subject to prior approval of essential service and should it happen that there is only one
the Monetary Board. bank in that particular area and it goes bankrupt and it is
If the receiver determines that the institution cannot dissolved, the people are deprived of banking services. It gave
be rehabilitated or permitted to resume business in accordance the Monetary Board the discretion to award the banking
with the next preceding paragraph, the Monetary Board shall license to another entity and to operate the banking franchise
notify in writing the board of directors of its findings and direct in the place where the bank under liquidation used to operate.
the receiver to proceed with the liquidation of the institution. There is a caveat – provided that whatever proceeds may be
The receiver shall: realized from such award of banking franchise to another
entity shall be subject to the appropriate exclusive disposition
(1) file ex parte with the proper regional trial court, of the Monetary Board. In other words, it does not go to the
and without requirement of prior notice or any other corpus of liquidated proceeds of the dissolved and liquidated
action, a petition for assistance in the liquidation of bank to be given to the creditors.
the institution pursuant to a liquidation plan adopted
by the Philippine Deposit Insurance Corporation for DOSRI – Directors, Officers, Stockholders and Related
general application to all closed banks. In case of Interests of a Bank
quasi-banks, the liquidation plan shall be adopted by What is peculiar about DOSRI?
the Monetary Board. Upon acquiring jurisdiction, the
court shall, upon motion by the receiver after due Section 26. Bank Deposits and Investments. - Any director,
notice, adjudicate disputed claims against the officer or stockholder who, together with his related interest,
institution, assist the enforcement of individual contracts a loan or any form of financial accommodation from:
liabilities of the stockholders, directors and officers, (1) his bank; or (2) from a bank (a) which is a subsidiary of a
and decide on other issues as may be material to bank holding company of which both his bank and the lending
implement the liquidation plan adopted. The receiver bank are subsidiaries or (b) in which a controlling proportion of
shall pay the cost of the proceedings from the assets the shares is owned by the same interest that owns a
of the institution. controlling proportion of the shares of his bank, in excess of
(2) convert the assets of the institutions to money, five percent (5%) of the capital and surplus of the bank, or in
dispose of the same to creditors and other parties, for the maximum amount permitted by law, whichever is lower,
the purpose of paying the debts of such institution in shall be required by the lending bank to waive the secrecy of
accordance with the rules on concurrence and his deposits of whatever nature in all banks in the Philippines.
preference of credit under the Civil Code of the Any information obtained from an examination of his deposits
Philippines and he may, in the name of the institution, shall be held strictly confidential and may be used by the
and with the assistance of counsel as he may retain, examiners only in connection with their supervisory and
institute such actions as may be necessary to collect examination responsibility or by the Bangko Sentral in an
and recover accounts and assets of, or defend any appropriate legal action it has initiated involving the deposit
action against, the institution. The assets of an account.
institution under receivership or liquidation shall be
deemed in custodia legis in the hands of the receiver Whenever there is a DOSRI loan in other words the directors,
and shall, from the moment the institution was placed officers, stockholders and related interests becomes a
under such receivership or liquidation, be exempt borrower of the bank or goes into an accommodation
from any order of garnishment, levy, attachment, or borrowing in other words the DOSRI becomes a co-maker of
execution. somebody who is the principal borrower; there is some rules
that apply.
The actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final and What are these rules?
executory, and may not be restrained or set aside by the court
1. The borrower must be a Director, Officer or
except on petition for certiorari on the ground that the action
Stockholder of bank;
taken was in excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction. The 2. He must contract a loan or any financial
petition for certiorari may only be filed by the stockholders of accommodation;
record representing the majority of the capital stock within ten
3. The loan or financial accommodation must be from
(10) days from receipt by the board of directors of the
his bank or from a bank that is a subsidiary of the
institution of the order directing receivership, liquidation or
bank holding company of which his bank and the
conservatorship.
lending bank are subsidiaries;
The designation of a conservator under Section 29 of
4. The loan or financial accommodation must be
this Act or the appointment of a receiver under this section
approved by the Board of Directors of the bank;
shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a 5. It cannot be approved unless the DOSRI borrower
precondition to the designation of a receiver. waives his right under Secrecy of Bank Deposits law;
6. He must allow his name to be listed in a monitoring
How about the banking franchise of a liquidated bank? What
list that is sent to the Monetary Board who monitors
happens?
the behaviour of DOSRI borrowers.
Section 33. Disposition of Banking Franchise. - The Bangko
What is that reason for that rule? Again, to prevent abuse 14% for commercial banks, it is now 15%. What does that
because there are some businesses that may be open to mean?
abuse. They put up a bank in order to finance their own
They say, that means, over a hundred billion pesos is taken
business.
out of money supply. Imagine that. There will be less money.
*AND THEN, THE EARTH SHOOK* *Let’s call it a night.* Money supply will be controlled so that you fulfill the
requirement of near full employment as much as possible and
yet, at the same time, you do not want high inflation.
February 27, 2017 (DelaCruz & Tan loveteam)
And they have to do that almost every day. They monitor
So, we are in the New Central Bank Act (RA 7653). We money supply and interest rates. If you have too high interest
saw the importance and pervasiveness of monetary policy. rates, business is discouraged. If you have been following
business forums, the worry now is the stock market in the US
If you are asked the questions, Why is monetary policy has for the past 11 days, hit record high. The highest ever
relegated to a special independent body that is collegiate in which is 21,000 pts for the blue chip stocks.
nature as one sole authority?; Why is monetary policy not
entrusted to Congress which after all is the body that has Why did the prices of their stocks got so high? Because they
plenary powers for laying down policies?; Why is monetary were so enamored with Trump.
policy taken out of Congress and in a sense, placed in the
*Kung ubhon daw ang Amerika, kita gi-TB na. Lol*
hands of a monetary board?
The Bangko Sentral can enter into what is called as open
That is provided for in the Constitution.
market transaction.
Fiscal policy is placed in the hands of the Congress.
What is open market transaction?
Monetary policy is placed in the hands of the monetary
board, the Bangko Sentral. In the financial markets, there are bonds that are bought and
sold.
Why? Modern day monetary policy is a fast-moving
phenomenon. You cannot put it entirely in the hands of the  First, they are issued (primary market);
Congress. It is still with the Congress but the day-to-day
 While the bonds have not yet matured, they can be
adjustment to monetary policy is in the hands of the monetary
bought and sold. The prices go up and down just like
board. That is the case of most countries in the world because
equities. And the Bangko Sentral, just like any player
you need almost daily intervention.
in the market, can go in and buy and sell bonds. This
When you talk about credit, the price or cost of money, is sometimes anomalous because the Bangko Sentral
interest rates, they change from day to day and these are calls the shots, declares the rules about interest rates
adjusted by the Bangko Sentral’s intervention in the open and money supply.
market. And Congress cannot do that.
It is allowed to play in the market so that it can tweak and
It takes a while for Congress to arrive at legislation. There are adjust the market.
3 readings, it moves to the Senate, there’s a compromise
What is the difference between Bangko Sentral buying
committee, it has to be approved by the 2 houses, then finally,
and selling bonds and BDO Investment Corporation
it is sent out to the President for his signature. It takes too
buying and selling bonds?
long. By the time they release it, patay na ang kabayo. The
horse is already dead before you arrive at an antidote for this The difference is in the inherent motivation, if BDO buys and
particular monetary ailment. sells bonds, it is in order to profit. But if the Bangko Sentral
buys and sells bonds, it is to make the necessary adjustment
That is why you need a body like the monetary board that
for an equilibrium price of bonds. It is for the sake of monetary
keeps up with the movements of the market; that meets
policy that it does that unlike the other players.
miniscule adjustments, fine-tuning of money supply from credit
and banking so as to maintain a sound monetary policy which Aron makasabot mo, naa nay basketball game diha. Kinsa man
tries to meet the contradictory demands between low inflation ang referee? Bangko Sentral.
and high employment rate.
Unya, nalup-og na ning isa ka team, kanang mga Philadelphia
If you have very high employment rate, there is so much (sa NBA), mukalit ug sulod ang referee, sila ang ikaunom na
money. The next thing to be affected by so much money is player, unya makadaog ang Philadelphia. That is to level the
inflation because with money supply increasing and there is playing field, in as near as possible, to an equilibrium state.
the same amount of goods and services in the economy, the
prices will increase. So you will have to lower money supply. Does it make sense? That is the way it is constructed. The
referee can also play. It plays not to win but to make sure that
How do you do that? By mopping up excess money supply. there will be not too many losers. That is the idea of the
Bangko Sentral entering into open market transactions.
All of a sudden, the Central Bank will raise its rediscount rate.
So banks will no longer be encouraged to borrow from the In the last financial crisis of 2008-2009, which almost brought
Bangko Sentral. Or the monetary board will increase the the whole financial world down, the US Congress passed laws
deposit liabilities1 of the banks. granting billions of dollars of subsidy to automobile industries
like General Motors.
Suppose the Central Bank raises the deposit liability by 1%, so
for rural banks, instead of 4%, it now becomes 5%; instead of Bangko Sentral is the authority that prints money.

1 The Federal Bank policy of intervention is proven correct:


Deposit liabilities – that amount of money of deposits in a
bank that the bank, by force, must keep in cash or near cash 1) It obviated financial collapse in the world;
in the vaults of the bank which cannot be lent out. 2) It made possible the expansion of the economy even
For Rural Banks – 4% (e.g.: For every P1, 4 centavos must be at a small rate; and
kept in the rural banks’ vaults that it cannot lend out to the
3) There is a better prospect in moving forward.
public.
For Commercial Banks – 14% If the Central Bank floats the bonds of the government itself,
every Monday, it bids out treasury bills. Wednesday is the
deadline. By Monday, it announces how many 90-day, 120- There was a strong change. It came about when the banks
day, 300-day treasury bills it is going to buy. These treasury said that is not enough. We have to serve the clientele. In the
bills are sold at a discount. There is no interest rate here so it name of service to the clientele, banks should be allowed to do
is sold at a discount. Those who bid, bid at a price lower than all sorts of services – one stop shop. Banks should be allowed
face value. The difference between the face value and the to be money changers (exchange dollars in the bank for
winning price is the interest. By Wednesday, they accept all foreign currency), lend money in foreign denominations.
the bids. By Friday, they announce the winners. And that
What is wrong with that?
happens every week. Sometimes, there is a week when there
is a failure of bidding. Bangko Sentral will not accept bids The trouble with that is it provides the bank a occasion to
because they suspect that there is collusion, bid was too low, speculate on foreign currency.
etc.
What will prevent a bank from hoarding foreign currency
Every time the Republic floats a treasury bill, it is actually in because it has a study and then they make forecasts. Say, the
competition with other private entities and person that are dollar will go down, so they have foreign currency reserves
looking for credit in the open market. Who will get a higher which they will sell and when the dollar goes down, convert it
interest rate? NCCC who has also floated its bonds or the to another currency. That is not the Volcker Rule. That is a
Republic who floats its bonds? From the public’s point of view, violation of the Volcker Rule.
who is the better borrower? The RP or NCCC? RP gyud diba?
Lower interest rates. This rule has been ignored by the successors of Volcker and
then the great financial crisis happened. Then there was the
The more money the Philippines ask from the financial market, Dodd-Frank Act, the largest financial regulation haul. But
it is actually depriving the individual entities that are in need of Trump now wants to remove that law to liberalize banking
money and cannot catch up with the interest rates and yet because he wants America to be great again (LOL).
that happens every week.
Our latest issue with the Bangko Sentral is the leadership.
And the Bangko Sentral must tone its intervention into the Tetangco is now going to retire after 12 years. He is going to
market and it must ask the question “Am I taking credit at the retire in June. He has been with Arroyo, PNoy, and part of
expense of others?” That’s not a metaphor ha. You take credit Du30. And he is finally, stepping down.
at the expense of other because you are always the prime
borrower. You have the lowest interest rates. If you have the Why? Because the New Central Bank Act only allows one
best rate, the others are left with the worst rate. If you take so reappointment. Remember the term of people in the monetary
much of the money supply and borrow it, that is to the board is 6 years and reappointment of another 6 years. 12
exclusion of others who need money for their operations, years is the longest that you can stay in the monetary board.
expansion, for new ventures and other uses of money. They were talking about amending the New Central Bank Act
to allow for a 3rd reappointment but that was put to rest
General Banking Law of 2000 because Tetangco said that 12 years is enough. So he is
retiring. Who will take his place? *Chika about Tetangco’s
R. A. No. 8791
background, not accounting but law.*
It defines what a bank is in Section 3. Which tells you about the theoretical background of law. Law
gives you a very good background for almost anything
SECTION 3. Definition and Classification of Banks. — including central banking if you are willing to learn. But if you
3.1. "Banks" shall refer to entities engaged in the lending of are not, mu-ingon ra ka ug kapoy ning General Banking Law
funds obtained in the form of deposits. kakapoy ra ani. Kapoy-kapoy ra ug baso ning mga maot na
termino. Father gives advice on taking the bar exam using
xxx Russian roulette as metaphor. God help you daw.
The old definition under the predecessor, Central Bank Law What are the kinds of banks? The General Banking Law of
(RA 337), gives a specific number. If you take deposits from 2000 categorizes the banks as:
20 or more people and re-lend that money, you are engaged in
1. Commercial banks. The biggest kind of commercial bank
banking. So you must obtain a license from the Bangko Sentral
is the Uni Bank otherwise an expanded commercial bank. You
in order for you to lend money. But that number 20 has been
might be asked what is the expanded commercial bank. That is
removed from the present definition in Sec 3.
the Universal Bank. Why is it called a universal bank? Because
What is the significance of that? for the first time you can do one stop financial shopping with
that bank.
The significance of that is that there are now entities that are
not just solely banking in nature. A universal bank can do any and all banking functions
including non-allied banking services. A commercial bank is
If you are a universal bank, you cease to do just simple
only issued a commercial banking license. What is the heart of
banking functions. You are now a multi-functional financial
commercial banking license? The power to accept demand
institution.
deposits. Deposits that may be subjected to checks as in the
What is wrong with that? negotiable instrument. In banking that is demand deposits.

The problem with that is you put at risk the deposits from the If other banks are allowed to accept checking accounts or
public because you engage in other than banking function. demand deposits it is by virtue of an additional license. If a
thrift bank, let us say a development bank is allowed to accept
That is why you come with the conundrum of what is called checking accounts it is issued an additional license by the
the Volcker Rule. It is named after Paul Volcker, an old Banko Sentral. It is not part and parcel of the banking license
Central Bank Federal Reserve Chairman of the US. Paul Volcker originally issued.
said that banks should be limited to strictly banking functions –
accept deposits and pay this much interest, lend the money to But for a commercial the power to accept demand deposits is
the public at this much interest and the difference between the the very heart of commercial banking license. Letters of credit
two, should be the gross profit. Deduct the administrative are part of that.
expenses and that is the net profit. The difference between the
Commercial banks are allowed to go into allied banking
interest paid to the depositors and the interest exacted from
function like foreign exchange. To maintain foreign exchange
the borrowers – that is banking business.
accounts that is allowed because it is an allied banking Rural banks are also the source of what is called micro
function. How about ATMs? That is considered allied banking financing. Micro financing is done on a selda (as father calls it)
function. In fact in the Philippines you cannot engage in the basis, you do not lend to one but you lend to a group or a cell.
opening of ATMs unless you are a bank. If you are a rural And the unwritten rule is that you are lending not to males but
bank, can you open ATMs? Not by virtue of your rural banking to females because they have a better organizational bond
license. You will have obtain a separate banking license and among themselves. You lend small amounts to these groups or
that will be based on capitalization and your number of selda of women for the purpose of income generating activities
branches. that are simple and not complicated. It might for an enterprise
for a buying a goat so that produce milk for the family and the
I should know it because I went through the application for
excess you can sell to the general public.
ATMs of ONB and they demanded at that time that we should
reach 60 branches in Mindanao before we are issued the Or you will borrow to buy raw materials that you can transform
license to open ATMs. How much is one ATM? A brand new into readily saleable goods like mats hats or what have you.
one ATM is 1.2 million Php. But believe me a reconstructed The idea that this selda takes on the responsibility of
ATM is only 650,000 if you buy 20 at a time. Asa man na monitoring the proper use of the money borrowed by each
pangitaa? Sus kadaghan sa kalibutan gusto mubaligya ana sa member of the selda. They also try to monitor the rate of
imoha. Naay China made, US made daghan kaayo. repayment by each member of the selda. The selda is
successful if all who have borrowed repaid. And then the next
I tell you something the most backward ATMs in the world,
time they can borrow a higher amount. But if there is one who
where are they found? They are found actually in the US. It’s
fails then the selda determines why this one has failed and
still the magnetic cards that are used. But they cannot change
what the others could have done because the poor cannot
it because there are so many of them in the US that they
borrow by themselves they need supporting structures.
cannot upgrade them. Where is the most advanced? They are
found in Japan, Taiwan, Sweden and Switzerland. That is the What is the difference in micro financing? The difference is
biggest incidence of identity theft is in the US. It’s very easy to that they are non-collateralized loans in small amounts.
do it there. Remember the Banko Sentral’s rule is that no bank should lend
without security or collateral. There must be, at the very least,
But if you have ATMs that are already chip-based it’s more
a guarantor.
difficult because the chip has already security measures that
are difficult to crack. But it’s more expensive. The US cannot So what do you call these so-called clean loans? There is no
accept it because they will have to change their very such thing as a clean loan. Muhuwam ka ug kwarta sa banko
infrastructure. Father talks about the no touch cards in Japan just on your face value? And you have no collateral? That
and Taiwan. would be a violation of the Banko Sentral rules. But they say
people can do that. Is that correct?
The cards are not allied to the banking function. The ATM is
allied. But the cards themselves for the purchase of goods and Have you ever had a clean loan? You borrow money ostensibly
services (credit cards) are not allied. there is no collateral but you have a deposit with the same
bank that is bigger than the amount of money that you
So Commercial Banks are those given the powers to engage in
borrowed. So the bank lends you that money short-term which
commercial banking functions the staples of which are
expires within a year. You should pay that back within a year.
checking accounts, letters of credit and the purchasing of
And why do they know that you will not decide to withdraw
receivables and deposits substitutes.
your deposit? No, they trust you because they know your
2. Thrift banks what are those? They are Savings and average daily balance. Pila man na imung average daily
Mortgage banks. These are banks that are normally constituted balance. Dili mu-ubos ug 500,000 Php imung balance. Mu-
to help the public in a particular community to obtain their first ingon na muhuwam ka ug 100,000 unya pirma lang ta diri,
home by saving up and then borrowing in addition to their pirma pud ka and you pay that within 90 days. That is what is
savings and purchasing their first home which is then called a clean loan. But there is really no such thing as a clean
mortgage to the bank. loan since there is a security which is your bank deposit.

They are known to the banker because they live in that There is also borrowing against your deposit and the bank will
community and they have a history of good credit, steady make sign for that. Your deposit is your guarantee which
work, regular income so these banks have the wherewithal to means that in common sense borrowing against your deposit
service their home mortgage. Mu-ingon gani ka ug mortgage with an agreement not to withdraw. What is that? You are
sa Amerika buot pasabot ana home motgage. Eprinda nimo really borrowing your own money. That is why they give you a
imung balay na imong gipalit kay naka-utang ka sa home lower interest rate. They give you prime prime (that’s what I
mortgage savings bank. heard). Let us say you are given less than 1% for your loan
and the standing rate of the bank is 6%. The prime rate is 3%.
Sometimes it’s not called a bank. They are sometimes called They will even be willing to lower that to less than 3%. Why?
home and mortgage association, home and loans association Because you are actually borrowing your own money.
or savings and loans association. That is a mortgage bank Preferential ang rate na ihatag ana.
which is a thrift bank. Then a Private Development Bank is also
a thrift bank. Mostly people who do that do not need the money. What do
they need? They need a record of having borrowed money.
3. Then you have Rural Banks. These are mandated to make Para maka-ingon siya sa mga tao especially to the BIR, maluoy
needed credit available and readily accessible in rural areas on ka nako naghuwam na ko ug kwarta. That is the reason why
reasonable terms which are covered primarily by the Rural they are borrowing against their own deposits.
Banks Act. Even poor people have credit needs and if you can
only price credit correctly a rural bank can be viable in the So that is the difference in micro financing, there is no
rural community because the poor are willing to pay in order to collateral. In fact they are called non-bankable people. By
get service for the credit needs that they have. ordinary rules on banking they should not be allowed to
borrow because they not bankable. If the risk of lending to
So rural banks are the credit arms which the government them is spread and it is reinforced by organizational skills then
assists to dispense credit in largely non-bankable areas or far it could turn that they will end up being successful users of
away areas. You have credit have facility. Father talks about credit. And when you multiply successful users of credit you
Tawi-Tawi which uses the Malaysian currency instead of the actually lift the informal economy. You lift the living standards
Philippine Peso. of the very-very poor. That is message of the whole micro
finance movement that was begun in Bangladesh one of the purchasing the receivable of Allado and selling it to NCCC in
most disadvantaged poor countries in the world. Father talks exchange for cash at discount value which is the interest
about the scam involving the reserves of Bangladesh in the US earned by NCCC.
and RCBC.
So that is represented in a piece of paper called a CP. A
4. What about this Islamic Bank? We have a law that Commercial Paper. There is no collateral there. There are only
provides for the institution of the Al-Amanah Bank which has two lines in the corner of the CP. What does the two lines
gone bankrupt but has been revived. The Al-Amanah bank is mean? It means with recourse. That means if NCCC cannot
supposed to render the banking functions acceptable under collect from Allado its receivables then it has recourse to the
the Sharia Law standards. The Sharia Law prohibits lending at quasi-bank. The interest with recourse is higher than if there
an interest. That is anathema for the believers of Islam. You was no recourse.
cannot lend on interest. You cannot take advantage of the
Can you think of a time when there is no need for those two
borrower.
lines? Let us say the one who is selling its receivables is San
Is collateral allowed? YES, but not interest. You borrow money Miguel Corp. will you insists of having with recourse? Dili
and your collateral is your cape, the all purpose cape that naman na mudagan dako naman kaayo nang San Miguel. They
protects you from the heat of the day and the cold of the enjoy AAA credit rating. It is next useless to talk about with
night. You turn it over to your creditor as a guarantee that you recourse when it comes to San Miguel. That is how quasi-bank
will pay the amount because you have take back your operates.
collateral. But the Koran says that at night the creditor must
It operates as a facility or a middleman. It facilitates for those
give back the cape so that the borrower will not suffer. That is
with excess cash and those in need of cash and they meet in a
a very compassionate rule. Ihatag nimo balik kay dili nimo
CP that may be with recourse or without recourse. It’s very
paantoson and tawo na nagkalisod-lison na mao gani na
simple. Kana ang imong huna-hunaon.
nangutang na siya. Father talks about the dessert cold which
goes down to below zero, basketball shorts (the greatest
invention in men’s fashion) and the dessert heat.
March 6, 2017 (EEscovilla)
So how do you banking the Sharia way? It does not become
just one contract, there are several contracts in order to go Financial Rehabilitation and Insolvency
around the prohibition against the payment of interest which is Act (FRIA) of 2010
anathema for the Moslem faith. That is why there is the
Islamic Bank. But there is no Catholic bank because we do not R.A. 10142
have a problem with lending at an interest.
Liquidations. And then there is another new rule, which is
The Old Testament prohibits payment of interest. But later on earlier than that, and that is the more common proceedings in
that was changed. Now they allow payment of interest. What FRIA. And that is Financial Rehabilitation Rules of Procedure
they do not allow in the Holy Scriptures is the payment if 2013. April 27, 2013.
usurious interest. In the Koran payment of any interest is not
allowed. In our Holy Book it is payment of usurious interest. Since this is most common, maybe we should go through some
of the features. Why is this the most common? Because
5. What is a Quasi-bank because in the General Banking Law culturally, Filipinos are allergic to being declared insolvent.
a quasi-bank is differentiated from a bank. A bank gets Nobody wants to be declared insolvent if you are a Filipino.
deposits from the public. You reach 20 depositors, you are
engaged in banking and you lend the money that you get from The nature of the proceedings is that it is in rem. Jurisdiction
the public to your borrowers. A pawnshop does not accept over all persons affected by the proceedings is acquired by
deposits. It accepts pledge. Delivery of personal property is publication upon commencement of the proceedings. And the
essential in pledge. Then the pawnshop lends you its own commencement order or any similar order of the proceedings
money. That’s why it can establish its own interest rates. in one newspaper of general circulation in the Philippines for
two consecutive weeks.
But the bank because it lends out the depositor’s money it is
regulated by the government as to the interest that it can pay. So that’s one characteristic, it is in rem and binding against the
Quasi-banks accepts from the public deposits substitutes and whole world
they bridge it those in need of money. Through their
What is published? What is published is the commencement
intermediation, the difference between the interest rates is
order. The commencement order is issued by the Court upon
where they get their commission. That is how a quasi-bank
the filing of the petition and within five days, if the petition is
does its business.
found to be sufficient in form and substance.
Quasi-banks are entities engaged in the borrowing of funds
Normally if it is not found to be sufficient in form and
through the issuances of endorsement or assignment with
substance, the court will not dismiss it. The court will just
recourse or acceptance of deposit substitutes for purposes of
return it to the petitioner and say “these are what are lacking”.
lending or purchasing of receivables and other obligations.
Like for instance you have to put down your list of liabilities.
Let’s say NCCC has so much cash instead of going to the bank
Complete list gyud. That means your creditors. Put down your
they go to a quasi-bank. They make a placement, here is my
list of creditors. The extent of their credit, and the ripening of
money. And you have Allado Construction that is expecting
these credits. You have to arrange it according to secured
payment. It has receivables from the government for
creditors and unsecured creditors.
constructing the highway. These receivables, it is hoped by
Allado that it receives them in tranches. Murag installment ba. The next list that you have to attach to your petition for
A 100 million job is received in 20 million installments so 5 financial rehabilitation is you list of assets, and also when the
tranches according to the degree of completion. assets ripen.
In the meantime Allado is in need of cash to pay its employees Third you have to put down your rehabilitation plan. How do
and to get fuel for its machineries etc. How can it meet it cash you propose to be rehabilitated financially? Have you invited
requirements? It borrows from a quasi-bank. Why does it go to some financier to come in, and in what fashion? Is he going to
a quasi-bank? Because it’s very easy. The obligation lasts only be just another creditor or is he going to be an owner,
for less than a year. Therefore there is not so many papers, no proprietor by selling him shares of stock. Will he gain control of
collateral that is needed. The quasi-bank facilitates by the petitioner, etc.? These are the issues.
If the court finds the petition sufficient in form and substance, you can continue to run after him, prosecute him criminally.
then the court will issue what is called a commencement order. That is not considered in the Stay Order.
The commencement order retroacts to the date of the filing of
Let us say it consists of estafa. You can proceed with the
the petition. There is a retroactive effect of the
estafa case because it is a criminal proceeding. Why? Because
commencement order. Now the rehabilitation proceeding has
a criminal cause of action cannot be compromised. That is the
commenced.
general rule.
Together with the commencement order is one, the
appointment of the receiver. There will be a financial Criminal prosecutions of the creditors of the debtor cannot be
rehabilitation receiver. What is his job? His job is to verify the the subject of a Stay Order. So you have a management
liabilities and recommend to the court if they should be committee that is being appointed to continue to run the
approved. So he examines all those who have credits against office. What are the powers of the finance committee? They
the corporation. Then recommend to the court. Then the court can countermand any resolution of the past Board of Directors.
will issue an order approving or disapproving the liability. If the They can run after iniquitous contracts and move to rescind
court approves or disapproves, that is a final order and that the same and so on. They can try to dig up irregular practices.
can be appealed as far as the creditor is concerned. Like for example you are a bank, you are a corporation and
somebody has taken advantage of you by inflating the market
Another job of the receiver is try to maximize and retrieve the
value of the consideration that it paid to the corporation in
assets and claims of the petitioner against certain people. So
exchange for issuance of shares of stock. You can go after that
he has to pursue those claims or look for them if it has not
particular subscriber to get what is rightfully the corporation's,
been recognized. There is a list of assets of the petitioner. He
namely the fair issued value of the shares of stock. These are
will round up those assets.
all subject to the assiduous action of the receiver.
Take note the receiver, especially if the debtor is so big, has
After the court has approved or disapproved all the creditors of
no time to run the debtor, that is why the commencement
the debtor, then the court moves on to determine the
order must contain together with the appointment of a
acceptability of the rehabilitation plan. What is the plan
receiver, a management committee.
proposed? How is it going to be carried out? The laws says
The management committee takes over the debtor to run the that if the majority of the committee of the unsecured
business pending the proceedings for financial rehabilitation. creditors plus the majority of the total amount of secured
Why is that significant? That is significant because during debts, vote for the plan, then regardless of any objection the
financial rehabilitation, the debtor continues to function in its plan is to be carried out. And the court can order that the plan
ordinary business. If it is making soft drinks, it continues to be enforced despite the objections of the others. Take note of
function while it is under the supervision of the court, that: majority of the committee of the unsecured
principally by the rehabilitation receiver and the management debtors and the majority of the total amount of
committee. secured debts.
And then you say, wa naman kahay kwarta. How can it Let us say for example napulo na sila kabuok ang secured
continue to function? We go to the Stay Order which comes debtors. But one of them in amount is 60% of the entire
together with the Commencement Order. What is a Stay secured debts of the debtor. The vote of this one is far
Order? superior to the other 9 because he is more than the majority of
the sum of the secured debts.
The Stay Order is an order to stop all creditors from filing suits
and/or enforcing their claims if it is already the subject of a If he votes, plus the majority of the committee of the
final judgment. They can no longer enforce. Everyone is unsecured debtors, then the court can cram down the
covered, unsecured debtors, secured debtors. rehabilitation plan and despite the objections it must be
accepted and carried out. So they begin to implement the plan.
What are the exceptions?
Supervision of the court.
I.
Once all the debts are satisfied, once the rehab plan has been
The exceptions are those creditors who have not been paid but completely executed--by stages man gud na, sometimes it’s
are still the suppliers of the company in its ordinary course of divided into first stage, second stage, third stage--once it is
business. The fact that they have not been paid does not fully implemented, then the court can ask the receiver. How is
prevent the court from ordering them to continue to supply the it performing now? Is it completely restored to financial
debtor with the necessary raw materials for it to continue to health? And if the receiver says yes, then the court will issue
operate for as long as the debtor pays the new current credits. an order dismissing the Petition for Financial Rehabilitation.
That's a very big favor. “Stay, do not enforce your claims of That is the end game. Order of dismissal. Which means the
the past, but continue to supply.” Ikaw, wa ka bayri sa utang debtor corporation can now go back to ordinary life.
nimo, pero you must continue to supply. Pila na kamilyon na Management committee completes its function and retires; the
asukal na imong gideliver niya wala kay bayri. Karon nikuyog receiver is gone; the Board of Directors of the corporation
ka sa mga creditors, nagfile kag Involuntary Petition for resume their functions and the corporation now resumes as an
Insolvency. Counter ang respondent ug Petition for Financial ongoing concern in the ordinary course of business.
Rehabiliation. Gigrant sa court. Okay, Stay Order. Ikaw,
That is what happens in a financial rehabilitation proceeding.
ordered to stay sa imong pangubra sa past credits. Unya
orderan ka magsupply ug dungag na asukal, basta bayran ka I told you that the nature of the proceeding is in rem.
lang niining bago nimong supply. Can you imagine that? Binding against the whole world. There must be publication.
That’s the power of the court. Publication in one newspaper of general circulation in PH for
two consecutive weeks. If you are a creditor and you did not
That is not covered in the Stay Order, the continuation of
present your credits in the court where the financial
supply to be given to those in order to make the debtor
rehabilitation proceeding is pending, and the time has lapsed
function in the ordinary course of business.
for you to present it, that's too bad because the court will no
II. longer recognize you. You are considered to have been
informed by publication.
Second exception is you can enforce the claim that is the
subject of a Stay Order as to a solidary debtor. Not included While it is in rem, there is also another characteristic, which is
because he is considered to be in criminal violation. Suppose that it is non-adversarial and summary in nature. Non-
his being a solidary debtor is understood to be a crime, then adversarial that means walay kalaban. This debtor, are not
these creditors his opponents? And the answer is no. Why Let us say you have audited financial statements for the past
because they are not named in the title of the case. The title 10 years. You do not have to attach it to the pleadings and
of the case is In Re: Financial Rehab of XYZ Corp. If you say give it to all the parties, there are so many creditors. You just
voluntary financial rehabilitation, that means it is the debtor announce to them, “You go to this website, and you can
himself who filed the petition. If you say In Re: Involuntary download the audited financial statements for the past 10
Petition for Financial Rehabiliation of XYZ Corp., that means years with this annex to the Voluntary Petition for Financial
the proceedings were initiated by a group of creditors of the Rehabilitation or Involuntary Petition for Financial
debtor. And he is summoned. And his reply to his summons is Rehabilitation.”
the mode by which the court obtains jurisdiction over the
That is basically financial rehabilitation.
debtor. But as to creditors it is by publication.
Now what happens when something is radically wrong later on
What is the indication that it is summary in nature? The
in the financial rehabilitation and it is found to be no longer
indication is that there is this list of pleadings that are not
possible? What will the court do?
allowed because it is summary in nature. What are these?
Listed in Section 4 of Rule 1 of the Financial Rehabilitation A special feature in FRIA 2010 is that the court can convert
Rules of Procedure of 2013. any of the proceedings—whether it is voluntary financial
rehabilitation petition or involuntary financial rehabilitation
Sec. 4 xxx petition or whether it is a petition for suspension of payments,
or whether it is a voluntary petition for insolvency—the court
1. Motion to Dismiss has discretion to convert the proceedings into a liquidation
2. Motion for a Bill of Particulars proceedings. So atoa pa, wa na, end game na ni, patyon na
ning juridical person. He will be dissolved and liquidated. The
3. Petition for Relief court can do that.
4. Motion for Extension In the old system before 2010, that was not possible. Why?
5. Motion for Postponement and other motions of Because the petition for suspension of payments filed by a
similar intent corporation, the one that had original and exclusive jurisdiction
was the SEC. So if you file for a suspension of payments,
6. Reply alleging that you have sufficient assets to meet your liabilities,
7. Rejoinder but your assets are not ripening at the same time as your
liabilities, and then the court finds out you do not have ½ of
8. Intervention; and the assets that you need. So insolvent ka na diay kay kuwang
na kag assets. What is the end result of insolvency?
9. Any pleading or motion that is similar to or of like
Liquidation. And your assets will be divided in accordance with
effect as any of the foregoing
the concurrence and preference of credits of the Civil Code.
Kay wala naman ka.
That is an indication that it is summary in nature.
But then the SEC has no jurisdiction to conduct a liquidation.
Again, another indication: So the SEC will just have to dismiss you, and tell the parties,
xxx file a liquidation proceeding with the ordinary courts. That is
what the SEC does because the SEC has no jurisdiction to
Any pleading, motion or other submission, submitted by any conduct liquidation proceedings.
interested party shall be supported by verified statements that
the affiant has read the submission and its factual allegations You remember in Corporation Law, we said the SEC approves
are true and correct of his personal knowledge or based on dissolution whether the dissolution is voluntary or it is
authentic records, and shall contain supporting annexes, which involuntary. But the moment the SEC approves the petition for
the submitting party shall attest as faithful reproductions of the dissolution, the next step is to endorse the same to the regular
originals. An unverified submission shall be considered as not courts. Intra-corporate courts. Endorse the same. Why?
filed, at the discretion of the judge. Upon motion, the originals Because the SEC has no jurisdiction over the numerous
of the annexes to a submission may be produced in court for nominate contracts that are listed in the Civil Code, of which
examination or comparison by a party to the proceedings. the petitioner corporation of the debtor has entered into.
Contract of sale, contract of lease, contract of exchange. There
Every time you submit documentary evidence, it must be are many contracts. And the ones that have jurisdiction over
accompanied by a verification. Importante na. And then you these contracts are the regular courts. That is why in the end,
file these pleadings or motions in three printed and two the determination of rights under these various contracts can
digital copies in CD format. only be done by the court. And after the court has made
This is where the Supreme Court really does not understand juridical findings as to the rights of these parties in these
digitalization. Why? You file it in three printed and two digital contracts, then it can order the proper liquidation of the
copies! Unsa man diay ning digital, back up lang? Kining niang remaining assets.
printed, mao gyud diay ni ang tinuod? When under the FRIA can the court order the transformation
xxx of the proceeding to liquidation?

Annexes to proceedings shall be in printed form. The court 1. Section 25(c)


may decide matters on the basis of affidavits, counter-
affidavits, and other documentary evidence, conducting
clarificatory hearings when necessary. (c)convert the proceedings into one for the liquidation of the
debtor upon a finding that:
You do not have to serve all parties copies of your pleadings or
your annexes. You just have to serve notice to them that there (1)the debtor is insolvent; and
is this pleading filed. Then as to the annexes especially if they
(2)there is no substantial likelihood for the debtor to be
are voluminous in nature, you designate the place and time for
successfully rehabilitated as determined in accordance with the
other parties to copy those annexes if they so desire, and they
rules to be promulgated by the Supreme Court.
copy them at their expense. It could be a website, and you
just download the facsimiles of these documentary evidence. 2. Section 72
Section 72. Period for Confirmation of the Rehabilitation Plan. forth the same matters required in the preceding paragraph,
- The court shall have a maximum period of one (1) year from and state that the debtor is seeking immediate dissolution and
the date of the filing of the petition to confirm a Rehabilitation termination of its corporate existence.
Plan. If the petition or the motion, as the case may be, is sufficient
If no Rehabilitation Plan is confirmed within the said period, in form and substance, the court shall issue a Liquidation
the proceedings may upon motion or motu propio, be Order mentioned in Section 112 hereof.
converted into one for the liquidation of the debtor.
Because the petition is for voluntary liquidation, unya dili
Usa na gani katuig unya wa pa gyud naapprove na financial naman diay kailangan pa tanawon pa ang assets because it's a
rehabilitation plan, that is legally the same as it can no longer very simple corporation. It just has cash assets in the bank.
be rehabilitated. And therefore the next step is liquidation. It’s already frozen. Its liabilities very simple, it’s already
reduced in numbers, it’s represented by promissory notes unya
Rehab gud mura gud nang nalumos ang corporation na giCPR dili na ko kabayad. Diretso dayon, liquidation. All of these
nimo. Isa ka katuig nagbuhat ana wala na gyud siya nibagnon. creditors are the same level. They all suffer the same haircut.
Ilubong na na. Liquidation. Patay na na. They are not preferred. They are all unsecured debtors. Pareha
3. Section 75 ra sila. So their haircut is proportional.

Section 75. Effects of Termination. - Termination of the Unsa may pasabot anang haircut? Ang ilang gipautang
proceedings shall result in the following: 100milliom. Unya pila na lang ang assets sa corporation,
20million na lang. Unya pila pa mo kabuok magtunga, daghan
(a) The discharge of the rehabilitation receiver subject to his kaayo. Putlon na inyong mga utang, proportionately, pareho ra
submission of a final accounting; and man mong rango, unya tagaan mog tagsa tagsa. Sayon ra
kaayo pagsolbad. Wa namay laing problema. This is equivalent
(b) The lifting of the Stay Order and any other court order
to judgment on the pleadings. Wa nay hearing hearing. Correct
holding in abeyance any action for the enforcement of a claim
ba nang imo? Klaro na kaayo. Naa namay uncontroverted
against the debtor.
evidence of indebtedness.
Provided, however, That if the termination of proceedings is
5. Section 92
due to failure of rehabilitation or dismissal of the petition for
reasons other than technical grounds, the proceedings shall be Section 92. Conversion by the Court into Liquidation
immediately converted to liquidation as provided in Section 92 Proceedings. - During the pendency of court-supervised or pre-
of this Act. negotiated rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation
Unsa may example ini? Due to failure of rehabilitation or
proceedings pursuant to (a) Section 25(c) of this Act; or (b)
dismissal of the petition for reasons other than technical
Section 72 of this Act; or (c) Section 75 of this Act; or (d)
grounds. Rehab siya nagimpose siyag rehab. Ingon siya. Mao
Section 90 of this Act; or at any other time upon the
ni akong assets. My number one assets is my holdings in this
recommendation of the rehabilitation receiver that the
particular other corporation. Gwapo kaayo ing corporation,
rehabilitation of the debtor is not feasible. Thereupon, the
dako kaayo kog holdings ani na corporation, and this
court shall issue the Liquidation Order mentioned in Section
constitutes more than 50% of my assets. Now while the court
112 hereof.
examines, all of a sudden they discover that this corporation,
the shares of stock of which is the major bulk of the assets of
this corporation under rehabilitaiton proceedings, kadto diay Recommends to the court, and the court issues an order.
nabankrupt. Zero diay ang balor ngadtong assets na giingon Because the receiver believes that it can no longer be
nimong 50% of the assets of the corporation. Wa nay balor. rehabilitated.
No more. It is practically without assets because the bulk of its
assets is proven to be without value. This is not just based on So remember ha, no matter what proceeding it is in,
technical grounds. This is substantial grounds. SO therefore it suspension of payments, voluntary rehabilitation, involuntary
is ordered liquidated, and the assets converted to cash by rehabilitation, petition for voluntary insolvency, petition for
execution sale and the assets are distributed to its rightful involuntary insolvency, they can all be changed into liquidation
owners in accordance with the concurrence and preference of if they fall into any of the five instances that are mentioned in
credits. the FRIA law.

4. Section 90 What are the exceptions to the stay order? In other words
when does the stay order NOT apply?
Section 90. Voluntary Liquidation. - An insolvent debtor may
apply for liquidation by filing a petition for liquidation with the 1. To appealed cases pending before the Supreme Court
court. The petition shall be verified, shall establish the between a debtor and creditor. That creditor is no longer
insolvency of the debtor and shall contain, whether as an covered by the Stay Order. Section 18(a).
attachment or as part of the body of the petition; (a) to cases already pending appeal in the Supreme Court as
(a) a schedule of the debtor's debts and liabilities including a of commencement date Provided, That any final and executory
list of creditors with their addresses, amounts of claims and judgment arising from such appeal shall be referred to the
collaterals, or securities, if any; court for appropriate action;

(b) an inventory of all its assets including receivables and 2. Pending cases before specialized court, quasi-judicial
claims against third parties; and agency. Section 18(b).

(c) the names of at least three (3) nominees to the position of (b) subject to the discretion of the court, to cases pending or
liquidator. filed at a specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim
At any time during the pendency of court-supervised or pre-
more quickly, fairly and efficiently than the court: Provided,
negotiated rehabilitation proceedings, the debtor may also
That any final and executory judgment of such court or agency
initiate liquidation proceedings by filing a motion in the same
shall be referred to the court and shall be treated as a non-
court where the rehabilitation proceedings are pending to
disputed claim;
convert the rehabilitation proceedings into liquidation
proceedings. The motion shall be verified, shall contain or set
3. Claims against sureties, persons solidarily liable, Coverage for the exam:
accommodation mortgagors, issuers of letters of credit. Section
Securities Regulation Code
18(c), reiterated by the SC and validated in the case of JAPRL
Development Corporation vs. Security Bank, 2011 650 SCRA PD 902-A
645.
New Central Bank Act
(c) to the enforcement of claims against sureties and other
General Banking Law of 2000
persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters of Financial Rehabilitation and Insolvency Act
credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of Anti-Money Laundering Law with the latest amendments
the debtor as determined by the court upon recommendation (Father talks about how casinos should be included in the list
by the rehabilitation receiver; of exceptions to AMLA but Congress is too busy discussing
EJKs.)
A creditor can demand payment from the surety solidarily
liable with the corporation seeking rehabilitation, it not being
included in the list of stayed claims.
END OF COVERAGE. KJavier
4. Where the debtor is a securities market participant, like a
broker in a stock market, actions to recover moneys entrusted
to the broker in the ordinary course of business or any
settlement of claims by the exchange are not covered by the
Stay Order.
This is to protect foreign investors from the right to recover
their investments trusting on the liquidity of our stock
exchanges. In order that we can preserve our institutional
international investors, like investment funds abroad, huge
retirement funds abroad, these people, if they enforce their
claims against an insolvent player in the stock market like their
broker, to return to them shares of stock which they left with
their broker uncertificated. They cannot be stopped. Otherwise
nobody will believe our stock markets.
5. Transactions through clearing agencies, similar entities
registered with the BSP or SEC., and settlements demanded by
such agencies for transactions done for the debtor. Section
18(e).
That is also because of similar considerations as the preceding
exception of a broker of a stock exchange.
6. Not included in the Stay Order is criminal actions against the
debtor. Section 18(f).
This has been recently—relatively recently—confirmed by SC in
Umale vs ASB Realty Corp 2011, 652 SCRA 215, whereby the
Court ruled there is no reason why a criminal proceeding
should be suspended during corporate rehabilitation.
That is the bulk of FRIA. (chika about Intra-Corporate Court
and Financial Rehabilitation Court being in the same sala in
Davao)
This law probably will get one chance of a question in the bar
examination. So now I ask you read it, because by the time
you go to the bar examination, third Sunday, I don’t think
you’ll be reading on FRIA. You’ll be concentrating on the five
top topics: Transportation Laws, Insurance, Corporation Law,
Negotiable Instruments and fifth, Credit Transactions. Sixth is
Special Laws. Naa na na tanan. Nahalo halo na nang special
laws. General Banking Act, Law on Banks, AMLA, Financial
Rehabilitation and so on.
Remember, the government has no chance to be in FRIA.
Unlike the US, States, counties, cities can seek protection
under the bankruptcy law. But our FRIA, government financial
institutions which contain in their charter an exemption cannot
be subjected to any proceedings in FRIA. For instance, SSS.
Dili gyud na kaabot sa FRIA. Ngano man? Where is the
exemption there? The exemption there is the provision that
says “all benefits in the SSS are guaranteed by the sovereign
republic.”
GSIS Law. “All benefits provided for under this law are
guaranteed by the sovereign republic of the Philippines.” So di
gyud na kaabot dinhi sa FRIA. Pag-ibig, also, and so on.