ilahang bride nga gi-order kay gi-examine naman nila.
Is that a
January 19, 2017 (NDBajenting)
THE SECURITIES REGULATION CODE
R.A. No. 8799
Section 1. Title. - This shall be known as "The Securities
Regulation Code."
The predecessor of the The Securities Regulation Code (The
SRC) is the Revised Securities Act (RSA). So, it used to be
copied from the U.S. federal law, the Securities Act. The
Securities Act for us, securities law, and the Revised Security
Act is gone. It is now the SRC. But in the U.S., they still have
the Securities Act. What does it tell us, that the U.S. still has
the Securities Act? And it is just interpretations of law that
keeps it holding along with Supreme Court Decisions. And they
just keep on adding provisions in the Securities Act. But we
were not satisfied, we changed the law completely, and so we
have the SRC.
Q: What is The Securities Regulation Code?
A: The SRC is known as the BLUE-SKY LAW. The blue-sky
law is taken from the decision of the U.S. SC, where the SC
affirmed the validity and constitutionality of the Securities Act.
The Court made a pronouncement which has since been
repeated again. The Securities Act is intended to protect the
investing public. That is the purpose.
The Court differentiated that when you buy intangibles, the
regular time-honored principle in sales, known as caveat
emptor, does not hold. Caveat emptor, has been translated
as, “Let the buyer beware!”. You are going to buy a horse, you
should beware and you should not take the word of the horse
trader hook, line, and sinker–to mix metaphors. That’s bad
English. Gamiton nimo sa horse trading ang fish metaphor—
that is mixing metaphors.
Q: Why is caveat emptor no longer applicable?
A: Because there is nothing to be examined.
Unlike the horse—subject matter of the sale, it cannot open
the mouth and count the teeth to verify the age of the horse
you are buying. The horse owners made a warrant that the
horse is not more than three (3) years old. You open the
mouth and when you count and see the teeth, “Oh, so this
must be more than 3 years old.”
What will you examine when you are sold shares of stock?
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
literature is as good as the referent.
Suppose you are one of the twenty-million Chinese who are for
all purposes made to live a single life. Why? Because they are
living in the rural agricultural part of China that has not left
gender in cases of birth, to chance. All the girls who were born
there had been drowned because it should be male children
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
can work in the farm, the female can work in the farm only a
little. They are put to plow field and do all sorts of heavy work.
Where will they get females to marry? For those who have
been able to amass a respectable fortune from their
agricultural enterprise, they will have some money to purchase
a mail-order bride. Where is the mail-order bride coming from?
It’s coming from Burma, Cambodia, Laos. And these mail-order
bride brokers come with pictures and resumés of those that
are available for marriage and that is what the males in rural
China look at. They look at the literature about this bride that
they are supposed to import and marry. Is that doing the due
diligence following caveat emptor by looking at these
descriptions and pictures? Because if it is, then dili na nili mauli
caveat emptor? It might be caveat, but it is not a caveat
emptor. “Sigurado ka ba mao ning nasa litrato gyud? Mao ba
gyud ni? Basin gigunting lang nang litrato sa magazine.” Unya
pag-adto didto, “Unsa man ning ni-a, tiguwang man diay ning
akong giminyo?! Batan-on man tong sa litrato, nganong
natiguwang man ni?!” Nadugay man gud padala ang post
office mao nang natiguwang.
By reading more literature about the subject matter, we do not
get to know the subject matter when it comes to sale. That is
only in law. More reading of law makes you know the law
more. But in sales, you do not get to know the thing at which
you are paying for, just because you have read more. You
must examine the thing itself. That is when caveat emptor
works. The U.S. SC says, “Caveat emptor is limited to tangibles
only. But even then, if it is tangible and it is not open to
examination— it is packed, sealed, you cannot inspect it until
after you pay for it, there is no caveat emptor principle that is
applied.” So, because securities that are bought and sold are
not subject to the caveat emptor principle, you cannot
examine it. And it is a complex thing that you are buying, you
need a law to be protected from the scams and schemes of
these people <I just changed the word FGN used kay wala sa
dictionary 😊> who often have nothing more to sell than a
few feet from the blue sky. That is what the SC in the U.S.
says. Schemes and scams in securities for sale are often
reduced to selling nothing more than a few feet of the blue
sky. That is why it is called the blue-sky law.
Sa sunod gani pangutan-on mo, what is the blue-sky law?
Ans.: Taken from the pronouncement of the U.S. SC, by which
the SC says, the purpose of the Securities Act, is to protect the
investing public against schemes and scams that purport to sell
nothing more than a few feet from the blue sky.
Sa ato pa, wala’y gibaligya. Hangin ra’y gibaligya. Wala’y unod
ang gibaligya. But look at this Declaration of State Policy now
under The SRC:
Section 2. Declaration of State Policy. – The State shall
establish a socially conscious, free market that regulates
itself, encourage the widest participation of ownership in
enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect
investors, ensure full and fair disclosure about securities,
minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which
create distortions in the free market. To achieve these ends,
this Securities Regulation Code is hereby enacted.
There are so many aims now added to that single pertinent
aim of protecting investors.
The SRC begins with Section 3, Definition of Terms. It says
definition of terms, but there are no definitions if you take a
look at this section, which has several paragraphs up to 3.15.
There is no definition of security. what do you have? You have
an enumeration of that securities:
Section 3. Definition of Terms. - 3.1. "Securities" are
shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instruments, whether
written or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certifies of
deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar
instruments
(f) Proprietary or nonproprietary membership certificates in
corporations; and
(g) Other instruments as may in the future be determined by
the Commission.
3.2. "Issuer" is the originator, maker, obligor, or creator of
the security.
3.3. "Broker" is a person engaged in the business of buying
and selling securities for the account of others.
3.4. "Dealer" means any person who buys sells securities for
his/her own account in the ordinary course of business.
3.5. "Associated person of a broker or dealer" is an employee
therefor whom, directly exercises control of supervisory
authority, but does not include a salesman, or an agent or a
person whose functions are solely clerical or ministerial.
3.6. "Clearing Agency" is any person who acts as
intermediary in making deliveries upon payment effect
settlement in securities transactions.
3.7. "Exchange" is an organized market place or facility that
brings together buyers and sellers and executes trade of
securities and/or commodities.
3.8. "Insider" means (a) the issuer; (b) a director or officer
(or any person performing similar functions) of, or a person
controlling the issuer; gives or gave him access to material
information about the issuer or the security that is not
generally available to the public; (d) A government
employee, director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access to
material information about an issuer or a security that is not
generally available to the public; or (e) a person who learns
such information by a communication from any forgoing
insiders.
3.9. "Pre-need plans" are contracts which provide for the
performance of future services of or the payment of future
monetary considerations at the time actual need, for which
plan holders pay in cash or installment at stated prices, with
or without interest or insurance coverage and includes life,
pension, education, interment, and other plans which the
Commission may from time to time approve.
3.10. "Promoter" is a person who, acting alone or with
others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefor.
3.11. "Prospectus" is the document made by or on behalf of
an issuer, underwriter or dealer to sell or offer securities for
sale to the public through registration statement filed with
the Commission.
3.12. "Registration statement" is the application for the
registration of securities required to be filed with the
Commission.
3.13. "Salesman" is a natural person, employed as such as an
agent, by a dealer, issuer or broker to buy and sell securities.
3.14. "Uncertificated security" is a security evidenced by
electronic or similar records.
3.15. "Underwriter" is a person who guarantees on a firm
commitment and/or declared best effort basis the distribution
and sale of securities of any kind by another company.
In one BAR examination, it was asked: What is the Howey
Test?
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,
that decided case became the yardstick of when an investment
contract becomes a security.
Q: When does an investment contract become a security?
What are the facts of that case?
A: There was this owner of a rather extensive estate in Florida.
It was planted with Florida oranges. And this owner, offered to
the public that he was subdividing his orchard and he was
selling it, one (1) unit would be three (3) acres (3 acres = 1.21
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
the owner who will accept, run the orchard for you, and then
there will be a profit sharing. You will get a share of the
profits. He alone will be working for you. Then this owner, by
using the postal system, mailed to the different people of New
York, giving them a brochure of what he was selling. You have
a choice. You want an orchard—mubakasyon ka didto pila ka
semana/buwan, layo baya na kaayo. Katilaw ka sa imong
kaugalingon nga orchard oranges. O dili ba, imong ihatag ug
balik ug ako’y mutrabaho unya bahinan ka lang nako ug kita.
Ang kita ini labaw pa sa bank deposit. Now, he did that
without first registering these investment contracts that he was
selling. So, the U.S. Securities and Exchange Commission ran
after him. He was also indicted for violating the postal laws.
Because you can only sell securities using the post office only
after you have registered. If you have not registered, and you
sell these things, it is a violation of the postal laws. It’s a
criminal violation. Then he challenged the accusation of the
SEC. “I am not selling any securities to the public. Those who
are buying from me, they are buying real estate. And it is up to
them. They want to make me work at it, and we will just split
the profits. That is ordinary. That is not a security.” So finally,
it went to the SC. Pildi man siya sa circuit court. Ang iyang
kumpanya, Howey man ang name. And the SC came out with
a ruling:
An investment contract becomes a security:
1. When there is an enterprise. – That enterprise is
characterized by the investor putting in money to
that enterprise.
2. The one who works that enterprise is another
person other than the investor and independent
of the instructions of the investor. – He works on
it alone. Alone in the sense that the investor does
not participate in the working of the enterprise.
3. The profits that are realized therefrom are wholly
independent from the exertion or the
participation of the investor. – The investor has
nothing to do, whether or not there is a profit.
He is completely detached, he just relies on this
other fellow who is out there trying to make a
profit. And he gets a share of the profits.
So, if you have that, then you have a security. And
because it is a security, you cannot sell it without first
registering it with the U.S. SEC.
SEC vs. W. J. Howey Co., 328 U.S. 293 (1946), was a case in
which the Supreme Court of the United States held that the
offer of a land sales and service contract was an "investment
contract" within the meaning of the Securities Act of 1933
U.S.C. § 77b and that the use of the mails and interstate
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
case in determining the general applicability of the federal
securities laws. ~ Wikipedia
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
Court: SEC Chairperson Herbosa, et al. vs. CJH
Development Corporation and CJH Suites Corporation,
3rd Division, Peralta, J. November 28, 2016, G.R. No.
210316.
CJH is “Camp John Hay” Development Corporation (CJHDC).
This is the corporation that won the right to develop CJH after
it was bid out. This corporation is controlled by the infamous
Mr. Sobrepeña. Infamous because he is behind the great
corporation that collapsed— The College Assurance Plan, Inc.
(CAP). Pre-need. Daghan kaayong pamilya tawon nga naloko
niana. Nagbayad sa ilang binulan, hangtod nahuman ug bayad,
wala na’y nahibilin. Nahurot nang kwarta. Who among here is
a CAP child? <Naa’y gi-interview si FGN> Wa pa naandam ang
kinainitang bahin sa impyerno aning tawhana. That is just
robbery.
Anyway this is another scam of Sobrepeña. You read this and
you will set your ears on fire. CJHDC entered into a Lease
Agreement with the Bases Conversion Development Authority
(BCDA), the same body that converted, sold, Fort Bonifacio for
real property development supposed to be to modernize the
armed forces. Pero ambot ha-in na ang kwarta ato. (More
segue: You know in Baguio there is a property where the SC
has several cottages. They may hold sessions there during the
summer because it is hot in Manila. So they go to Baguio. And
we know that CJH used to be owned by the US Armed Forces
for rest and recreation of its military personnel because morale
is essential to the members of the armed forces. That is where
the officers from the Vietnam war used to go.) CJH was
opened up for bidding. CJHDC bid three condominium units
there. And then, it offered the condominium units to the
public. But, the public did not take to the sale of the
condominiums. So, what happened? Sobrepeña came up with
a development plan which was to construct condotels. These
condotels were offered to the general public by means of two
schemes. The first is straight purchase. The other scheme
added an option to avail of a “leaseback” or a “money-back”
arrangement. If you buy a condominium, you can lease it back
to the seller. And the seller Sobrepeña would open it up to
foreigners who will be coming to CJH to play golf, recreate,
take advantage of the cool weather of Baguio. And out of the
rent, he will deduct the expenses and you will share in the
profits.
Doesn’t that sound familiar to you? The trouble is, he started
selling this without registering these particular contracts with
the SEC. And the SEC Investigation Department said, “You are
selling securities without registering the securities as required
by The SRC.” So, Sobrepeña fought it out and in fact he got a
decision in favor of CJHDC. CA ruled in his favor. “There is no
security, etc.” So, SEC Commissioner Herbosa went to SC.
What did SC say? SEC is correct. That is a security! You should
have registered before you sold. So, SC castigated the CA for
lifting the restraining order. The restraining order should have
been made permanent. You cannot sell the security. You are
restrained from selling the security because you have not
registered. Unsa ma’y imong prayer sa korte? “Hununga
pagbaligya ini,” matod pa sa SEC. Ang respondent, “Lift the
restraining order.” SC Decision: The injunction/restraining
order, is made permanent.
What’s the dispositive portion?
WHEREFORE, the petition is GRANTED. The Decision of the
Court of Appeals, dated June 7, 2013, and its Resolution
dated November 28, 2013, in CA-G.R. SP No. 125482 are
REVERSED and SET ASIDE. The Writ of Preliminary
Injunction, per CA Resolution dated November 8, 2012,
which was made permanent by its June 7, 2013 Decision, is
hereby LIFTED. SEC-CDO Case No. 05-12-006 and the June
7, 2012 Cease and Desist Order of the Securities and
Exchange Commission are REINSTATED.
That’s very interesting, you read the case. This case has no
reference to the Howey test. How did the SC arrive at the
decision that this is a security? No mention at all. Make sure
everybody has read the case. Mugawas ni sa Bar.
Remember that the requisites for paying a security is only true
as to an investment contract— one of the enumerated
securities in The SRC.
There are five (5) kinds of securities basically:
1. Proprietary interest
The primary example of proprietary interest is shares
of stock.
2. Credit interest
Utang ba, mutuum. It could be bonds, commercial
papers, acceptances of receivables, many kinds of
features of credits.
3. Participation in interest
Lunod2x ka lang, pusta2x. Wa ka mupalit, ningpusta
ka lang. Kanang investment contracts, certification in
interest for participation in profit sharing agreement,
certificate of deposit for a future subscription, etc.
4. Derivatives
Q: What is a derivative?
A: A derivative is a security, the underlying asset of
which is another security.
Explanation: What are you selling? You are selling a
warrant. A warrant is a right to purchase shares of
stock at a given strike price which is good for a
number of months.
So let us say, the warrant is good for one (1) year.
You buy a warrant today, to buy BDO shares, at a
trade price today which is Php 112.00 per share. And,
you buy this warrant to be able to buy shares.
“Warrant to buy 1,000 BDO shares at Php 112.00
selling price per share.” So, you have a right to buy.
What is the asset value in that security? The asset
value in that security is another security which is
shares of stock of BDO. Ang nagpailawom nga value
is another security. Kintahay imong gipugngan na,
naghuwat ka, at the end of the year, all of a sudden
you find out that BDO is now Php 140.00 per share.
Nagtan-aw ka sa imong warrant, malipay ka ba or
maghilak? Malipay ka kay you can buy at Php 112.00
per share which is for sale at Php 140.00 in the
market. Naa pa kay ginansya. Ingon ka, “Wala man
kay ikapalit.” O, kasayon ana. Tawagon nimo ang
broker. Ang broker muhatag nimo ug kwarta unya
bahinan nimo siya sa ginansya. Wa na kay problema
sa pagpangita ug kwarta ana. But come 12 months
from now, the price of BDO is only at Php 108.00 per
share, unya ang imong warrant Php 112.00. Maunsa
man ka? Mas barato pa ug wa kay warrant. Mupalit
ka nalang sa stock market at Php 108.00 per share.
Ang imong warrant, gision nalang ‘to nimo kay wa
nama’y kapuslanan. You see, derivative is a security
the underlying asset of which is another security.
5. Pre-need plans
Now here’s an interesting thing of our SRC. Because
our SRC specifically says that pre-need plans are
securities. In the US, pre-need plans are not
securities. Dinhi ra na. Why? For God’s sake, I don’t
know. Because pre-need plans are a hybrid security.
Wa pa nimo kinahanglana kanang pre-need plan para
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
kandila, naa ba’y listahanan sa mga guests. Those are
all specified in the pre-need plan. When will you use
it? When you are dead. Karon buhi ka pa, that is all
you pay for it. You keep on paying. After you have
finished, you have done your part, you wait for your
own death. Then when you die, the pre-need
company will perform its part of the bargain, provide
you with your funeral services. What happens if you
die before finishing the complete payment? Not to
worry, because there is an insurance feature in the
pre-need plan. You are insured. If you die, you have
not finished paying, you will be considered to have
paid it completely because the insurance pays the
balance. Why is the company that issues this type of
plan very generous nga kung mamatay ka, wa pa ka
kahuma’g bayad then they will consider it fully paid?
Because the risk of abuse is very little. Ug gusto gyud
ka magpahimulos gyud ana, “Ay, dili nalang ko
mubayad, pakamatay nalang ko.” Pila may mubuhat
ana— magpakamatay ka aron mu-take advantage ka
sa imong premium? That is too far-fetched. That’s
why they include that as a feature. Who is in charge
of that? The insurance commissioner because that is
an insurable interest, part of the scheme is insurance.
So, they actually issued you a policy that is approved
by the insurance commissioner, not just the SEC. And
yet, The SRC puts it as a security.
You know, all securities have what they call a
secondary market. You can buy and sell security
before it matures. Shares of stock, you have the stock
exchange (PSE). Kini ni-ang pre-need, nahuman na
nimo’g bayad. Can you buy and sell the pre-need plan
for funeral services? Nakadungog na ba ka ana? Is
there a market for that? Nakadungog ko nga naa kay
plan, unya muingon ka nga ang namatay imo mang
inahan, gihatag nalang nimo niya, goodbye ka na.
Nagamit na. It’s not bought and sold like shares of
stock. There is no secondary market for pre-need
plans. And yet, The SRC says it is a security. And it
includes all kinds of pre-need plans, ha.
Section 3. xxx
Section 3.9. "Pre-need plans" are contracts which
provide for the performance of future services of or
the payment of future monetary considerations at the
time actual need, for which plan holders pay in cash
or installment at stated prices, with or without
interest or insurance coverage and includes life,
pension, education, interment, and other plans which
the Commission may from time to time approve.
By the way, do you remember FRIA? There are
certain entities that are exempt from FRIA, mostly
they are government financial institutions which in
their charter the government is directly liable or is the
direct guarantor of this financial establishments.
Other entities that are exempt from FRIA are
these pre-need companies! Unsa man na,
sagubangon sa gobyerno?! It’s not loan but that is
the fifth kind of security— Pre-need plans.
These are the groupings of securities.
The requirement for registration of securities is found in Sec.
8:
Section 8. Requirement of Registration of
Securities.– 8.1. Securities shall not be sold or offered for
sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the
securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each
prospective purchaser.
8.2. The Commission may conditionally approve the
registration statement under such terms as it may deem
necessary.
8.3. The Commission may specify the terms and conditions
under which any written communication, including any
summary prospectus, shall be deemed not to constitute an
offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in
Register Securities in which shall be recorded orders
entered by the Commission with respect such securities.
Such register and all documents or information with the
respect to the securities registered therein shall be open to
public inspection at reasonable hours on business days.
8.5. The Commission may audit the financial statements,
assets and other information of firm applying for
registration of its securities whenever it deems the same
necessary to insure full disclosure or to protect the interest
of the investors and the public in general.
So you have to register, and then you pay the registration fee.
If not, then you have to apply for exemption on registration
and the exemption of registration also has a fee but it is lower
than the registration fee. So you are not really completely free
of fees. You have a family corporation and the family
corporation is being formed. So pre-incorporation subscription,
you register it with the SEC, the SEC will determine if you can
be exempt, you are applying for exemption because it’s only
family you are not selling it to the public. So apply ka, but then
you find out naa man gihapon diay fee, but it is smaller than
the fee required for registration of securities that are offered
for sale to the public.
Section 10. xxx
10.2. The Commission may exempt other transactions, if it
finds that the requirements of registration under this Code is
not necessary in the public interest or for the
protection of the investors such as by the reason of the
small amount involved or the limited character of the public
offering.
10.3. Any person applying for an exemption under this
Section, shall file with the Commission a notice identifying the
exemption relied upon on such form and at such time as the
Commission by the rule may prescribe and with such notice
shall pay to the Commission fee equivalent to one-
tenth (1/10) of one percent (1%) of the maximum value
aggregate price or issued value of the securities.
So, what do you need if you do not file for exemption? You
need to file what is called a registration statement. And the
registration statement is a description of the corporation or
those behind the corporation, if you are registering it as a
corporation, what is the purpose, what are the plans of the
corporation, etc. There is a complete discussion as to the
business side of the corporation and the personalities that are
involved.
Q: Are all securities required to be registered?
A: NO. There are two (2) kinds of securities that are not
required to be registered:
1. exempt securities
2. exempt transactions
EXEMPT SECURITIES
Section 9. Exempt Securities. – 9.1. The requirement of
registration under Subsection 8.1 shall not as a general rule
apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the Government of
the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of
any country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and
content for disclosures the Commission may prescribe.
(c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory body.
(d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of the
Office of the Insurance Commission, Housing and Land Use
Rule Regulatory Board, or the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of
stock.
Discussion:
9 (a) Any security issued or guaranteed by the Government
of the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
The government does not have to register its own security. An
example of a security that the government issues are
treasury bills. Every Monday, the government auctions off
security bills. What are the security bills? IOUs of the treasury
of the Philippines. Government needs money to run. There are
payrolls to be met, operation expenses to be incurred but the
government collects taxes at periodic times. Personal income
taxes are collected annually, corporate income tax is normally
quarterly, and so on. So, they borrow money from the public
by way of treasury bills. They auction these treasury bills. On
Wednesday, they receive and gather all the bids, then they
open the bids. By Friday, they award the bids. Sometimes,
they pronounce a failure of bidding because they don’t agree
with the interest that the bidders are willing to pay.
You know treasury bills are zero interest bills. So how do you
derive interest? You derive interest by giving it at a discount—
A face value of P 1 Million, if you bid for it, for P 900,000, that
means that the interest you pay is 10%, is it not? P 100,000 is
10% of P 1 Million. That is how the no-interest bill is sold at a
discount.
But if it is with interest, and the interest is already carried on
the face of it then you make money according to the yield. The
price at which you pay which is lower or higher than the face
value. That is the yield of a particular security— whether it be
a bond or a commercial paper, or it be a participation in
interest. And it is bought and sold before its maturity in the
secondary market. You buy and sell these securities.
EXEMPT TRANSACTIONS
Q: What is an example of an exempt transaction?
A:
Section 10. Exempt Transactions. – 10.1. The
requirement of registration under Subsection 8.1 shall not
apply to the sale of any security in any of the following
transactions:
(a) At any judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or bankruptcy.
Here is an estate that is being administered by the court. And
the estate has many earning assets. Suppose the receiver
says, “We need cash to maintain all these different hotels, all
these earning assets, to pay the taxes because the end of the
year is coming and we have to pay real estate taxes.” How can
we make this money? The court now asks the receiver, “How
do you propose that the estate earn money?” “It should sell
securities, like a bond! Borrow money from the public at a
determined price.”
Q: Now the bond that the estate sells, is an exempt security.
Why?
A: Because there is already a government entity/authority
overseeing the propriety of the issuance of the shares.
Q: What government authority?
A: The court itself. That is why it is an exempt security.
Section 10 (d) The distribution by a corporation actively
engaged in the business authorized by its articles of
incorporation, of securities to its stockholders or other security
holders as a stock dividend or other distribution out of surplus.
So when a private corporation declares stock dividend, it is
issuing a security. And yet, if it is distributed only among
stockholders in a corporation, the public is not involved. You
are not afraid of misleading the public because the public is
not at all the buyer. It’s only the stockholders so that is called
an exempt transaction. And so on, you can go down the list in
Section 10. <Read Sec. 10 sa codal nalang. Mahaba.>
Now, suppose a registration statement which is actually an
application for registration is found to be sufficient in form and
substance, the next thing is normally the approval of security
but the SEC does not approve the security. Why? The SEC
might be misinterpreted as endorsing it for sale. Hala pamalit
na mo niini kay approved ni. The SEC only declares a security
because this registration statement is sufficient in form and
substance, it will declare it as in effect. So now you can sell it
because it is now in effect. There is no approval of a
registration statement. It’s a very small technicality.
Q: When can the SEC deny registration of security?
A: Under Section 12.
12.6. Within forty-five (45) days after the date of filing of the
registration statement, or by such later date to which the
issuer has consented, the Commission shall declare the
registration statement effective or rejected, unless the
applicant is allowed to amend the registration statement as
provided in Section 14 hereof. The Commission shall enter an
order declaring the registration statement to be effective if it
finds that the registration statement together with all the
other papers and documents attached thereto, is on its face
complete and that the requirements have been complied
with. The Commission may impose such terms and conditions
as may be necessary or appropriate for the protection of the
investors.
Take note ha, it does not say “APPROVED”. It says,
“EFFECTIVE or REJECTED.”
Section 13. Rejection and Revocation of Registration
of Securities. – 13.1. The Commission may reject a
registration statement and refuse registration of the security
there-under, or revoke the affectivity of a registration
statement and the registration of the security there-under
after the due notice and hearing by issuing an order to such
effect, setting forth its finding in respect thereto, if it finds
that:
(a) The issuer:
 (i) Has been judicially declared insolvent;
(ii) Has violated any of the provision of this Code,
the rules promulgate pursuant thereto, or any
order of the Commission of which the issuer has
notice in connection with the offering for which a
registration statement has been filed
(iii) Has been or is engaged or is about to engage
in fraudulent transactions;
(iv) Has made any false or misleading
representation of material facts in any prospectus
concerning the issuer or its securities;
(v) Has failed to comply with any requirements
that the Commission may impose as a condition for
registration of the security for which the
registration statement has been filed; or
xxx
That is the list of causes that may be attributable to the issuer.
The issuer could be the corporation that issues the securities.
Again, causes of rejection that is attributable to the
registration statement itself:
xxx
(b) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue
statements of a material fact required to be stated therein or
necessary to make the statement therein not misleading; or
And then:
(c) The issuer, any officer, director or controlling person
performing similar functions, or any under writer has been
convicted, by a competent judicial or administrative body,
upon plea of guilty, or otherwise, of an offense involving
moral turpitude and /or fraud or is enjoined or restrained by
the Commission or other competent or administrative body
for violations of securities, commodities, and other related
laws.
For the purposes of this subsection, the term "competent
judicial or administrative body" shall include a foreign court
of competent jurisdiction as provided for under Rules of
Court.
So if you have been convicted by the SEC in the U.S. for
engaging in fraudulent activities, and you are one of the
officers of a corporation that issues a security in the
Philippines, you can be denied registration because one of your
officers has been found to have violated the securities law in
another jurisdiction as ruled upon by a foreign court.
Because you know, this is entered into by the World Trade
Organization— cooperation between security exchanges all
over the world.
So, amendment of registration statement is by permission of
the SEC.
Section 14. Amendment to the Registration
Statement. – 14.1. If a registration statement is on its face
incomplete or inaccurate in any material respect, the
Commission shall issue an order directing the amendment of
the registration statement. Upon compliance with such order,
the amended registration statement shall become effective in
accordance with the procedure mentioned in Subsection 12.6
hereof.
14.2. An amendment filed prior to the effective date of the
registration statement shall recommence the forty-five (45)
day period within which the Commission shall act on a
registration statement. An amendment filed after the effective
date of the registration statement shall become effective only
upon such date as determined by the Commission.
14.3. If any change occurs in the facts set forth in a
registration statement, the issuer shall file an amendment
thereto setting forth the change.
14.4. If, at any time, the Commission finds that the
registration statement contains any false statement or omits
to state any fact required to be stated therein or necessary to
make the statements therein not misleading, the Commission
may conduct an examination, and, after due notice and
hearing, issue an order suspending the affectivity registration
statement. If the statement is duly amended, the suspension
order may be lifted.
14.5. In making such examination the Commission or any
officer or officers designated by it may administer oaths and
affirmations and shall have access to, and may demand the
production of, any books, records or documents relevant to
the examination. Failure of the issuer, underwriter, or any
other person to cooperate, or his obstruction or refusal to
undergo an examination, shall be a ground for the issuance
of a suspension order.
How about regulation of pre-need plans?
Section 16. Pre-Need Plans. – No person shall sell or offer for
sale to the public any pre-need plan except in accordance
with rules and regulations which the Commission shall
prescribe. Such rules shall regulate the sale of pre-need plans
by, among other things, requiring the registration of pre-need
plans, licensing persons involved in the sale of pre- need
plans, requiring disclosures to prospective plan holders,
prescribing advertising guidelines, providing for uniform
accounting system, reports and recording keeping with
respect to such plans, imposing capital, bonding and other
financial responsibility, and establishing trust funds for the
payment of benefits under such plans.
Pre-need plans require disclosure. Disclosure, with respect to
prospective plan holders.
Because pre-need plans are securities, those who sell it have
to be registered as sales persons and they require a license
under the SEC. Unya muingon ka nga, “But why is it that
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
securities gud na only registered brokers, dealers, sales
persons and associates of sales persons are allowed to sell
securities man?
Ah, these people are not actually selling these plans. They are
dicers. Maguwang lang na sila gamay or pareha ra na anang
mga barkers dira sa jeepney. “Dali mo dinhi, sakay mo,
paingon ni sa Bankerohan.” Barkers man na sila. Kanang sales
person, mao na’y paghatag nimo sa downpayment, sila na’y
mupirma that binds the pre-need companies. And then they
sign the policy and give it to you. That is when the sale is
consummated. These housewives who are dicing these pre-
need plans do not actually sell. Sale happens when the policy
is issued to you, and binding the pre-need issuer.
Let us now cross over to stock markets, rules with respect to
stock markets.
Q: What are the percentages that you must remember that
requires certain duties, especially reportorial duties with
respect to shares of stock traded in the stock market?
A: You have to remember four (4):
 5%
 15%
  30%
 50%+1.
If you buy up to 5% of the outstanding shares of a corporation
listed in the stock market, you have the duty under Section 18
to report by means of a sworn statement containing the
following information:
Section 18. Reports by five per centum (5%) Holders
of Equity Securities. – 18.1. In every case in which an
issuer satisfies the requirements of Subsection 17.2 hereof
any person who acquires directly or indirectly the beneficial
ownership of more than five of per centum (5%) of such
class or in excess of such lesser per centum as the
Commission by rule may prescribe, shall, within ten (10) days
after such acquisition or such reasonable time as fixed by the
Commission, submit to the issuer of the securities, to the
Exchange where the security is traded, and to the
Commission a sworn statement containing the following
information and such order information as the Commission
may require in the public interest or for the protection of
investors.
(a) The personal background, identity, residence, and
citizenship of, and the nature of such beneficial ownership by,
such person and all other person by whom or on whose
behalf the purchases are effected; in the event the beneficial
owner is a juridical person, the of business of the beneficial
owner shall also be reported;
(b) If the purpose of the purchases or prospective purchases
is to acquire control of the business of the issuer of the
securities, any plans or proposals which such persons may
have that will effect a major change in its business or
corporate structure;
(c) The number of shares of such security which are
beneficially owned, and the number of shares concerning
which there is a right to acquire, directly or indirectly, by; (i)
such person, and (ii) each associate of such person, giving
the background, identity, residence, and citizenship of each
such associate; and
(d) Information as to any contracts, arrangements, or
understanding with any person with respect to any securities
of the issuer including but not limited to transfer, joint
ventures, loan or option arrangements, puts or call
guarantees or division of losses or profits, or proxies naming
the persons with whom such contracts, arrangements, or
understanding have been entered into, and giving the details
thereof.
xxx
You have to report to the SEC who the beneficial owner is of
the shares of stock of the 5% of the outstanding capital stock
of the corporation bought. In other words, the law does not
assume that the name that is carried on in the books of the
corporation as owning those shares is itself the beneficial
owner. Somebody else may be a beneficial owner. And you
must disclose.
Now, if you are Juan Dela Cruz, you bought these shares and
you are also the beneficial owner, you are not just the titular
owner, you are also the beneficial. Then you must state that in
the disclosure which you file with the SEC within ten (10) days
after such acquisition or such reasonable time as fixed by the
Commission.
Now it is five (5) days according to the rules of the PSE.
Because the PSE is a self-regulatory organization (SRO). Its
rules are more stringent than the SRC. You must reveal within
five (5) days who the beneficial owner is. What happens if you
cannot tell who the beneficial owner is? How come you cannot
tell?! Pangutan-on diay nimo kanang nagpapalit nimo, “Kinsa
man beneficial owner niini?” Maayo lagi ug siya gyud nipalit.
Ug dili siya?
I’ll give you an example: Credit Suisse, is suddenly given a
corpus of funds to spread indirect investments in five (5) Asian
countries which it thinks are the safest investments, in view of
what is happening in Europe. So, “Ibutang ko ni sa Korea,
Japan, Singapore, Malaysia, unya mubutang sad ko sa
Pilipinas.” Credit Suisse is already a manager of a fund.
Unsaon man niya pagpalit diri sa Pilipinas nga wala man siya’y
[seat (?)] diri sa Pilipinas? Mu-contact siya ug stockbroker sa
Pilipinas. “Buy me the following: 1 Million shares in Meralco, 1
Million shares in San Miguel, 1 Million in PLDT.” Sisiw ra man
na sa ila nang kwartaha. Pagpalit ana, let us say that is 5%
already of the outstanding capital stock of these companies.
So, the broker has to report. Who is your beneficial owner? He
has to do it within five (5) days. Pag report niya, kinsa ma’y
beneficial owner ana? Unya, “Wa man ko kaila kinsa’y
beneficial owner niini kay ang nagpalit niini, broker man sad sa
Credit Suisse didto sa Zurich.” So inig report niya, ang broker.
Muadto nasad ka ato nga Credit Suisse broker, “Kinsa man
ning imong principal nga gidala?” “Kining CFE Fund, it is a fund
that is traded in the stock exchange in Zurich. This particular
fund.” “Kinsa man beneficial owners anang fund?” “Daghan.”
Kining CFE Fund ga-manage ni ug mga funds of some of the
biggest retirement funds in the world. And it is managing part
of the so-called CalPERS. Unsa man nang CalPERS? California
Public Employees' Retirement System, which is something like
USD 280 Billion. Ang ilang mga analysts mutan-aw man sa
mga funds. Ha-i man nga fund ang gwapo ug returns? Ibutang
nila, “Mao ni kwarta, kamo magdala niini. Bati gani ang return,
bawion namo.” Unya pakang2x man na because the rule in
investment is, you never put all your eggs in one basket. Imo
gyud balansehon. You are not expected nga sige ka ug
kadaog. You are expected not to lose. Dako man kaayo imong
fund, kinahanglan pugngan nimo nga dili mawala. So, it must
be international imong butangan. Tan-awa na sa Bloomberg. “I
am overweight in the Pacific because it is more prosperous
than EU.” Nagkagidlay naman ang EU. So, overweight sila diri.
Kung muisa nasad diri sa EU, basin diay ang Asia nasad
mulup-og. Bakwi dayon na nila, gawas nasad na nila ilang
kwarta butang nasad sa EU.
Unya ang source pa gyud tu-a outside the Philippine
jurisdiction. Mapugos ba na nimo ug reveal kung kinsa nang
beneficial owner? Very difficult. Muingon nalang ka ug broker
ka sa Pilipinas, “Ayaw nalang pugsa. Ug pugson na nimo,
tingali ug mang-withdraw na sila.” Once there is a massive
withdrawal of these investments, then the price of the stocks
will be affected. Daghan mubaligya. Pagtan-aw nimo sa
volume sa buying and selling daghan kayo gusto mubaligya
pero wala’y buyer diri. Mao na nang muubos na nang presyo.
Significant trading is done electronically. If you are
managing a fund, naa kay targets: Mao ni ang breakeven
price, Mao ni imong reasonable return price. Unya imo nang i-
program sa computer. Muabot na gani nga muginansiya ka,
desired return nimo which is not spectacular, baligya ka.
Automatic sad na connected sa broker imong program. The
broker electronically will tell the exchange he is selling.
Kung individual stockholder ang mu-participate sa stock
exchange telepono ra imo, kanang smartphone, unsa man na
bisan asa makatrade man ko. Mapildi gihapon ka anang mga
makina. Pag-abot sa ilang numero, paaak! Baligya dayon. Ug
ang price padulong na sa ubos, pag-abot sa breakeven,
baligya na. Unsa ma’y chance nimo individual anang pre-
programmed, automatic trading? Mao nang mga dagkong
funds.
BlackRock, USD 3 trillion in assets under management. Pinco,
almost USD 2 trillion in bonds under management. Singapore
Government Sovereign funds, over USD 200 billion worth of
investments. Mao na imong mga kalaban sa stock market.
Even the thought of stock certificates, that is passé. Stock
ownership now are represented by electronic evidence. If you
still resort to stock certificates, it increases the cost of buying
and selling securities. And many are allergic to that, mutaas
man ilang breakeven. Unya kung dagko kaayo dili ka gusto
nga mutaas imong breakeven. That is why the SEC wants to
know who these beneficial owners are so you will know who
you are up against.
Sunod, 15%. Nganong kinahanglan man nimo mahibal-an ang
15%? Because of Section 19.
Section 19. Tender Offers. – Any person or group of
persons acting in concert who intends to acquire at least
15% of any class of any equity security of a listed
corporation or of any class of any equity security of a
corporation with assets of at least fifty million pesos
(50,000,000.00) and having two hundred(200) or more
stockholders at least one hundred shares each or who
intends to acquire at least thirty percent(30%) of such equity
over a period of twelve months(12) shall make a tender
offer to stockholders by filing with the Commission a
declaration to that effect; and furnish the issuer, a
statement containing such of the information required in
Section 17 of this Code as the Commission may prescribe.
Such person or group of persons shall publish all request or
invitations or tender offer or requesting such tender offers
subsequent to the initial solicitation or request shall contain
such information as the Commission may prescribe, and shall
be filed with the Commission and sent to the issuer not alter
than the time copies of such materials are first published or
sent or given to security holders.
xxx
Gusto gani ka mupalit ug at least 15% of the outstanding
capital stock (OCS) of the listed corporation, you must make a
tender offer. Mupahibaw ka na sa SEC, unya ang SEC
mudirecho sa PSE nga naay mupalit up to 15%. So therefore,
even the small stockholders, they will make a tender offer.
“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
mahalin gikan sa imong 2%. <murag gina-illustrate lang ni
FGN unsaon pag proportion>
Q: Why is that the rule?
A: To make the availability of opportunity open to all
stockholders. Even the smallest minority stockholder is given a
chance. That is why you are asked to make a tender offer.
Gusto ka mupalit atong 15%. What if those people who want
to buy 15% already arranged it with somebody? Naa na sila’y
natawagan na stockholder nga dako, nagkasabot na sila sa
presyo, mao man nang ginatawag na over-the-counter deal.
Unya dili man na ipalakra dinha nga nagkasabot sila sa presyo.
Ug mupalit sila, dili 15%. 14.5% ra ang ilang paliton so dili sila
mahulog sa Section 19. Unya maghuwat nasad sila ug isa ka
tuig.
Then they come up with the next rule: If you are a person or a
joint interest and you acquire 30% or above of the OCS of a
listed company, whether you acquire it by creeping, ginagmay
over a period of 12 months, you must make a tender offer.
Pahibal-on nimo tanan nga 30% imong gusto kuhaon so that
everybody has a chance. What will the investors do? If they
want 30%, less than 30% ilang paliton, 29.5% aron dili sila
maigo niining 30% rule. Unya muhuwat nasad sila ug one (1)
year.
Karon ug mupalit ka’g 50% + 1, the new rule is you must
make a general offer.
Q: What is a general offer?
A: You are willing to buy everybody, according to the last price
at which you bought shares of stock to each 50% +1.
That is a general offer. So, what do you have to remember?
 5% - disclosure of beneficial owner
 15% - tender offer
 30% - tender offer
 50% + 1 – general offer
Note: Under the 2015-2016 TSN, FGN used 35% and not
30%. He based it on the 2015 SRC Rules:
19.2. Mandatory Tender Offers
19.2.1. Any person or group of persons acting in concert, who
intends to acquire fifteen percent (15 %) of equity securities in
a public company in one or more transactions within a period
of twelve (12) months, shall file a declaration to that effect
with the Commission.
19.2.2. Any person or group of persons acting in concert, who
intends to acquire thirty five percent (35%) of the outstanding
voting shares or such outstanding voting shares that are
sufficient to gain control of the board in a public company in
one or more transactions within a
period of twelve (12) months, shall disclose such intention and
contemporaneously make a tender offer for the percentage
sought to all holders of such securities within the said period.
If the tender offer is oversubscribed, the aggregate amount of
securities to be acquired at the close of such tender offer shall
be proportionately distributed across selling shareholders with
whom the acquirer may have been in private negotiations and
other shareholders. For
purposes of SRC Rule 19.2.2, the last sale that meets the
threshold shall not be consummated until the closing and
completion of the tender offer.
xxx
January 29, 2017 (KVTan)
So we were into the percentages(?) rules—that is my own
categorization. Section 18, 5%. Section 19, 15%, 30% and
50%+1. Remember, 30% is either creeping or in one
transaction there is such a this as an accumulation of 30% of
the corporatiion in a creeping manner. That means, small
percentages.
If within 1 year, you reach 30%, then you are covered by the
tender offer rule. You reached 30%.
Section 19. Tender Offers. – Any person or group
of persons acting in concert who intends to acquire
at least 15% of any class of any equity security of a
listed corporation of any class of any equity security
of a corporation with assets of at least fifty million
pesos (50,000,000.00) and having two
hundred(200) or more stockholders at least one
hundred shares each or who intends to acquire at
least thirty percent(30%) of such equity over a
period of twelve months(12) shall make a tender
offer to stockholders by filling with the Commission
a declaration to that effect; and furnish the issuer,
a statement containing such of the information
required in Section 17 of this Code as the
Commission may prescribe. Such person or group
of persons shall publish all request or invitations or
tender offer or requesting such tender offers
subsequent to the initial solicitation or request shall
contain such information as the Commission may
prescribe, and shall be filed with the Commission
 and sent to the issuer not alter than the time
copies of such materials are first published or sent
or given to security holders.
(a) Any solicitation or recommendation to
the holders of such a security to accept or
reject a tender offer or request or
invitation for tenders shall be made in
accordance with such rules and
regulations as may be prescribe.
(b) Securities deposited pursuant to a
tender offer or request or invitation for
tenders may be withdrawn by or on behalf
of the depositor at any time throughout
the period that tender offer remains open
and if the securities deposited have not
been previously accepted for payment,
and at any time after sixty (60) days from
the date of the original tender offer to
request or invitation, except as the
Commission may otherwise prescribe.
(c) Where the securities offered exceed
that which person or group of persons is
bound or willing to take up and pay for,
the securities that are subject of the
tender offers shall be taken up us nearly
as may be pro data, disregarding fractions,
according to the number of securities
deposited to each depositor. The provision
of this subject shall also apply to securities
deposited within ten (10) days after notice
of increase in the consideration offered to
security holders, as described in paragraph
(e) of this subsection, is first published or
sent or given to security holders.
(d) Where any person varies the terms of
a tender offer or request or invitation for
tenders before the expiration thereof by
increasing the consideration offered to
holders of such securities, such person
shall pay the increased consideration to
each security holder whose securities are
taken up and paid for whether or not such
securities have been taken up by such
person before the variation of the tender
offer or request or invitation.
19.2. It shall be lawful for any person to make any
untrue statement of a material fact or omit to state
any material fact necessary in order to make the
statements made in the light of the circumstances
under which they are made, not mis-leading, or to
engaged to any fraudulent, deceptive or
manipulative acts or practices, in connection with
any tender offer or request or invitation for
tenders, or any solicitation for any security holders
in opposition to or in favor of any such favor of any
such offer, request, or invitation. The Commission
shall, for the purposes of this subsection, define
and prescribe means reasonably designed to
prevent, such acts and practices as are fraudulent,
deceptive and manipulative.
Now, I pointed out to you this case of SEMCO Holdings Inc.
vs National Life Insurance (529 SCRA 355)(2007).
Remember, it is a listed company—Union Cement. But between
its mother holding corporation, there is an in-between holding
corporation. Because the holding corporation holds several
other cement factories. There is a holding corporation.
Suppose, you do not buy the shares of stock of the listed
company but you but the shares of stock of the holding
company, are you covered by the tender offer rule? That is the
issue. And the SC says, YES. What matters is that you reach
the percentages of control that are mentioned in the Securities
Regulation Code. Now if you reach it directly or indirectly, you
are covered by the tender offer rule.
Now, if the corporation controlling interest recommends or
does not recommend the tender offer, the same must be done
under the so-called proxy solicitation rules. In other words, you
must send out a proxy statement. And the proxy statement,
the rule is that it must be in writing, signed by the stockholder
or his duly authorized representative, and filed before the
scheduled meeting with the Corporate Secretary.
Unless otherwise provided in the proxy, it shall be valid only for
the meeting for which it is intended. No proxy shall be valid
and effective for a period longer than 5 years at one time.
And then, no broker or seller shall give any proxy, consent, or
any authorization, in respect of any security carried for the
account of the customer, to a person other than the customer,
without the written authorization of such customer.
Section 20. Proxy solicitations. - 20.1. Proxies
must be issued and proxy solicitation must be
made in accordance with rules and regulations to
be issued by the Commission;
20.2. Proxies must be in writing, signed by the
stockholder or his duly authorized representative
and file before the scheduled meeting with the
corporate secretary.
20.3. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended. No proxy shall be valid only for the
meting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5)
years at one time.
20.4. No broker or dealer shall give any proxy,
consent or any authorization, in respect of any
security carried for the account of the customer, to
a person other than the customer, without written
authorization of such customer.
xxx
Remember, I told you that there are people who buy shares of
stock that are listed in the stock market no longer bother to
require a certificate of stock because that is additional cost. So
they have the shares of stock LONG. They call it. It is held by
the broker. The broker is holding the street certificate. The
transferor has endorsed it in blank and they keep it and it is
meant to be for the client of the broker who made the order.
So if that client also orders now to sell it, all he has to do is
negotiate the certificate of stock. Just deliver it to the next
transferor because it is already endorsed in blank.
Now, if you are the broker, you have so many of these long
certificates, can you exercise the tender offer? And the
Securities Regulation Code is explicit. The broker CANNOT do
anything with the shares in his possession that are long for the
benefit of the client without the client ordering so.
So, the client must be informed. It is the client who makes the
decision and not the broker.
And then there is rule:
xxx
20.5. A broker or dealer who holds or acquire the
proxy for at least ten percent (10%) or such
percentage as the commission may prescribe of the
outstanding share of such issuer, shall submit a
report identifying the beneficial owner of ten days
after such acquisition, for its own account or
customer, to the issuer of security, to the exchange
 where the security is traded and to the
Commission.
So the proxy is for the broker or dealer. If he has more than
10% or such percentage as the commission may prescribe of
the outstanding share of the issuer, then he must make that
disclosure—that he has more than 10% of the outstanding
capital stock of the issuer as proxy. He is exercising proxy.
Why is that necessary? Because the broker might make money
out of being a proxy without the knowledge of the true owner
or beneficial owner.
If there is a proxy fight, what will prevent the proxy from
telling the rivals, “I am holding the proxy for 10% of the
outstanding capital stock. You want me? Then you have to
come across.” But actually, he is not the beneficial owner. So
the proxy is required to inform the Philippine Stock Exchange,
the Commission, and also the issuer. He must inform so that
the Commission (if it wants to) can inquire from the owner.
“Did you grant a proxy?” The owner might not know.
So alright. That is the tender offer rule.
Alright.
We go now to the prohibitions of fraud and manipulation and
insider trading.
This is the general rule or premise of the Stock Market: All
transactions are to be open and listed. Why? So that
everybody will know what is going on. The price of the shares
of stock may go up or may go down. But it is disclosed there.
And everybody who has shares of stock can make a decision
as to whether or not to hold, to sell, acquire more shares, to
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.
What influences that? The price. And the price is listed.
Because all transactions are listed. And that is how you know
the movement of the price for the shares of stock.
Now, if the shares of stock go up and there is no known
reason for it, then the stock market—their officials—might ask
the issuer. “Why is your stock moving up or down? Is there any
information that you wish to divulge to the public to explain
this unusual movement of the shares of stock? Because they
do not know any reason.” And then they will ask the issuer and
then they will suspend the trading for probably an hour or two
hours. And then, the issuer must give an explanation.
The issuer will say, “We do not know. Frankly speaking, we do
not know of any reason. It might be a movement that is
international in character over which no one is in control.” Now
if the issuer can point that out as a reason, then it might give
that as an explanation. Or if he does not know, then he tells
them that he does not know. Or maybe, he has plans to do
something which he has not yet divulge. And now is the
occasion to divulge it to the public.
The whole idea is that disclosure (making known to the public)
is the best way to arrive at the reasonable regular market price
of the security. Secrecy does not work towards establishing the
correct market price. It must be disclosure. You must make
disclosure.
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
shares of stock of which you are the issuer and you do not
disclose it and you have already profitted from it from buying
and selling it to the general public and you know the material
information that has an influence on the decision of the
investors to either buy, sell, or own, then that means that you
are engaged in INSIDER TRADING.
So you make a transaction. Possessing ann information that
you alone possess. Everybody does not know it. And then you
profit from it. Then that is irregular. And that is punished by
the Securities Regulation Code. That is called insider trading.
Who is an insider? That is the issue. And the answer is found
in Section 3.8. Layo kaayo! In the definition.
Section 3. Definition of Terms. - xxx
3.8. "Insider" means
(a) the issuer;
(b) a director or officer (or any person performing
similar functions) of, or a person controlling the
issuer;
(c) a person whose relationship or former
relationship to the issuer for a security that is not
generally available gives or gave him access to
material information about the issuer or the security
that is not generally available to the public;
xxx
So a relationship or the person in a relationship or former
relationship so that he has access to material information.
xxx
(d) A government employee, director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
(e) a person who learns such information by a
communication from any forgoing insiders.
That is an insider. So there are 5 possibilities on how you can
be an insider.
You know ha. You are familiar with that The Shadow knows.
That is the insider. He knows and nobody else knows. And then
he profits by trading on that information.
What is the duty of that insider when trading? That is what
Section 27 defines.
Section 27. Insider’s Duty to Disclose When
Trading. – 27.1. It shall be unlawful for an insider to
sell or buy a security of the issuer, while in
possession of material information with respect to
the issuer or the security that is not generally
available to the public, xxx
You cannot trade while you possess that and it has not yet
been disclosed.
xxx unless: xxx
This is now a matter of defense. The following enumeration is
how you defend against the charge of insider trading.
(a) The insider proves that the information was not
gained from such relationship; or
(b) If the other party selling to or buying from the
insider (or his agent) is identified, the insider
proves:
(I) that he disclosed the information to the other
party, or
(ii) that he had reason to believe that the other
party otherwise is also in possession of the
information.
A purchase or sale of a security of the issuer made
by an insider defined in Subsection 3.8, or such
insider’s spouse or relatives by affinity or
consanguinity within the second degree, legitimate
or common-law, shall be presumed to have been
effected while in possession of material nonpublic
information if transacted after such information
came into existence but prior to dissemination of
 such information to the public and the lapse of a
reasonable time for market to absorb such
information: xxx
So that is a rule on presumption of evidence. If you are
defined as an insider under the SRA and there is this existing
material information not yet disclosed and you do some
trading—buying or selling of a security—while that information
is already in existence but not yet disclosed, then you are
PRESUMED to be engaged in insider trading. Unless, you prove
otherwise. Disputable presumption but the presumption
already arises.
[Segue: Sigi mo anag hinumdom anang disputable
presumptions. Naa na may lista ana sa Rules of Court.
Maghinumdom ka na kay substantive law also adds disputable
presumption.]
What is the effect of a disputable presumption? The burden of
proof shifts. It shifts to the insider now to prove that he is not
engaged in an irregularity.
A cashier who holds cash, who is bonded, and has a
responsibility for cash or money of the employer. If he is given
a cash count and his cash and checks to not equal his receipts,
then shortage na. It gives rise to a disputable presumption.
What is the disputable presumption? Na nangawat na siya. The
burden shifts! It must be he now who must prove that there
was no absconding or converting of the funds for personal use.
And that is not an exception to the order of trial.
Unsa may order of trial? The complainant proves his case
first—the one who suffered the cause of action. He proves
first. Nganong kini naman nuong defendant ang mu-prove nga
wala sya nakasala?! Kay na-prove na man sa compalinant nga
pag-ihap niya, kuwang. Bali dayon! Shift na!
Mao sad ni. Naa ganiy material non-public information in
existence and it is proven that you made trades during the
existence of that information and before it was made known,
wa na. The presumption is you engaged in insider trading,
unless you can prove otherwise.
Now, for purposes of this Section, and here is the definition
now, “material nonpublic” information means:
xxx Provided, however, That this presumption shall
be rebutted upon a showing by the purchaser or
seller that he was aware of the material nonpublic
information at the time of the purchase or sale.
27.2. For purposes of this Section, information is
"material nonpublic" if:
(a) It has not been generally disclosed to the public
and would likely affect the market price of the
security after being disseminated to the public and
the lapse of a reasonable time for the market to
absorb the information; or
(b) would be considered by a reasonable person
important under the circumstances in determining
his course of action whether to buy, sell or hold a
security.
27.3. It shall be unlawful for any insider to
communicate material nonpublic information about
the issuer or the security to any person who, by
virtue of the communication, becomes an insider as
defined in Subsection 3.8, where the insider
communicating the information knows or has
reason to believe that such person will likely buy or
sell a security of the issuer whole in possession of
such information.
xxx
So, that is another violation. You relay material information
that is nonpublic with the realizatiion that that person who
received that information that is material will likely trade, buy,
or sell, and profit. That is another violation.
You know how they discovered insider trading? Most stock
exchanges now have programs that monitor transactions in a
big data way. For each issue, there is a tracking device that all
their transactions are translated into a graph.
Now, when that information that is material is finally out and
everyone scambles for a share to buy that particular issue
because the benefits are already known to the public, then
there will be a spike is it not? Because the price goes up since
everybody wants to buy.
Now what the authorities do after the big spike is that they
look for the little spike. And when they look for the little spikes,
they even look for the antecedent spikes. Kay pila ra guy
kwarta sa usa ka tao kung naa ba syay kwarta if he relies on
material information.
[Segue: Just like Mr. Boisky who is a mergers and acquisitions
lawyer in Wallstreet in one of the investment banks. When he
worked on a merger and acquisition, he just kept it to himself.
He knew he was under ethical principles that he should
maintain secrecy. In fact, he is the one who draws up the non-
disclosure agreements.
Now, but once he knows that it is about to be consumated,
what does he do? He goes out of his office and walks down in
the sidewalks of New York and goes to the public telephone
booths. Dala syag daghang coins. Muhulog sya. Unya mu-long
distance call sya sa iyahang banker sa Zurich, Switzerland.
Muingon sya, “Paliti ko aning shares traded in Wallstreet. Buy
me a couple of thousand!”
He says that to his New York banker who contacts a banker in
the stock exchange and trades his name. Wala man silay
kalibutan nga naa na diay tong merger so normal ra tong
price. After he has done that with the conclusion (the merger
was concluded), of course, the price went up! And that is when
he unloads. Nakaginansya na sya. He made money.
Now, nganong nadakpan man sya? There was no trace. He
just walks down to a public payphone. Wala may mag
eavesdrop dira kay daghan man kaayog manawag. Maskin
kinsa! Why was he caught? He was caught because after he
made a trade in a small bank, there was even a bigger bank
because his bank began to follow him. Katong iyahang sugoon
nga bank, nakabantay man. Kada mu-trade ning tawhana,
musipa man ang presyo sa iyahang paliton. So ang bangko na
mas dako ang kwarta, edi mas dako ang spike! Dira sya nakit-
an! Nisipa man ang iyahang transaction. Mao man ang naa sa
iyahang ngalan. Nakit-an man to. That was the end of him.
Pagkahuman, nibuhat syag libro—Insider Trading by Boisky.]
[Note: Continuation of Section 27:
xxx 27.4. (a) It shall be unlawful where a tender
offer has commenced or is about to commence for:
(i) Any person (other than the tender
offeror) who is in possession of material
nonpublic information relating to such
tender offer, to buy or sell the securities of
the issuer that are sought or to be sought
by such tender offer if such person knows
or has reason to believe that the
information is nonpublic and has been
acquired directly or indirectly from the
tender offeror, those acting on its behalf,
the issuer of the securities sought or to be
sought by such tender offer, or any insider
of such issuer; and
(ii) Any tender offeror, those acting on its
behalf, the issuer of the securities sought
or to be sought by such tender offer, and
any insider of such issuer to communicate
 material nonpublic information relating to
the tender offer to any other person where
such communication is likely to result in a
violation of Subsection 27.4 (a)(I).
(b) For purposes of this subsection the term
"securities of the issuer sought or to be sought by
such tender offer" shall include any securities
convertible or exchangeable into such securities or
any options or rights in any of the foregoing
securities.
Now question: What is the so-called Technical Insider
trading? This refers to the practice by which prominent
issuers gather together their large investors, before they make
public, crucial information or plans of the issuer as to the
business and they sound(?) out these investors. So they know
ahead. And knowing ahead, they can communicate ahead to
their brokers to buy, sell, or hold the particular security.
Now, there have been two cases brought to the Supreme Court
in the United States but the Court has refused to rule. In other
words, the court has not accepted those two cases.
[Segue: You know, the US Supreme Court accepts only a given
number of cases each year. By the second sunday of October,
you know the exact number of cases that they will deal with
for the year from October to the end of September. They have
a number of cases that they will accept. And then throughout
that year, they will be accepting a number of cases for the next
year. And they are given only a number of cases. Di man sila
mu-accept.]
So there is still no ruling as to this Technical insider trading.
Apple. Mag-investors' conference sila kung kanus-a nila i-
release ang ilahang information. Mga alas-5 sa hapon just
before the close of the business day. But in the morning, they
already have a briefing with their chosen investors. And the
briefing is closed-door. Apple even asks feedback from their
large investors. So their large investors have time to
communicate with their brokers. So in a way, they are given
advance information.
“Mao ni ang mga features sa latest Iphone. Nagduda pa mu og
wala pa ni nakasabot kung unsay mga color ani nia.” And then
they will compare on how are they doing in the competition.
Now sometimes, it also works the other way. Like for example
in the last conference, Apple believed that it sold more Iphones
during that given quarter than any quarter so far. Mas daghan
silag nabaligyag Iphone. But then the investors there, they did
not buy more shares. What is more, they sold their own
shares. Because they say, that is already a handwriting on the
wall. All the other sellers of smartphones that are not Apple-
based combined were already multiples higher than Apple. So
Appple is beginning to be history. It is not leading the trend in
other countries.
So what happened? The large investors sold. Nag una sila. Two
days later, the stocks begin to climb because the ordinary
investors did not read it the same way that those that had
advance briefing had understood it. So nisaka na sad ang
presyo.
That was their argument—that there is no such thing as
technical insider trading. We give the information to large
investors because we consider them as distinctly different from
the general run of the public investors. Lain na silag paghuna-
huna mao na unahon namo silag hatag ug information. And
many times, they do not agree with the general investing
public.
So, it is not so clear on whether or not there exists the so-
called technical insider trading.
I am telling you this because this might be asked. What is
technical insider trading? It is a system in which very high
profile issuers give advance investor briefings to the large
investors which they do not yet gve out to the general public.
Only later after they have given them in this advance briefings
to they make the public know of the genral content of that
briefing.
Alright.
Now, the Securities regulation Code also anathemizes
MANIPULATIVE PRACTICES. Promotions on fraud and
manipulative practices.
Manipulative practices are making it appear that there are
certain transactions that are issued—that is being bought and
sold—in the exchange when actually there is none of this that
is happening. Why is that? In order to mislead the market—the
investing public.
You go into transactions to make the public believe that there
is this particular transaction that is issued like a share of stock
when there is none.
Like for instance, a WASH SALE. What is a wash sale? You call
your broker and say, “Mr. Broker A, buy me San Miguel at 52.
1000 shares at this price.”
Muingon man ang broker, “O mas taas man lagi ni kaysa
market kuan dinha?”
“Basta buy me!”
Unya mutawag na sad ka after how many minutes and call
Broker B and tell him, “Sell my San Miguel common shares at
this price.”
So kay out of the ordinary man tong price, una man to.
Mamaligya ka ana, unya gitukog diri, mulakra na ang
transaction. Kinsa may nibaligya? Ikaw. Kunsay nipalit? Ikaw.
Wash sale! There is no beneficial transfer of ownership.
Nganong nag gasto-gasto man jud ka ana? Nibayad ka sa
broker's fee, bayad sad ka sa broker's fee kay imong gusto
ipakita sa kadaghanan nga naay nipalit sa gibaligya nga ingon
ana nga presyoha. Unya kanang mga nagbantay ra sa stock
market, muingon na silag “Uy! This guy might know something
that I don't know.” Mamantay na na siya. Unya kay usbon na
sad nimo—buy this, sell this. “O naa na sad! Nag anam na nig
kadaghan. Ah~ ako na lang nig sugdan kay tingali mag
maulahi ko.” Naa may ana nga mga investor. Wala na. Na-dali
na sila sa simulated transactions. That is called a wash sale.
A wash sale happens when despite the transaction of buy and
sell, there is actually no real transfer of beneficial ownership.
Again, there is such a thing as MATCHED ORDER.
Karon duha na mo ka tao ha. A and B. unya magsabot mo,
“Bai, alas-10 ha sa buntag pag abri jud sa market. Ikaw
mubaligya ka sa imong San Miguel at this price. Ako kay
mupalit sad ko sa imong San Miguel at this price. Mao ning
gidaganan sa imong shares. Dungan ta ha. Unya 20 minutes
later, ako nasad ang mubaligya unya ikaw na sad ang mupalit.
Mao gihapon ha. Patas-an ra nato gamay ang presyo by
50centavos. Unya after 30minutes na sad, balik na sad ta.
Usbon na sad nato ang role.”
That is called a matched order. In order to buy by one is
matched to another to sell. And then the buyer afterwards will
be the one to sell. And katong ni-sell mao tong mupalit na sad.
Puli-puli lang sila. Drama ba!
Mulakra man didto. “Uy murag natulog man ning particular nga
issue kaning shares of stock. Unya karon kay daghan na man
kaayog transactions?” Mao na. It is a manipulative transaction.
Unya kay daghan man na kaayog mga klase. Naay mga
practice nga PUT, Hold, Struggle. Naa may mga variants ana.
Mao nay xxx sa mga tao.
The best example, in order to understand that in street
language, is naglakaw ka sa dalan sa sidewalk. Naay tao dinha
nga naglingkod nga naay gamay la mesa. Unya naay tulo ka
thimble. Unya naa silay liso sa apple. Ilaha nang duwaan. Hain
man ang liso sa tulo? Ikaw nitan-aw ka kay nidumog na man
ang mga tao. Naa dayon mupusta. 100 pesos! Tuod, nasakpan
niya. Unya kay sunod na sad. Unya kay ikaw nakakita jud ka
kung hain jud. Nia dapita diri. Unya katong nipusta layo man
gibutang. Ana ka nga ayaw dira kay naa ra diri. Ah~ didto man
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!”
Kita ka nga tua didto. Nipusta ka na. 200 imong pusta kay
kakita man ka nga tua didto. Pagtan-aw didto kay wa man!
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!
Wa na didto.
Kaingon nimog fair and square ni nga game. Klaro ni. Kaingon
nimo. Wa ka kahibaw nga ang kato diay una nga nipusta, bata-
bata diay to niya nga magpretend. Mao tong manipulative
transaction. Kakita na ka dinha. Unya nikuyog ka sa
kadaghanan. Pagkahuman ana, hurot na imong kwarta kay
kining kalibutan naay naloko og naa sad nangloko.
There are many manipulative practices in the stock exchange.
And they have criminal and also civil liabilities.
Alright.
The next thing we'll take up is INDEPENDENT DIRECTORS.
The Securities regulation Code requires that corporations
coevered by the securities regulation code must now have
independent directors at least 10% of the directors in no case
less than 2 directors. Independent directors.
Who is an independent director? We go back to the definition
under Section 38:
Section 38. Independent Directors. – Any
corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess
of Fifty million pesos (P50,000,000.00) and having
two hundred (200) or more holders, at least of two
hundred (200) of which are holding at least one
hundred (100) shares of a class of its equity
securities or which has sold a class of equity
securities to the public pursuant to an effective
registration statement in compliance with Section
12 hereof shall have at least two (2) independent
directors or such independent directors shall
constitute at least twenty percent (20%) of the
members of such board whichever is the lesser. For
this purpose, an "independent director" shall mean
a person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other
individual having a relationship with the
corporation, which would interfere with the
exercise of independent judgement in carrying out
the responsibilities of a director.
So here, the less you have to do with the corporation, the
better qualified you are to be an independent director.
Now, who are covered by this requirement?
1. Listed corporations in the stock exchange;
2. those with assets in excess of P50Million and having
200 or more holders, at least 200 of which are
holding at least 100 shares of a class of equity(?)
securities –these are also required even if not listed to
have independent directors. At least 2 in the board or
20% of the members of such board whichever is
lesser.
3. If you are a corporation and you have sold seurities
required to be registered with the Securities and
Exchange Commission, you are required to engage
the services of an independent director/s.
4. Banks and quasi-banks required by the General
Banking Law to have independent directors.
Remember the theory here. The theory here is that the lesser
you have a connections or financial interest in the corporation,
the more objective you are for doing the right thing for the
corporation. In other words, your role there is to defend and
protect the general investing public.
Remember in the Corporation code, the more stake you have
in the corporation, the less fraud you will more likely to
commit.
So if a director has dealings with the corporation, if he is 2/3
he can ratify it even if some of the formalities are not followed.
Why? Because he is more likely not to harm the corporation
because he has a big investment in the corporation. That is the
theory behind that which is now superceded or has to live with
this other theory that because you are an independent director,
you will work more likely for the benefit of the corporation.
Alright.
Next thing we'll take up is MARGIN TRADING.
What is margin trading? Margin trading is investing in the stock
market, entering into trasactions in the stock market, from the
broker. In other words, the broker, the one who executes your
order to buy or sell securities, lends you money to be able to
conduct your buying or selling.
Question: Is that prohibited? The answer is NO. There is no
prohibition from the broker lending money to the client (who
has been a faithful client of his) in order to execute his buying
and selling of securities.
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
exceeds the following amounts:
 65 percentum of the current market price of the
security that you put with the broker
Muhulam ka gud sa imong broker pero ang imong collateral is
the shares of stock that you have bought but you are
entrusting to your broker long position. You have not taken the
certificate of stock. So he holds the endorsed in blank
certificates. So that is your security that you can pay the
broker. But the rule is that it should not exceed the money
that they lent 65% of the current market price of the securities
you left behind with the broker.
The trouble is the price of the securities that you have is also
moving up and down as the trades go on. And so there is also
another limit. And the other limit is:
 it should not exceed also 100 percentum of the lowest
market price of the security during the preceding 36
calendar months but not more than 75% of the
current market price.
So 100% of the lowest market price in the trading of the last
36 months nor more than 75% of the current market price.
So there is a formula that is involved.Margin trading is nnot
prohibited but there is a limit.
Alright.
Who are required to register?
1. Brokers, dealers of securities;
What is the difference between a broker and a dealer? A
broker is a person engaged in the business of buying and
selling securities for the account of others. A dealer is one who
buys and sells securities for his or her own account in the
ordinary course of business.
Like for instance, if you are an investment company. You have
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
you are the manager of the fund.
If you are given a dealer's license to buy and sell securities,
you cannot at the same time be given a license to buy and sell
securities for the account of others.
What is the reason why you cannot be given two licenses—to
buy and sell for your account and to buy and sell for your
clients? Because the temptation is very strong. That if you
made a mistake for your own account, then ipasa na nimo sa
imong client unya walay kalibutan ang imong client.
Kay nagkagidlay na man ka ining shares of stock nga imong
gipalit. Tawagon dayon nimo ang imong kliyente, “Have you
heard of what is happening in San Miguel?” “No I have not.
Why?” “Ulahi kaayo ka. Ubos pa na karon pero tan-awa
mutaas ra nag kalit.” “Ah~ mao ba?” “Dia raba ning naghulat
sa ako. O mupalit ka ini?” Mupalit sya. Pero wala na jud nisaka.
Ang loss asa man? Paingon didto sa imong client. Ang gain?
Niara nimo.
Naa na gani mu-gain sa imong client, ingnan dayon nimog
“Wala ba ka mahadlok anang imong gikuptan?” O paliton na
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
dealer at the same time.
2. Associated person of a broker or dealer, is an
employee, and he must be licensed.
Broker na gani ka, kinahanglan nga mu-pass kag exam. Unya
unsa man ning exam? Securities Regulation Code ang
examination. Unsa may test? True or false ang test! Walay
daghan storya-storya. You will die or swim on whether or not
you know it or you don't.
Tan-awa ra gud. Broker's exam. Naa may mga samples. Di
man ka makahuhag exam kung wala kay ihatag nga proof nga
ningtuon ka. Unya unsaon man nimo pagkahibaw nga naay
proof nga ningtuon jud ka? Mu-attend kag seminar. Mubayad
kag seminar sa gatudlo ining Securities Regulation Code. And it
must be from an accredited source. Set-ups in Makati or in
Manila that are approved by the SEC. You attend their
seminars. Tagaan ka nilag samples sa questions. Kapasar gani
ka, you are given a license. And every now and then, you have
to undergo updating seminars.
Who is a salesman? He is also licensed. A natural peson
employed as such or as an agent by the dealer, issuer, or
broker to buy or sell securities.
Now, what is a prospectus? Remember, we have a registration
statement. A registration statement is actually an application to
register a security and that is where you apprise all the facts
that the securities regulation code requires you to apprise the
securities and exchange commission in order to have your
security registered.
But because the regsitration statement is so complicated and
so technical—baga kaayo—it is not an appropriate material to
convince the general public to buy your security.
So out of that regsitration statement, you come up with a
prospectus. It is a document made by or on behalf of an issuer,
underwriter, or dealer to sell or offer securities for sale to the
public through a registration statement filed with the
Commission.
Kanang prospectus, mao na nang naay mga litrato dinha. Naay
mga graphs, pie charts. Makit-an na nimo. Kani imong original
investment unya musaka na, unya kani ang imohang gain.
Long term, short term, medium term. Mao na nang naay..awit
na na. Ang kanang regsitration statement, mao nang real
mcoy. That has all the facts there. Pero kanang prospectus,
mao nang diluted regsitration statement suitable for popular
consumption. Baligya nimo ang security, kini ang imong
basahon.
That must also be registered. That must be reviewed by the
SEC that that is not a distortion of the registration statement.
So, who and what should be registered:
1. The issuer;
2. the broker, the dealer, the associated person, the
salesman;
3. the brochure, prospectuus, and exchanges;
There are three kinds of exchanges:
1. stock exchange;
2. Credit exchange – in other words, you have the Bond
market, or Money Market
In money market, they buy and sell commercial papers.
Commercial papers are IOUs that mature within 1 year and it
is unsecured. Bonds are those that mature after a year (that is
short term), after 5 years (that is medium term), 10 years or
more )that is long term bonds). So that is the bond market.
They have to be registered also. The money market has to be
registered in the securities and exchange commission.
These are the two markets where you can go to to raise
capital. They have their own officers, own board, and mosty
they register to be an SRE—Self-regulating exchange.
In othe words, like in the Philippine Stock Exchange, we say
here that the minimum acquisition that you have when you
must make a tender offer is 15%. If you are going to buy 15%
of the outstanding capital stock of the issuer, then you must
make a tender offer. The Philippine Stock exchange says that if
you must buy as much as 10%, you must already make a
tender offer.
Mao nang mubasa gani ka sa business section muingon kag,
“Unsa man ni si father nga muingon mag 15%? nganong 10%
ra man ni diri?” Philippine Stock Exchange na na as a self-
regulating enterprise. The rule in the Securities regulation code
is 15%.
Nganong gitugutan man na sa SEC?nalipay ang SEC kay mas
strikto ang Philippine Stock exchange kaysa sa balaod mismo.
Ah~ sa mutuo ra!
Tan-awa nang Singapore. 15% ang ilahang kinamub-an.
Nganong gwapo man kaayo ang Singapore? Kay ang board sa
Singapore Stock Exchange is not made up of brokers. Diri sa
atoa, big boy club! Kung makasala sila, muingon ra silag “Ah~
pareha ra bitaw ta. Puros ra man ta brokers diri sa board.”
Wala pa man jud na masulbad. Kanang naa sa board, mga
dagkkong brokers. Masayop sila, appeal dayon na sila. “These
securities have been fined!” unya kay mahilot ra diay. Dili
mapatuman ug fine kay puros man sila brokers.
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
reward the faithful, it must have a governing body that is not
made up of the old boys club—non-brokers! Independent and
not brokers.
3. So, another kind of exchange is the FUTURES
exchange.
What is a futures exchange? They sell futures contracts. And
there can be currency futures (a selling of foreign currencies),
or there can be agricultural commodities futures (like fresh
orange juice, pork belies). Pork bellies is a question of futures
contract because pork bellies is where bacon is made from and
it is one of the essentials for breakfast for some people
especially in the United States. What else? Grains is a subject
of futures contract as well as rice, corn, and soybean, palm oil,
and many things.
What is the purpose of futures contracts? When somebody
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
cocoa, then you want predictability in your price. Because in
retail, it is a fixed price. Di ka gusto nga muabot ang panahon
nga mangita pa kag cocoa. You want a fixed price. So you
want to protect your self. Six months from now, you would like
to know what the price is. So mupalit kag contrataha na at 66.
Mao na may presyo ron.
Pag-abot sa six months from now, ang baligya sa cocoa is 40
cents na man lang. Muunsa man ka? Salamat sa Diyos! Imo na
nang gision kay di na na nimo gamiton kay mas barato man
ang baligya sa ercado sa cocoa.
Pero kung 6 months from now kay ang baligya na kay $1 per
bushel, samot kag pasalamat sa Ginoo! 66 ray akoa. Mao nay
akoang Hershey's cholocate! 66 cents ra gihapon kay 66 cents
ra may ang bushel.
So what is the purpose of futures exchange? It is not to raise
capital. It is to manage risks. To protect you against risk.
Nangutang ka karon og dollar denominated loans. Ngano man?
Kay ang peso mahal man kaayo. Niutang ka pero naay
interest—11% or 12% interest rate. Paghuwam nimo sa dollar
kay 2.5% ra may interest. Kadakog diperensya! Muingon kag,
“Muhuwam kog dollar unya pailisan na lang nakog peso sa
akong negosyo.” Daw bi ug mubayad ka ana 2 years from now
unya kung musaka ang exchange rate. Karong exchange rate
baya kay 49.92. So karon, muingon kag “Two years from now,
mupalit kog futures contract nga mobaligya sa nakog dollar at
49.92 ang rate karon sa paghulam nako aron mas gwapo.”
Pero pag-abot 2 years from now kay niubos man. Nahimog 42
ra man. Lipay ka dba? Pero kung niabot nag 60, ah~ labaw
kang lipay.
[Segue: Mao man nang nahimo sa Union Cement mao nang
nabaligya na sa Holcim. Huwam sila. Barato lage. They did not
hedge their bets or loans bisag katunga lang. Additional cost
pero protektado ka, diba? Wala man sila. Pero ilahang
earnings. Wala may earnings kay nibaba man ang economy. So
unsaon man nila? Naglisod silag breakeven sa operation. Hain
pa tong pagbayad nila sa ilahang loans nga dollar
denominated. So no choice! Baligya! Gilamoy sila sa mga
dagko sa 3 biggest cement conglomerates in the world. Mga
walay kaluoy na sila.]
So three kinds of exchanges. You have to register an
exchange. You have to register the officers of the exchange.
And if there is something wrong with your registration, who is
liable? AH~ those who have signed the registration statement?
Who is made to sign? The issuer, the chief executive officer,
the chief operating officer, the chief financial officer, and the
external independent auditors. They are held liable. Karon
liable ka na.
Di na ka makaingon nga, “So many pages! I could not
understand!” NO! Because there is already verificatiion. What
is verification? The petition must be verified. Memoryahon na
ninyo:
“That I am the complainant/petitioner of the above-titled
case;”
“That I have read the petition; I have caused it to be
prepared; I have read it and understood its contents; and that
its contents are true to the best of my knowledge?” NO! That it
is true to MY OWN PERSONAL KNOWLEDGE. That is the
correct verification. Mao na. CEO ka. Di na man ka mahimo ka
mu-escape nga mupirma-pirma ka ra.
Now, what is a SETTLEMENT OFFER? Section 55. Remember,
a security that has already began to be sold can be recalled
and investigated if something comes up that makes it
unworthy of public dissemination.
Section 55. Settlement Offers. – 55.1. At any
time, during an investigation or proceeding xxx
When there is an investigation of the security, it is just
stopped. And then there is a confidential investigation.
xxx under this Code, parties being investigated
and/or charged may propose in writing an offer of
settlement with the Commission.
xxx
Gi-imbestigar ka kay daghan kag bakak sa imong registration
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
ka. Nistudy ka sa Wharton pero undergrad ka lang. Unya
nahagbong ka, nibalhin ka sa Colgate University.
[Segue: Muingon kag “Binuang man ka Father.” Naa baya juy
Colgate University. Naa na sa California. Usa na sa mga
universities nga walay SAT. so tua didto tanan mga Arabo,
Koreano. Magtagbo-tagbo mo. Mag sign language mo aron
kasabot. Wala may english.]
Now, if you make such untruthful statement, then you can be
subject to an investigation. Is there a way out of the
investigation? Yes. You can make a settlement offer.
The nice thing about this settlement offer is that it is a no-fault
offer. It does not mean that it is an admission of guilt when
you offer an amount to settle the investigation.
Unya muingon ka, “Binuang ra man ka. Ug mapalit diay nimo
ang imong hiwi nga binuhatan unya unsa na man na? Is that
constitutional?” kwarta ra man ni tanan. These are all property
matters. No person shall be deprived of life, liberty, or property
without due process of law. Property ra gani, dali ra kaayo na!
Kabtangan ra man na. Ang mawala kwarta. Ang ipuli kay
kwarta ra sad. Mao nang settlement offer is allowed.
[Segue: Mind you that lately, the sums that are offered in the
United States are no laughing matter. Kana! Name me any
bank and they have made settlement offers that are huge! Into
billions of dollars! Why? Because they have experienced
prolonged securities and corporated cases. The most famous
of which is IBM vs Securities and Exchange Commission. It
lasted for 25 years. And in the end it was settled because it
had become so unmanageable. 7 storeys of building full of
records! 5 judges already died, one after the other taking over
the case. And what was it? It was a charge of monopilies and
illegal combinations of trade on the part of IBM—how IBM tried
to corner the main frame of computer market. Ang nabulahan
ra kay ang mga abogado nga nigraduate sa Harvard, Yale, and
all these big lawfirms. That is the reason why there is this
settlement offers.]
When you make an offer, the SEC will consider general welfare,
etcetera. And then he will decide. There will be negotiations.
And then you pay.
[Segue: Kanang subprime mortgage, almost all banks were
involved in irregularities. And they have paid billion dollars to
pay off. From the point of view of the bank, uncertainty is our
worst enemy because Wallstreet will find us. The Stock
exchange will find us. When the investor sees it nga naa pa
diay ni nagbitay nga kaso, wala na sila kahibaw ana. Pilay net
profit nila karon pero kuhaon ra diay sa gobyerno. Dili sila
mupalit sa ilahang stocks kay magkaanam nag kaubos. Kung
ilaha tong giprenda aron makautang silag capital, edi bayad ka
na lang ug settlement offer aron mahuman tanan! Uncertainty
is eliminated.
Karon muingon ka kanang ilahang net profit 2billion pero
nibayad pa silag 1billion settlement. Unsa na lang man na?
Well, they are saving for the future. They are settling it now to
solve the problem of uncertainty. That is why they pay very
high.]
So, pangutan-on unya mo: What is a settlement offer? Parties
to an investigation of any charge may propose an offer of
settlement with the Securities and Exchange Commission.
Upon receipt of such offer, the Commission may consider the
offer based on the finding, the nature of its investigation or
proceeding, and the public interest. Any agreement to settle
shall have no legal effect until publicly dislosed. Such decision
may be made without a determination of guilt on the part of
the person making the offer.
55.2. Upon receipt of such offer of settlement, the
Commission may consider the offer based on
timing, the nature of the investigation or
proceeding, and the public interest.
55.3. The Commission may only agree to a
settlement offer based on its findings that such
settlement is in the public interest. Any agreement
to settle shall have no legal effect until publicly
disclosed. Such decision may be made without a
determination of guilt on the part of the person
making the offer.
55.4. The Commission shall adopt rules and
procedures governing the filing, review, withdrawal,
form of rejection and acceptance of such offers.
It is a no fault offer. Dili ka ni-admit nga ikaw ang nisayop kay
ning offer ka. Because offers are encouraged. Settlement
offers are encouraged.
Alright. So we are finished with the Securities Regulation Code.
On thursday, we will take up PD 902-A and the jurisdiction of
the intracorporate court.
January 26, 2017 (ALLora)
SECURITIES AND EXCHANGE
COMMISSION REORGANIZATION
P.D. 902-A
The Securities and Exchange Commission has of course
redefined their powers more properly describe and define in
the Securities Regulation Code. But what is important about PD
902-A is Section 5 of the Reorganization decree. Why? Because
Section 5 of the decree is referred to by the Securities
Regulation Code and it is referred only to transfer jurisdiction
of these cases that were more properly under the Securities
and Exchange Commission to the new designated sala of the
RTC as the Intra-corporate court. So the Securities Regulation
code mandates that the SC should designate a particular sala
as an Intra-corporate court.
Section 5.2 of Republic Act of the Securities Regulation
Code (RA8799):
5.2. The Commission’s jurisdiction over all
cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise
of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these
cases. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code.
The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of
30 June 2000 until finally disposed.
Section 5.2 of Rep. Act No. 8799, transferred the erstwhile
exclusive and original jurisdiction of the SEC over cases
involving intra-corporate controversies to the courts of general
jurisdiction, or the appropriate RTC. All intra-corporate cases
pending in the SEC were to be transferred to the appropriate
sala of the RTC. Congress thereby recognized the expertise
and competence of the RTC to take cognizance of and resolve
cases involving intra-corporate controversies.
What are these cases? It is not enumerated in the SRC, it is
enumerated in PD 902-A.
Sec. 5.
(a) Devices or schemes employed by or any acts, of
the board of directors, business associates, its
officers or partnership, amounting to fraud and
misrepresentation which may be detrimental to
the interest of the public and/or of the
stockholder, partners, members of associations
or organizations registered with the
Commission;
So, short cut term for this particular class of cases is
devices or schemes. More properly, this is referred to
by the newspapers and media as the pyramiding
scheme. If you have a pyramiding scheme, it is not
under the jurisdiction of the ordinary courts but the
specific sala designated by the SC as an Intra-
corporate court. Why Pyramiding scheme? Because of
its structure and its essence. You begin with one
person, entity, board, or partnership, or what have
you. They offer a fantastic return on investment like
2% every month. You ask them what is this business,
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
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
month interest, 2%. So you tell your friends and so
they follow you and so they will also put their money
and so it grows. You begin with one, then there are
three, then three more and very soon you have the
makings of the pyramid. What used to characterize
pyramiding schemes was that there was nothing of
value involved. If there is nothing of value involved
then it is a pyramiding scheme. There is no product.
And so they differentiate pyramiding scheme from a
networking scheme, like Amway or Herbalife. You
have a direct selling organization, you become a
member of the organization and you paid a handsome
fee. You go to a training and then you sell their
products directly to the consumer and you convince
others to sell for you and you have an overriding
commission over anyone who sells for you and you
also have an overriding commission from whoever
sells because of the one you convince and so on.
Pretty soon you will also have a pyramid.
What is the difference between a pyramiding scheme
and a networking scheme? In a networking scheme
there is a product whether a service or good that has
a commercial value. In a pyramiding scheme there is
nothing involved. The scheme works as long as there
are more and more people enrolling into the scheme.
Everybody will continue to receive his interest as long
as there are newcomers. As long as the newcomers
stop, then the well dries up and then it is discovered
that there is actually no commercial undertaking. It is
just an empty scheme.
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
absence of commercial good or service with a
commercial value. Now, however in the US the SC has
arrived at a conclusion that unless Herbalife overhauls
its system it is engaged in a pyramiding scheme.
Why? Because the SC says even if there is a
commercial product if the originator of the scheme
earns more out of membership fees of those who join
rather than the sale of the product itself then it is still
a pyramiding scheme. Please take note of that, It has
not come yet in the PH. Google it Herbalife life
pyramiding scheme because that is the finding of the
[US] SC last year. (Chika about Herbalife, there is
really nothing there. IT is not HERBAL!)
In the PH since this is review, the moment a
pyramiding scheme opens they usually make use of
the bank. They open an account where all the
contributions are placed. And they tell their investors
to open an account also in the same bank and that is
where the company or corporation will place their
interest every month. That is what happens to
Legacy. You place your money with a particular
outfit(?) they tell you to open your account in any of
these 14 rural bank. If you do that you are engage in
money laundering. So it gets complicated. You are
not only involved in a pyramiding scheme which is
already a violation of the SRC, you are also at odds
with the law because you are laundering money
which is dirty. Money that comes from proceeds of
the crime. You are in fact engage in estafa, you are
fooling people, you are engage in fraud. You are
using the bank to launder the money. You are doing
something criminal two ways: defrauding and
washing dirty money(laundering dirty money) and
there are two penalties that you have to contend
with.
Another name more used internationally is a PONZI
SCHEME. Mr Ponzi an Italian gentleman who came
to the US and who started this scheme in NY and he
was so convincing that half of the police precincts in
NY deposited with him the payroll. This guy, just
before the ship hit the fan he left NY and went back
to Italy and it was because of him that the law on
extradition was enacted.
So this is the first class of cases now under the
jurisdiction of the Intra-corporate court. Who grants
jurisdiction? It is the law that grants jurisdiction. What
is the role of the SC here? The role of the SC is to
designate a specific sala or branch of the court that
will be the proper court to entertain these particular
cases. It is not the court that determines jurisdiction
it is the law. What happens when an intra-corporate
case such as a pyramiding scheme lands in an
ordinary RTC branch not an intra-corporate RTC
branch? Is the judgment valid? This is where your
remedial law will be tested because it is the court that
has jurisdiction. A branch is just another expression of
the same court. If it does not fall within the intra-
corporate court it is valid but it is not licit. it is illicit
but it is still valid. Which means you will have to face
the SC for disciplinary action. Why would you assume
jurisdiction over this controversy when it supposed to
belong to the intra-corporate court? You, an ordinary
branch you should recognize that you don’t have
jurisdiction. It is with the intra-corporate court. So the
decision, the judgment, is valid but it is not allowed, it
is illicit and the court will discipline you if you are the
judge. A branch is not the court, RTC of Judicial
district Number 11 that is where the RTC is in the hall
of justice in Davao City. There are many branches,
that is still part of the court.
Second class of cases:
(b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between
any or all of them and the corporation,
partnership or association of which they are
stockholders, members or associates,
respectively; and between such corporation,
partnership or association and the state insofar
as it concerns their individual franchise or right
to exist as such entity; and
This is an intra-corporate controversy. The question is
how will you determine whether or not a controversy
is intra-corporate? Just because the parties involved
in the controversies are stockholders and officers of
the corporations - Stockholders complaining against
the officers or directors of the corporation - does it
make the controversy intra-corporate?
The latest case is RAUL C.
COSARE, Petitioner, v. BROADCOM ASIA, INC. et
al L-201298 February 5 2014.
First, the case answers when is an individual
considered a corporate officer as distinguish from an
ordinary employee.
“…there are two circumstances which must
concur in order for an individual to be
considered a corporate officer, as against an
ordinary employee or officer, namely: (1)
the creation of the position is under the
corporation’s charter or by–laws; and (2)
the election of the officer is by the directors
or stockholders. It is only when the officer
claiming to have been illegally dismissed is
classified as such corporate officer that the
issue is deemed an intra–corporate dispute
which falls within the jurisdiction of the trial
courts.”
So if the position is provided for in the corporation
code like President, Secretary, Treasurer, VP Asst.
Secretary, Chairman, then there is compliance with
this first requisite. Or the position is provided for in
the corporation’s articles of incorporation or it is
provided for in the By-laws of the corporation, then
you are an officer.
Then the second requirement is:
(2) the election of the officer is by the
directors or stockholders.
Remember in the stock and profit Corporation it is the
board of directors that appoint the officers. In a non-
stock non-profit corporation it is the members of the
corporation that directly elect the officers. There must
be an appointive or elective action. Appointive action
if it is the BOD, stock and profit corporation. Elective
position by the members of the corporation if it is a
non-stock non-profit corporation.
Then Cosare goes ahead and quotes an earlier
decided case by the SC, MEDICAL PLAZA MAKATI
CONDOMINIUM
CORPORATION, Petitioners, v. ROBERT H.
CULLEN, November 11, 2013. Then Cosare says
there are two tests to determine whether or not the
controversy is intra-corporate.
The first test is the so-called relationship test.
An intra–corporate controversy, which falls
within the jurisdiction of regular courts, has
been regarded in its broad sense to pertain
to disputes that involve any of the following
 relationships: (1) between the corporation,
partnership or association and the public; (2)
between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned; (3) between the corporation,
partnership or association and its
stockholders, partners, members or officers;
and (4) among the stockholders, partners or
associates, themselves.29 Settled
jurisprudence, however, qualifies that when
the dispute involves a charge of illegal
dismissal, the action may fall under the
jurisdiction of the LAs upon whose
jurisdiction, as a rule, falls termination
disputes and claims for damages arising
from employer–employee relations as
provided in Article 217 of the Labor Code.
Consistent with this jurisprudence, the mere
fact that Cosare was a stockholder and an
officer of Broadcom at the time the subject
controversy developed failed to necessarily
make the case an intra–corporate dispute.
Between the corporation, partnership or association
and the state in so far as its franchise, permit or
license to operate is concerned; So that second
instance tells you that the petition for cancellation of
union registration is an intra-corporate controversy
and it belongs to the jurisdiction of the special sala of
the RTC which is the is the intra-corporate court.
Third relationship: between the corporation,
partnership or association and its stockholders,
partners, members or officers;
Fourth relationship: among the stockholders, partners
or associates, themselves. Stockholder vs.
stockholder, stockholder vs. officer, director vs.
director, among themselves. If these parties have this
relational connection or disconnection then the first
requisite is complied.
Second test is the nature of the controversy
test.
Under the nature of the controversy test,
the incidents of that relationship must also
be considered for the purpose of
ascertaining whether the controversy itself is
intra–corporate. The controversy must not
only be rooted in the existence of an intra–
corporate relationship, but must as well
pertain to the enforcement of the parties’
correlative rights and obligations under the
Corporation Code and the internal and intra–
corporate regulatory rules of the corporation.
If the relationship and its incidents are
merely incidental to the controversy or if
there will still be conflict even if the
relationship does not exist, then no intra–
corporate controversy exists.
In other words jurisdiction should be determined by
considering both the relationship of the parties as well
as the nature of the question involved w/n the
corporation code or the corporation law is to be used
to resolve the dispute. So that is the nature of the
controversy test.
Two requisites to make it an intra-corporate
controversy:
1. Relationship test
2. Nature of controversy test
The third class of cases that are now transferred to the intra-
corporate court
(c) Controversies in the election or appointments
of directors, trustees, officers or managers of
such corporations, partnerships or
associations.
Election controversies within the corporation - whether it be
the election of directors or trustees or the appointment of
officers of the corporation. Election controversies belong to the
intra-corporate court.
What is the latest case? It’s the case of GSIS by Winston
Garcia vs. Rosete that is the leading case. Remember this
was annual meeting of MERALCO for the election of its BOD
and Winston Garcia he moves to have the election postponed
to give him more material time to examine the proxies of the
Lopez Group. Because according to Garcia the Lopezes do not
have the necessary votes to command the majority of the
outstanding shares and choose who will sit as directors. Are
your proxies in accordance with law or are you just making up
these proxies? The Lopezes said, “No”. Manolo Lopez was the
president and chairman of MERALCO, said we will not
postpone, there is a cut-off date and the cut-off date is 1
month before the meeting you did not bring this up you should
have examined it before. Then what did Garcia say? He said I
am questioning the proxies and the question of proxy is under
the original and exclusive jurisdiction of the SEC under the
Securities Regulation Code, which is true. The SRC says The
SEC has the proper authority to determine the form and
sufficiency of proxy. The SEC has the authority to do so.
Whereby in the afternoon of the meeting PGM Garcia produced
a restraining order issued by the SEC, purportedly issued by
the SEC. The trouble with this restraining order it was just
signed by one (1) member of the SEC. The one who signed it
says he is signing for others, they gave me authority. He
admits that the SEC is a collegial body that is why he says, “I
am signing for the others not just for me.” But still Anthony
Rosete the Secretary of MERALCO Corp refused to pay heed to
the restraining order issued by SEC. so Winston Garcia went to
the CA and the CA says this is an election contest, this is a
controversy of the election so it falls under letter (c) and the
one that has jurisdiction is not the SEC but the intra-corporate
court. So GSIS went to the SC on the question of law. Who has
jurisdiction, The SEC or RTC? GSIS/Garcia claims that this is an
issue about proxies and when it is proxies it is the SEC. The
camp of the Lopezes say this is an issue of election
controversies and proxies are just a side issue, an ancillary
issue therefore the one that has jurisdiction is the intra-
corporate court not the SEC. Who is Correct? The SC said it is
the intra-corporate court that has jurisdiction. It is true that
the SEC has jurisdiction as to the sufficiency, the proper form
of the proxy but if the proxy controversy is just part of the
larger controversy of the election then the SEC does not have
the proper forum and mechanism to look into all the issue that
will arise. It is only the court and it is the special designated
sala of the RTC that has jurisdiction.
From First exam TSN:
GSIS VS. CA
FACTS: Meralco raises the substantial point that nothing in the
SRC empowers the SEC to annul or invalidate improper proxies
issued in contravention of Section 20. It cites that the penalties
defined by the SEC itself for violation of Section 20 or AIRRSRC
Rule 20 are limited to a reprimand/warning for the first
offense, and pecuniary fines for succeeding offenses. Indeed,
if the SEC does not have the power to invalidate proxies
solicited in violation of its promulgated rules, serious questions
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
seeking the exclusion of the proxies.
ISSUE: w/n the SEC has authority to pass upon the question
on proxy solicitation in relation to election controversies
HELD: NO. Section 6(g) of Presidential Decree No. 902-A,
which states:
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx
(g) To pass upon the validity of the issuance and use of
proxies and voting trust agreements for absent stockholders or
members;
xxx
As promulgated then, the provision would confer on the SEC
the power to adjudicate controversies relating not only to
proxy solicitation, but also to proxy validation. Should the
proposition hold true up to the present, the position of GSIS
would have merit, especially since Section 6 of Presidential
Decree No. 902-A was not expressly repealed or abrogated by
the SRC. Yet a closer reading of the provision indicates that
such power of the SEC then was incidental or ancillary to the
"exercise of such jurisdiction." Note that Section 6 is
immediately preceded by Section 5, which originally conferred
on the SEC "original and exclusive jurisdiction to hear and
decide cases" involving "controversies in the election or
appointments of directors, trustees, officers or managers of
such corporations, partnerships or associations." The cases
referred to in Section 5 were transferred from the jurisdiction
of the SEC to the regular courts with the passage of the SRC,
specifically Section 5.2. Thus, the SEC’s power to pass upon
the validity of proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its abrogated
jurisdictional powers.
Shares of stock in corporations may be divided into voting
shares and non-voting shares, which are generally issued as
"preferred" or "redeemable" shares.45 Voting rights are
exercised during regular or special meetings of stockholders;
regular meetings to be held annually on a fixed date, while
special meetings may be held at any time necessary or as
provided in the by-laws, upon due notice.46 The Corporation
Code provides for a whole range of matters which can be
voted upon by stockholders, including a limited set on which
even non-voting stockholders are entitled to vote on.47 On any
of these matters which may be voted upon by stockholders,
the proxy device is generally available.48 Under Section 5(c) of
Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election-
related controversies is specifically confined to "controversies
in the election or appointment of directors, trustees, officers or
managers of corporations, partnerships, or associations."
Evidently, the jurisdiction of the regular courts over so-called
election contests or controversies under Section 5(c) does not
extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees,
in which stockholders are authorized to participate under
Section 24 of the Corporation Code.49 This qualification allows
for a useful distinction that gives due effect to the statutory
right of the SEC to regulate proxy solicitation, and the
statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of
its rules on proxy solicitation is unquestioned when proxies are
obtained to vote on matters unrelated to the cases
enumerated under Section 5 of Presidential Decree No. 902-A.
However, when proxies are solicited in relation to the election
of corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy
within the original and exclusive jurisdiction of the trial courts
by virtue of Section 5.2 of the SRC in relation to Section 5(c) of
Presidential Decree No. 902A.
That the proxy challenge raised by GSIS relates to the election
of the directors of Meralco is undisputed. The controversy was
engendered by the looming annual meeting, during which the
stockholders of Meralco were to elect the directors of the
corporation. GSIS very well knew of that fact.
So Garcia lost, because he lost that is how Ramon Ang
representing Danding–Cojuangco failed to acquire the
necessary shares of stocks to control the BOD of MERALCO.
The Lopezes remain and then the Lopezes entered into an
agreement with the Pangilinan Group. And that is when
Pangilinan slowly gain control of MERALCO. Why could you not
control (sorry inaudible)? You have to connect this when we
are talking about percentages that you have to remember. If
you have 5% of the outstanding capital stock of the
corporation you must declare the xxx beneficial interest xxx. If
you acquire 15% then you must make a tender offer. You
cannot just buy the 15% from one group you must give a
chance to the other group to make a tender offer. Pangilinan
first bought 9% because the PSEX(?) rule is more stringent
than the SRC rule the PSEX rule is if you acquire 10%, you
must already make a tender offer. So Pangilinan first bought
9% and he let 1 year passed. With his 9% and with Lopez and
the proxies of Lopez they held a twilight zone control for 1
year. And then they went to 29% then in the third year they
jump to 49%. So much so that Pangilinan has something like
48%, the Lopezes have something like 4%.
So if a person has been a treasurer for 20 years; that means
every year he is appointed by the board. But on the 21st year
the board does not appoint him. Can he say that my security
of tenure has been violated so therefore he goes to the labor
arbiter and files an illegal dismissal case. Does the labor arbiter
have jurisdiction? Time and again there is a long list of cases
where the SC says that the labor arbiter does not have
jurisdiction. Why? If the labor arbiter has jurisdiction, then
labor arbiter would have the power to review the power of the
BOD. He would have to look into the activities of the BOD. The
labor arbiter does not have a forum of general jurisdiction it
only has jurisdiction as to the labor code. And the labor code is
not involved there, it is the corporation code, the mechanics of
the meeting. So the labor arbiter does not have jurisdiction.
Is that true of all cases and actions of the board? Are there no
exceptions? There are at least 2 exceptions?
1. Gregorio Araneta University Foundation vs.
Teodoro, 167 scra 79, 1988
2. Salafranca vs. Phil-am Life 300 scra 469, 1990
In Gregorio Araneta University vs. Teodoro, you have a
VP of the university for administration. For more than 10 years
he was voted by the Board to act as VP. The board xxx from
the regular ranks of the professors of the university, they
made him an administrator. All of a sudden the board changed
its mind. Goodbye we don’t need you anymore. So he went to
the labor arbiter and of course the university moved to
dismiss. The labor arbiter insists that he has jurisdiction and
ruled that Teodoro was illegally dismissed. Upon review by the
SC the SC said LA is correct. Why does the labor arbiter have
jurisdiction here? According to the SC his security of tenure
was violated. The university was well within its authority not to
elect as the continuing VP for administration but the university
had no authority to fire. They should have returned him to his
status as regular faculty because he had already gained tenure
as a faculty and he was made an officer. By just
unceremoniously severing his relationship with the university
that is a violation of his Security of Tenure. That is the first
exception.
The second exception is Salafranca vs Phil-am Life 300
scra 469 1999. We are talking here about the head of
security of a homeowner’s association of Phil-am life
subdivision along Edsa. They wanted to get rid of this head
because he was getting old and he could not discipline the
unruly youth of the subdivision. The subdivision did not like the
head of security. The parents decided a way to get rid of the
head of security, they amended the bylaws of the homeowners
association. They made a provision to make the job of the
head of security to be appointed by the BOD. The next annual
meeting they appointed a new head of security and they told
Salafranca goodbye. He files an illegal dismissal case. It is
upheld by the LA but then the NLRC overturns the LA. So it
goes up to the SC. Salafranca challenges the ruling of the
NLRC. SC says he had already security of tenure, it had vested
in him and you cannot by the sheer rubric of amending the
bylaws of the constitution circumvent the law and deprive of
his right to security of tenure. It had vested in him, regular na
siya. That is why the SC overturned the NLRC and ordered the
reinstatement of Salafranca. Of course by then Salafranca was
too old he was awarded backwages and separation benefits
instead of reinstatement. So those are the two exceptions
The first has already been asked in the Bar, the second has
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:
(d) Petitions of corporations, partnerships or
associations to be declared in a state
of suspension of payments in cases where the
corporation, partnership or association
possesses sufficient property to cover all its
debts but foresees the impossibility of meeting
them when they respectively fall due or in
cases where the corporation, partnership or
association has no sufficient assets to cover its
liabilities but is under the management of a
Rehabilitation Receiver or Management
Committee.
TWO kinds of cases:
1. Petitions Suspension of payment by corporations
You actually go to court with the list of your
assets and a list of liabilities when they become
due. You tell the court it is not that I have an
offer(?) it is because I have difficulty getting cash
from my assets. But I have more assets than my
liabilities; the only problem is my assets are not
ripening at the same time as my liabilities. That is
why I pray the court to grant me an order
suspending my obligations until the assets turn to
cash so I can meet my obligation. The order to
suspend is not so that I will escape my liabilities;
the order of suspension is to help me answer and
paid my liability. Before, that was under the SEC.
Now it is transferred to the intra-corporate court
by the SRC but the SRC has been overtaken by
FRIA (2010).
So the one that has jurisdiction of these kinds of
petitions are the specially designated sala again
of the RTC which is the insolvency court/the
bankruptcy court/the financial rehabilitation
court. It is still RTC but it is again a specially
designated sala. In most cities I have heard the
intra-corporate court is also at the same time is
designated as the FRIA court I don’t know here
whether that is true.
When you don’t have sufficient assets to meet
your liabilities, you are bankrupt. Kung kulang na
imong ibayad sa imong bayronon, unsa na? The
court will divided your money in accordance with
the principles of concurrence and preference of
credit. However there is another road – financial
rehabilitation. You pray to the court “approve this
plan to rehabilitate me financially, there is this
financial investor that is willing to come in.” So
you will be under court receivership. You
implement the plan and once the plan is
implemented what happens? The final order in a
financial rehabilitation case is an order to dismiss.
Now you can live as a regular corporation
because you are now been restored. Who has
jurisdiction? The FRIA court designated by the
SC.
There you have it, these last class of cases has
been overtaken by FRIA law which we will take
when we come to Special laws. We will take up
General Banking Law 2000, AMLA, FRIA, Secrecy
of Bank Deposits, Truth in Lending Act which has
now been amended to Transparency in Credit.
(Transcriber’s note: Father did not anymore
discuss the second kind)
February 23 (RDatukon)
THE NEW CENTRAL BANK ACT
R.A. No. 7653
Monetary policy is not the province of the legislature. Why?
Because it is so defined in the Constitution. The sole monetary
propriety central monetary authority shall be lodged in an
independent and accountable body in the discharge of its
mandated responsibilities concerning money, banking and
credit and in line with these policies its main function of
responsibilities the central monetary authority established
under this act while being a government owned corporation
shall enjoy fiscal and administrative authority.
Section 1. Declaration of Policy. - The State shall maintain a
central monetary authority that shall function and operate as
an independent and accountable body corporate in the
discharge of its mandated responsibilities concerning money,
banking and credit. In line with this policy, and considering its
unique functions and responsibilities, the central monetary
authority established under this Act, while being a
government-owned corporation, shall enjoy fiscal and
administrative autonomy.
Section 2. Creation of the Bangko Sentral. - There is
hereby established an independent central monetary authority,
which shall be a body corporate known as the Bangko Sentral
ng Pilipinas, hereafter referred to as the Bangko Sentral.
Question: Has the Bangko Sentral receive money from General
Appropriations? Is it included in the General Appropriations
Act? It is not. Why? It has its own capital. It is a bank! The law
provides that it shall have 50 Billion pesos as authorized capital
stock of which 10 billion is already released and the
subsequent amounts have been release. So it has its own
money. It is truly independent fiscally and administratively.
Now does the BSP make money? Yes. Sometimes, it makes
money. Where does the net profits of the BSP go? It goes to
the Treasury. Its dividends because it enters into financial
transactions. It has the authority to buy and sell bonds to
originate credit instruments, it keeps some or good portion of
the banks deposit liabilities and in turn, it can lend it and make
money. But its purpose in the open market transactions is not
to make money, it is to aid certain policy targets of the
monetary system of the Philippines or its banks. It works to
strengthen the stability of the peso as to its currency so it
might engage in meeting the demands of foreign currency if
there is an excessive demand so it will sell foreign currency.
Where did it get its foreign currencies? From the remittances
of Filipinos who are overseas workers. They will send in foreign
currency, the BSP will exchange it in pesos. So it has a
reserved foreign currency they call it Foreign Currency
Reserves and that should there be a demand of foreign
currencies, the BSP can meet the demands so that the peso
will not suffer in depreciation. There is always a monetary
purpose when the BSP participates in open market
transactions. But its purpose is really not to make money, its
purpose is to stabilize the peso or to make the peso
convertible, to reduce the cost of money, to keep low the
interest of loans and lending, to control money supply so that
inflation will be held _, so that the consumer’s price index will
be at the acceptable level and it is deemed fast thermometer
as to the cost of living in the Philippines. It is in fact one of the
determinations of the regional tripartite wages and productivity
board for determining whether or not the minimum wage will
be adjusted upwards in order to meet the consumer price
index.
So that is the job of the monetary board/ BSP – monetary
policy. It is distinguished from fiscal policy which is the job of
Congress. Fiscal policy is obtaining money for the purpose of
running the government. You need money to run the
government. Your basic source is taxation. Taxation is a matter
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
expenditure part of fiscal policy. You have the appropriations
law that delineates how much goes to the judiciary, the
executive, the lower house and the senate; how much are they
allowed to spend and for what. That is fiscal policy that is
separate and distinct from monetary policy. Monetary policy
has to do with the strength of the peso, its convertibility
compared to other countries, it has to do with managing
inflation, it has to do with the cost of credit,the cost of
borrowing is reflected in interest. It is the Bangko Sentral that
is in charge with monetary policy, banking and credit, inflation
and policies suggested to government with respect to full
employment.
Why should the monetary policy be placed in an independent
monetary authority? If it is not independent, then you will have
a country like Zimbabwe. What happened to Zimbabwe? They
just printed money because the dictator directed their
monetary authority to print more money so he can buy more
votes which practically happened during Marcos’ time.
The Monetary Board is to the BSP as the board of directors is
to a corporation. The Monetary Board runs the BSP, the BOD
runs the corporation. But what is the difference? The
difference between the two is that the Monetary Board can
issue circulars that have the force and effect of law. It can
bring down or bring up deposit liabilities of banks and the
banks must follow it otherwise the BSP can close the bank for
disobeying a directive. So it is a governmental agency. It is not
an ordinary BOD and yet being a governmental agency it does
not share in the inherent right of the government to be
immune from suit. The Republic/Government/State is immune
from suit as a general rule you cannot sue the state. But the
BSP can be sued and it is often been sued. Why? Because its
ordinary activities bring it down to an ordinary citizen when it
engages in the financial markets. The way it engages the
financial market it is like an ordinary participant in the market
buys and sells financial instruments, bonds, treasury bills,
credit acceptance, etc.
What is the composition?
Section 6. Composition of the Monetary Board. - The powers
and functions of the Bangko Sentral shall be exercised by the
Bangko Sentral Monetary Board, hereafter referred to as the
Monetary Board, composed of seven (7) members appointed
by the President of the Philippines for a term of six (6) years.
The seven (7) members are:
(a) the Governor of the Bangko Sentral, who shall be
the Chairman of the Monetary Board. The Governor of
the Bangko Sentral shall be head of a department and
his appointment shall be subject to confirmation by
the Commission on Appointments. Whenever the
Governor is unable to attend a meeting of the Board,
he shall designate a Deputy Governor to act as his
alternate: Provided, That in such event, the Monetary
Board shall designate one of its members as acting
Chairman;
(b) a member of the Cabinet to be designated by the
President of the Philippines. Whenever the designated
Cabinet Member is unable to attend a meeting of the
Board, he shall designate an Undersecretary in his
Department to attend as his alternate; and
(c) five (5) members who shall come from the private
sector, all of whom shall serve full-time: Provided,
however, That of the members first appointed under
the provisions of this subsection, three (3) shall have
a term of six (6) years, and the other two (2), three
(3) years.
No member of the Monetary Board may be
reappointed more than once.
You can go through the qualifications of the Monetary Board
members. The big difference of the Old Central Bank and the
New Bangko Sentral is that the majority overwhelming
majority of the Monetary Board is now civilian based. There
are only 2 government officials in the Monetary Board. The 5
others are appointed from the private sector.
3 Stages of Distress of Banks
Remember:
CONSERVATORSHIP, RECEIVERSHIP, LIQUIDATORSHIP
If a bank is placed under conservatorship, the bank still
continues to function as a bank and a conservator is
appointed. The appointment is only for one (1) year after one
(1) year the conservator makes a recommendation before the
monetary board whether to revert the bank to its own
independence and carry out its business as usual or to make
the bank go to receivership or liquidatorship. That is upon the
recommendation of the conservator.
If the conservator makes that recommendation that it is
accepted before the 1 year period has ended, the conservator
nonetheless receives the entire compensation for one (1) year.
Why is that rule? So that the conservator will not unduly
prolong his stay with the bank just for the sake of pay. The
pay of the conservator is maximum ¾ of the pay of the CEO of
the bank. *note – 2/3 ang nasa law Hahaha*
What is the ground for conservatorship?
That the bank continues to maintain its operations in a way the
bank or quasi bank is in a state of inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect
the interest of depositors and creditors. That is the underlying
cause why a conservator is appointed to rule the bank. A
conservator can countermand any action or resolution of the
board.
Then, the conservator is supposed to maximize the assets of
the bank and supposed to fight the claimants of the bank that
are exaggerated or have no basis at all and he reports to the
Monetary Board.
Section 29. Appointment of Conservator. - Whenever, on the
basis of a report submitted by the appropriate supervising or
examining department, the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator with such
powers as the Monetary Board shall deem necessary to take
charge of the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts due
said institution, and exercise all powers necessary to restore its
viability. The conservator shall report and be responsible to the
Monetary Board and shall have the power to overrule or
revoke the actions of the previous management and board of
directors of the bank or quasi-bank.
The conservator should be competent and
knowledgeable in bank operations and management. The
conservatorship shall not exceed one (1) year.
The conservator shall receive remuneration to be fixed
by the Monetary Board in an amount not to exceed two-thirds
(2/3) of the salary of the president of the institution in one (1)
year, payable in twelve (12) equal monthly payments:
Provided, That, if at any time within one-year period, the
conservatorship is terminated on the ground that the
institution can operate on its own, the conservator shall
receive the balance of the remuneration which he would have
received up to the end of the year; but if the conservatorship
is terminated on other grounds, the conservator shall not be
entitled to such remaining balance. The Monetary Board may
appoint a conservator connected with the Bangko Sentral, in
which case he shall not be entitled to receive any
remuneration or emolument from the Bangko Sentral during
the conservatorship. The expenses attendant to the
conservatorship shall be borne by the bank or quasi-bank
concerned.
The Monetary Board shall terminate the
conservatorship when it is satisfied that the institution can
continue to operate on its own and the conservatorship is no
longer necessary. The conservatorship shall likewise be
terminated should the Monetary Board, on the basis of the
report of the conservator or of its own findings, determine that
the continuance in business of the institution would involve
probable loss to its depositors or creditors, in which case the
provisions of Section 30 shall apply.
What is Receivership?
There is only one receiver that may be appointed and that is
the Philippine Deposit Insurance Corporation (PDIC). Once the
bank is placed under receivership, the bank ceases to open its
doors to the public and it no longer functions as bank. It is
closed.
When is receivership decreed? Grounds –
(1) When the bank is unable to pay its liabilities as they
became due on the ordinary course of business.
(2) When the bank has insufficient realizable assets as
determined by the BSP to meet its liabilities.
(3) When the bank cannot continue in business without
involving probable losses to its depositors or creditors.
(4) When the bank has wilfully violated the cease and
desist order issued.
What is the job of the receiver? The receiver’s job is to
maximize the assets, files suits to recover assets unjustly
withdrawn or taken from the bank and the receiver is given
not later than 90 days from take over, he is to report to the
monetary board whether the bank or quasi bank can be
rehabilitated or not. Once the Monetary Board accepts the
recommendation of the receiver that the bank can no longer
be rehabilitated, then all the MB shall do is to notify in writing
the BOD of the bank of its findings and direct the receiver to
proceed with the liquidation of the institution.
So then, you have the third aspect of distressed bank and that
is LIQUIDATION. Remember, the BSP does not liquidate banks
because the first thing the receiver has to do is to file ex parte
with the proper RTC for assistance in the liquidation of the
bank. Is this any RTC? It is by considered opinion that it is not
just any RTC, it must be the RTC designated by the SC to take
care of Insolvency and Rehabilitation proceedings under FRIA
of 2010 because they are more competent salas of the RTC to
deal with liquidation.
Why can the BSP not preside over liquidation? Why does the
receiver have to file an ex parte petition with the RTC?
Because the BSP is not a court of general jurisdiction. A bank
enters to many contracts in fact the contract of deposit is
mutuum, a loan, it is a nominate contract and the jurisdiction
of that is regular courts. A bank can enter into a contract of
lease, a contract of sale and many other contracts that are
under the jurisdiction of the regular courts. So how can the
BSP act on these various contracts or purposes of liquidation
when it is not a court of general jurisdiction? That is why the
receiver must endorse the liquidation process to the regular
courts.
In liquidation, the general flow of procedure is towards the
convertibility of assets into cash so that cash will be applied to
the valid and just obligations of the bank in accordance with
concurrence and preference of credit provisions. The bank is
liquidated because it does not have enough assets to meet its
liabilities and for purposes its reputation in the banking
industry could no longer be resurrected.
So the Court liquidates, how? It is by public auction. There is a
receiver to do that, a receiver in liquidation. The monies that
are realized are not enough to meet the just obligations of the
bank so the court who has jurisdiction over the concurrence
and preference of credits ranks the creditors of the banks and
it apportions according to the concurrence and preference of
credits on how much will go to each creditor. There is one
creditor whose credit must be satisfied in full whether or not
the others are paid and that is the Government. The
obligations of taxes of the bank must be met because
sovereign claims cannot be compromised in favour of private
proprietary claims.
Section 30. Proceedings in Receivership and Liquidation. -
Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank
or quasi-bank:
(a) is unable to pay its liabilities as they become due
in the ordinary course of business: Provided, That this
shall not include inability to pay caused by
extraordinary demands induced by financial panic in
the banking community;
(b) has insufficient realizable assets, as determined by
the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving
probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order
under Section 37 that has become final, involving acts
or transactions which amount to fraud or a dissipation
of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for
prior hearing forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver
of the banking institution.
For a quasi-bank, any person of recognized
competence in banking or finance may be designed as
receiver.
The receiver shall immediately gather and take charge
of all the assets and liabilities of the institution, administer the
same for the benefit of its creditors, and exercise the general
powers of a receiver under the Revised Rules of Court but shall
not, with the exception of administrative expenditures, pay or
commit any act that will involve the transfer or disposition of
any asset of the institution: Provided, That the receiver may
deposit or place the funds of the institution in non-speculative
investments. The receiver shall determine as soon as possible,
but not later than ninety (90) days from take over, whether
the institution may be rehabilitated or otherwise placed in such
a condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general
public: Provided, That any determination for the resumption of
business of the institution shall be subject to prior approval of
the Monetary Board.
If the receiver determines that the institution cannot
be rehabilitated or permitted to resume business in accordance
with the next preceding paragraph, the Monetary Board shall
notify in writing the board of directors of its findings and direct
the receiver to proceed with the liquidation of the institution.
The receiver shall:
(1) file ex parte with the proper regional trial court,
and without requirement of prior notice or any other
action, a petition for assistance in the liquidation of
the institution pursuant to a liquidation plan adopted
by the Philippine Deposit Insurance Corporation for
general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by
the Monetary Board. Upon acquiring jurisdiction, the
court shall, upon motion by the receiver after due
notice, adjudicate disputed claims against the
institution, assist the enforcement of individual
liabilities of the stockholders, directors and officers,
and decide on other issues as may be material to
implement the liquidation plan adopted. The receiver
shall pay the cost of the proceedings from the assets
of the institution.
(2) convert the assets of the institutions to money,
dispose of the same to creditors and other parties, for
the purpose of paying the debts of such institution in
accordance with the rules on concurrence and
preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution,
and with the assistance of counsel as he may retain,
institute such actions as may be necessary to collect
and recover accounts and assets of, or defend any
action against, the institution. The assets of an
institution under receivership or liquidation shall be
deemed in custodia legis in the hands of the receiver
and shall, from the moment the institution was placed
under such receivership or liquidation, be exempt
from any order of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final and
executory, and may not be restrained or set aside by the court
except on petition for certiorari on the ground that the action
taken was in excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction. The
petition for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock within ten
(10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship.
The designation of a conservator under Section 29 of
this Act or the appointment of a receiver under this section
shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a
precondition to the designation of a receiver.
How about the banking franchise of a liquidated bank? What
happens?
Section 33. Disposition of Banking Franchise. - The Bangko
Sentral may, if public interest so requires, award to an
institution, upon such terms and conditions as the Monetary
Board may approve, the banking franchise of a bank under
liquidation to operate in the area where said bank or its
branches were previously operating: Provided, That whatever
proceeds may be realized from such award shall be subject to
the appropriate exclusive disposition of the Monetary Board.
Why is that allowed? Because banking is a necessary and
essential service and should it happen that there is only one
bank in that particular area and it goes bankrupt and it is
dissolved, the people are deprived of banking services. It gave
the Monetary Board the discretion to award the banking
license to another entity and to operate the banking franchise
in the place where the bank under liquidation used to operate.
There is a caveat – provided that whatever proceeds may be
realized from such award of banking franchise to another
entity shall be subject to the appropriate exclusive disposition
of the Monetary Board. In other words, it does not go to the
corpus of liquidated proceeds of the dissolved and liquidated
bank to be given to the creditors.
DOSRI – Directors, Officers, Stockholders and Related
Interests of a Bank
What is peculiar about DOSRI?
Section 26. Bank Deposits and Investments. - Any director,
officer or stockholder who, together with his related interest,
contracts a loan or any form of financial accommodation from:
(1) his bank; or (2) from a bank (a) which is a subsidiary of a
bank holding company of which both his bank and the lending
bank are subsidiaries or (b) in which a controlling proportion of
the shares is owned by the same interest that owns a
controlling proportion of the shares of his bank, in excess of
five percent (5%) of the capital and surplus of the bank, or in
the maximum amount permitted by law, whichever is lower,
shall be required by the lending bank to waive the secrecy of
his deposits of whatever nature in all banks in the Philippines.
Any information obtained from an examination of his deposits
shall be held strictly confidential and may be used by the
examiners only in connection with their supervisory and
examination responsibility or by the Bangko Sentral in an
appropriate legal action it has initiated involving the deposit
account.
Whenever there is a DOSRI loan in other words the directors,
officers, stockholders and related interests becomes a
borrower of the bank or goes into an accommodation
borrowing in other words the DOSRI becomes a co-maker of
somebody who is the principal borrower; there is some rules
that apply.
What are these rules?
1. The borrower must be a Director, Officer or
Stockholder of bank;
2. He must contract a loan or any financial
accommodation;
3. The loan or financial accommodation must be from
his bank or from a bank that is a subsidiary of the
bank holding company of which his bank and the
lending bank are subsidiaries;
4. The loan or financial accommodation must be
approved by the Board of Directors of the bank;
5. It cannot be approved unless the DOSRI borrower
waives his right under Secrecy of Bank Deposits law;
6. He must allow his name to be listed in a monitoring
list that is sent to the Monetary Board who monitors
the behaviour of DOSRI borrowers.
What is that reason for that rule? Again, to prevent abuse
because there are some businesses that may be open to
abuse. They put up a bank in order to finance their own
business.
*AND THEN, THE EARTH SHOOK* *Let’s call it a night.*
February 27, 2017 (DelaCruz & Tan loveteam)
So, we are in the New Central Bank Act (RA 7653). We
saw the importance and pervasiveness of monetary policy.
If you are asked the questions, Why is monetary policy
relegated to a special independent body that is collegiate in
nature as one sole authority?; Why is monetary policy not
entrusted to Congress which after all is the body that has
plenary powers for laying down policies?; Why is monetary
policy taken out of Congress and in a sense, placed in the
hands of a monetary board?
That is provided for in the Constitution.
Fiscal policy is placed in the hands of the Congress.
Monetary policy is placed in the hands of the monetary
board, the Bangko Sentral.
Why? Modern day monetary policy is a fast-moving
phenomenon. You cannot put it entirely in the hands of the
Congress. It is still with the Congress but the day-to-day
adjustment to monetary policy is in the hands of the monetary
board. That is the case of most countries in the world because
you need almost daily intervention.
When you talk about credit, the price or cost of money,
interest rates, they change from day to day and these are
adjusted by the Bangko Sentral’s intervention in the open
market. And Congress cannot do that.
It takes a while for Congress to arrive at legislation. There are
3 readings, it moves to the Senate, there’s a compromise
committee, it has to be approved by the 2 houses, then finally,
it is sent out to the President for his signature. It takes too
long. By the time they release it, patay na ang kabayo. The
horse is already dead before you arrive at an antidote for this
particular monetary ailment.
That is why you need a body like the monetary board that
keeps up with the movements of the market; that meets
miniscule adjustments, fine-tuning of money supply from credit
and banking so as to maintain a sound monetary policy which
tries to meet the contradictory demands between low inflation
and high employment rate.
If you have very high employment rate, there is so much
money. The next thing to be affected by so much money is
inflation because with money supply increasing and there is
the same amount of goods and services in the economy, the
prices will increase. So you will have to lower money supply.
How do you do that? By mopping up excess money supply.
All of a sudden, the Central Bank will raise its rediscount rate.
So banks will no longer be encouraged to borrow from the
Bangko Sentral. Or the monetary board will increase the
deposit liabilities1 of the banks.
Suppose the Central Bank raises the deposit liability by 1%, so
for rural banks, instead of 4%, it now becomes 5%; instead of
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
in the vaults of the bank which cannot be lent out.
For Rural Banks – 4% (e.g.: For every P1, 4 centavos must be
kept in the rural banks’ vaults that it cannot lend out to the
public.
For Commercial Banks – 14%
14% for commercial banks, it is now 15%. What does that
mean?
They say, that means, over a hundred billion pesos is taken
out of money supply. Imagine that. There will be less money.
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.
And they have to do that almost every day. They monitor
money supply and interest rates. If you have too high interest
rates, business is discouraged. If you have been following
business forums, the worry now is the stock market in the US
has for the past 11 days, hit record high. The highest ever
which is 21,000 pts for the blue chip stocks.
Why did the prices of their stocks got so high? Because they
were so enamored with Trump.
*Kung ubhon daw ang Amerika, kita gi-TB na. Lol*
The Bangko Sentral can enter into what is called as open
market transaction.
What is open market transaction?
In the financial markets, there are bonds that are bought and
sold.
 First, they are issued (primary market);
 While the bonds have not yet matured, they can be
bought and sold. The prices go up and down just like
equities. And the Bangko Sentral, just like any player
in the market, can go in and buy and sell bonds. This
is sometimes anomalous because the Bangko Sentral
calls the shots, declares the rules about interest rates
and money supply.
It is allowed to play in the market so that it can tweak and
adjust the market.
What is the difference between Bangko Sentral buying
and selling bonds and BDO Investment Corporation
buying and selling bonds?
The difference is in the inherent motivation, if BDO buys and
sells bonds, it is in order to profit. But if the Bangko Sentral
buys and sells bonds, it is to make the necessary adjustment
for an equilibrium price of bonds. It is for the sake of monetary
policy that it does that unlike the other players.
Aron makasabot mo, naa nay basketball game diha. Kinsa man
ang referee? Bangko Sentral.
Unya, nalup-og na ning isa ka team, kanang mga Philadelphia
(sa NBA), mukalit ug sulod ang referee, sila ang ikaunom na
player, unya makadaog ang Philadelphia. That is to level the
playing field, in as near as possible, to an equilibrium state.
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
there will be not too many losers. That is the idea of the
Bangko Sentral entering into open market transactions.
In the last financial crisis of 2008-2009, which almost brought
the whole financial world down, the US Congress passed laws
granting billions of dollars of subsidy to automobile industries
like General Motors.
Bangko Sentral is the authority that prints money.
1) It obviated financial collapse in the world;
2) It made possible the expansion of the economy even
at a small rate; and
3) There is a better prospect in moving forward.
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-
day, 300-day treasury bills it is going to buy. These treasury
bills are sold at a discount. There is no interest rate here so it
is sold at a discount. Those who bid, bid at a price lower than
face value. The difference between the face value and the
winning price is the interest. By Wednesday, they accept all
the bids. By Friday, they announce the winners. And that
happens every week. Sometimes, there is a week when there
is a failure of bidding. Bangko Sentral will not accept bids
because they suspect that there is collusion, bid was too low,
etc.
Every time the Republic floats a treasury bill, it is actually in
competition with other private entities and person that are
looking for credit in the open market. Who will get a higher
interest rate? NCCC who has also floated its bonds or the
Republic who floats its bonds? From the public’s point of view,
who is the better borrower? The RP or NCCC? RP gyud diba?
Lower interest rates.
The more money the Philippines ask from the financial market,
it is actually depriving the individual entities that are in need of
money and cannot catch up with the interest rates and yet
that happens every week.
And the Bangko Sentral must tone its intervention into the
market and it must ask the question “Am I taking credit at the
expense of others?” That’s not a metaphor ha. You take credit
at the expense of other because you are always the prime
borrower. You have the lowest interest rates. If you have the
best rate, the others are left with the worst rate. If you take so
much of the money supply and borrow it, that is to the
exclusion of others who need money for their operations,
expansion, for new ventures and other uses of money.
General Banking Law of 2000
R. A. No. 8791
It defines what a bank is in Section 3.
SECTION 3. Definition and Classification of Banks. —
3.1. "Banks" shall refer to entities engaged in the lending of
funds obtained in the form of deposits.
xxx
The old definition under the predecessor, Central Bank Law
(RA 337), gives a specific number. If you take deposits from
20 or more people and re-lend that money, you are engaged in
banking. So you must obtain a license from the Bangko Sentral
in order for you to lend money. But that number 20 has been
removed from the present definition in Sec 3.
What is the significance of that?
The significance of that is that there are now entities that are
not just solely banking in nature.
If you are a universal bank, you cease to do just simple
banking functions. You are now a multi-functional financial
institution.
What is wrong with that?
The problem with that is you put at risk the deposits from the
public because you engage in other than banking function.
That is why you come with the conundrum of what is called
the Volcker Rule. It is named after Paul Volcker, an old
Central Bank Federal Reserve Chairman of the US. Paul Volcker
said that banks should be limited to strictly banking functions –
accept deposits and pay this much interest, lend the money to
the public at this much interest and the difference between the
two, should be the gross profit. Deduct the administrative
expenses and that is the net profit. The difference between the
interest paid to the depositors and the interest exacted from
the borrowers – that is banking business.
There was a strong change. It came about when the banks
said that is not enough. We have to serve the clientele. In the
name of service to the clientele, banks should be allowed to do
all sorts of services – one stop shop. Banks should be allowed
to be money changers (exchange dollars in the bank for
foreign currency), lend money in foreign denominations.
What is wrong with that?
The trouble with that is it provides the bank a occasion to
speculate on foreign currency.
What will prevent a bank from hoarding foreign currency
because it has a study and then they make forecasts. Say, the
dollar will go down, so they have foreign currency reserves
which they will sell and when the dollar goes down, convert it
to another currency. That is not the Volcker Rule. That is a
violation of the Volcker Rule.
This rule has been ignored by the successors of Volcker and
then the great financial crisis happened. Then there was the
Dodd-Frank Act, the largest financial regulation haul. But
Trump now wants to remove that law to liberalize banking
because he wants America to be great again (LOL).
Our latest issue with the Bangko Sentral is the leadership.
Tetangco is now going to retire after 12 years. He is going to
retire in June. He has been with Arroyo, PNoy, and part of
Du30. And he is finally, stepping down.
Why? Because the New Central Bank Act only allows one
reappointment. Remember the term of people in the monetary
board is 6 years and reappointment of another 6 years. 12
years is the longest that you can stay in the monetary board.
They were talking about amending the New Central Bank Act
to allow for a 3rd reappointment but that was put to rest
because Tetangco said that 12 years is enough. So he is
retiring. Who will take his place? *Chika about Tetangco’s
background, not accounting but law.*
Which tells you about the theoretical background of law. Law
gives you a very good background for almost anything
including central banking if you are willing to learn. But if you
are not, mu-ingon ra ka ug kapoy ning General Banking Law
kakapoy ra ani. Kapoy-kapoy ra ug baso ning mga maot na
termino. Father gives advice on taking the bar exam using
Russian roulette as metaphor. God help you daw.
What are the kinds of banks? The General Banking Law of
2000 categorizes the banks as:
1. Commercial banks. The biggest kind of commercial bank
is the Uni Bank otherwise an expanded commercial bank. You
might be asked what is the expanded commercial bank. That is
the Universal Bank. Why is it called a universal bank? Because
for the first time you can do one stop financial shopping with
that bank.
A universal bank can do any and all banking functions
including non-allied banking services. A commercial bank is
only issued a commercial banking license. What is the heart of
commercial banking license? The power to accept demand
deposits. Deposits that may be subjected to checks as in the
negotiable instrument. In banking that is demand deposits.
If other banks are allowed to accept checking accounts or
demand deposits it is by virtue of an additional license. If a
thrift bank, let us say a development bank is allowed to accept
checking accounts it is issued an additional license by the
Banko Sentral. It is not part and parcel of the banking license
originally issued.
But for a commercial the power to accept demand deposits is
the very heart of commercial banking license. Letters of credit
are part of that.
Commercial banks are allowed to go into allied banking
function like foreign exchange. To maintain foreign exchange
accounts that is allowed because it is an allied banking
function. How about ATMs? That is considered allied banking
function. In fact in the Philippines you cannot engage in the
opening of ATMs unless you are a bank. If you are a rural
bank, can you open ATMs? Not by virtue of your rural banking
license. You will have obtain a separate banking license and
that will be based on capitalization and your number of
branches.
I should know it because I went through the application for
ATMs of ONB and they demanded at that time that we should
reach 60 branches in Mindanao before we are issued the
license to open ATMs. How much is one ATM? A brand new
one ATM is 1.2 million Php. But believe me a reconstructed
ATM is only 650,000 if you buy 20 at a time. Asa man na
pangitaa? Sus kadaghan sa kalibutan gusto mubaligya ana sa
imoha. Naay China made, US made daghan kaayo.
I tell you something the most backward ATMs in the world,
where are they found? They are found actually in the US. It’s
still the magnetic cards that are used. But they cannot change
it because there are so many of them in the US that they
cannot upgrade them. Where is the most advanced? They are
found in Japan, Taiwan, Sweden and Switzerland. That is the
biggest incidence of identity theft is in the US. It’s very easy to
do it there.
But if you have ATMs that are already chip-based it’s more
difficult because the chip has already security measures that
are difficult to crack. But it’s more expensive. The US cannot
accept it because they will have to change their very
infrastructure. Father talks about the no touch cards in Japan
and Taiwan.
The cards are not allied to the banking function. The ATM is
allied. But the cards themselves for the purchase of goods and
services (credit cards) are not allied.
So Commercial Banks are those given the powers to engage in
commercial banking functions the staples of which are
checking accounts, letters of credit and the purchasing of
receivables and deposits substitutes.
2. Thrift banks what are those? They are Savings and
Mortgage banks. These are banks that are normally constituted
to help the public in a particular community to obtain their first
home by saving up and then borrowing in addition to their
savings and purchasing their first home which is then
mortgage to the bank.
They are known to the banker because they live in that
community and they have a history of good credit, steady
work, regular income so these banks have the wherewithal to
service their home mortgage. Mu-ingon gani ka ug mortgage
sa Amerika buot pasabot ana home motgage. Eprinda nimo
imung balay na imong gipalit kay naka-utang ka sa home
mortgage savings bank.
Sometimes it’s not called a bank. They are sometimes called
home and mortgage association, home and loans association
or savings and loans association. That is a mortgage bank
which is a thrift bank. Then a Private Development Bank is also
a thrift bank.
3. Then you have Rural Banks. These are mandated to make
needed credit available and readily accessible in rural areas on
reasonable terms which are covered primarily by the Rural
Banks Act. Even poor people have credit needs and if you can
only price credit correctly a rural bank can be viable in the
rural community because the poor are willing to pay in order to
get service for the credit needs that they have.
So rural banks are the credit arms which the government
assists to dispense credit in largely non-bankable areas or far
away areas. You have credit have facility. Father talks about
Tawi-Tawi which uses the Malaysian currency instead of the
Philippine Peso.
Rural banks are also the source of what is called micro
financing. Micro financing is done on a selda (as father calls it)
basis, you do not lend to one but you lend to a group or a cell.
And the unwritten rule is that you are lending not to males but
to females because they have a better organizational bond
among themselves. You lend small amounts to these groups or
selda of women for the purpose of income generating activities
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
excess you can sell to the general public.
Or you will borrow to buy raw materials that you can transform
into readily saleable goods like mats hats or what have you.
The idea that this selda takes on the responsibility of
monitoring the proper use of the money borrowed by each
member of the selda. They also try to monitor the rate of
repayment by each member of the selda. The selda is
successful if all who have borrowed repaid. And then the next
time they can borrow a higher amount. But if there is one who
fails then the selda determines why this one has failed and
what the others could have done because the poor cannot
borrow by themselves they need supporting structures.
What is the difference in micro financing? The difference is
that they are non-collateralized loans in small amounts.
Remember the Banko Sentral’s rule is that no bank should lend
without security or collateral. There must be, at the very least,
a guarantor.
So what do you call these so-called clean loans? There is no
such thing as a clean loan. Muhuwam ka ug kwarta sa banko
just on your face value? And you have no collateral? That
would be a violation of the Banko Sentral rules. But they say
people can do that. Is that correct?
Have you ever had a clean loan? You borrow money ostensibly
there is no collateral but you have a deposit with the same
bank that is bigger than the amount of money that you
borrowed. So the bank lends you that money short-term which
expires within a year. You should pay that back within a year.
And why do they know that you will not decide to withdraw
your deposit? No, they trust you because they know your
average daily balance. Pila man na imung average daily
balance. Dili mu-ubos ug 500,000 Php imung balance. Mu-
ingon na muhuwam ka ug 100,000 unya pirma lang ta diri,
pirma pud ka and you pay that within 90 days. That is what is
called a clean loan. But there is really no such thing as a clean
loan since there is a security which is your bank deposit.
There is also borrowing against your deposit and the bank will
make sign for that. Your deposit is your guarantee which
means that in common sense borrowing against your deposit
with an agreement not to withdraw. What is that? You are
really borrowing your own money. That is why they give you a
lower interest rate. They give you prime prime (that’s what I
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%.
They will even be willing to lower that to less than 3%. Why?
Because you are actually borrowing your own money.
Preferential ang rate na ihatag ana.
Mostly people who do that do not need the money. What do
they need? They need a record of having borrowed money.
Para maka-ingon siya sa mga tao especially to the BIR, maluoy
ka nako naghuwam na ko ug kwarta. That is the reason why
they are borrowing against their own deposits.
So that is the difference in micro financing, there is no
collateral. In fact they are called non-bankable people. By
ordinary rules on banking they should not be allowed to
borrow because they not bankable. If the risk of lending to
them is spread and it is reinforced by organizational skills then
it could turn that they will end up being successful users of
credit. And when you multiply successful users of credit you
actually lift the informal economy. You lift the living standards
of the very-very poor. That is message of the whole micro
finance movement that was begun in Bangladesh one of the
most disadvantaged poor countries in the world. Father talks
about the scam involving the reserves of Bangladesh in the US
and RCBC.
4. What about this Islamic Bank? We have a law that
provides for the institution of the Al-Amanah Bank which has
gone bankrupt but has been revived. The Al-Amanah bank is
supposed to render the banking functions acceptable under
the Sharia Law standards. The Sharia Law prohibits lending at
an interest. That is anathema for the believers of Islam. You
cannot lend on interest. You cannot take advantage of the
borrower.
Is collateral allowed? YES, but not interest. You borrow money
and your collateral is your cape, the all purpose cape that
protects you from the heat of the day and the cold of the
night. You turn it over to your creditor as a guarantee that you
will pay the amount because you have take back your
collateral. But the Koran says that at night the creditor must
give back the cape so that the borrower will not suffer. That is
a very compassionate rule. Ihatag nimo balik kay dili nimo
paantoson and tawo na nagkalisod-lison na mao gani na
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.
So how do you banking the Sharia way? It does not become
just one contract, there are several contracts in order to go
around the prohibition against the payment of interest which is
anathema for the Moslem faith. That is why there is the
Islamic Bank. But there is no Catholic bank because we do not
have a problem with lending at an interest.
The Old Testament prohibits payment of interest. But later on
that was changed. Now they allow payment of interest. What
they do not allow in the Holy Scriptures is the payment if
usurious interest. In the Koran payment of any interest is not
allowed. In our Holy Book it is payment of usurious interest.
5. What is a Quasi-bank because in the General Banking Law
a quasi-bank is differentiated from a bank. A bank gets
deposits from the public. You reach 20 depositors, you are
engaged in banking and you lend the money that you get from
the public to your borrowers. A pawnshop does not accept
deposits. It accepts pledge. Delivery of personal property is
essential in pledge. Then the pawnshop lends you its own
money. That’s why it can establish its own interest rates.
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.
Quasi-banks accepts from the public deposits substitutes and
they bridge it those in need of money. Through their
intermediation, the difference between the interest rates is
where they get their commission. That is how a quasi-bank
does its business.
Quasi-banks are entities engaged in the borrowing of funds
through the issuances of endorsement or assignment with
recourse or acceptance of deposit substitutes for purposes of
lending or purchasing of receivables and other obligations.
Let’s say NCCC has so much cash instead of going to the bank
they go to a quasi-bank. They make a placement, here is my
money. And you have Allado Construction that is expecting
payment. It has receivables from the government for
constructing the highway. These receivables, it is hoped by
Allado that it receives them in tranches. Murag installment ba.
A 100 million job is received in 20 million installments so 5
tranches according to the degree of completion.
In the meantime Allado is in need of cash to pay its employees
and to get fuel for its machineries etc. How can it meet it cash
requirements? It borrows from a quasi-bank. Why does it go to
a quasi-bank? Because it’s very easy. The obligation lasts only
for less than a year. Therefore there is not so many papers, no
collateral that is needed. The quasi-bank facilitates by
purchasing the receivable of Allado and selling it to NCCC in
exchange for cash at discount value which is the interest
earned by NCCC.
So that is represented in a piece of paper called a CP. A
Commercial Paper. There is no collateral there. There are only
two lines in the corner of the CP. What does the two lines
mean? It means with recourse. That means if NCCC cannot
collect from Allado its receivables then it has recourse to the
quasi-bank. The interest with recourse is higher than if there
was no recourse.
Can you think of a time when there is no need for those two
lines? Let us say the one who is selling its receivables is San
Miguel Corp. will you insists of having with recourse? Dili
naman na mudagan dako naman kaayo nang San Miguel. They
enjoy AAA credit rating. It is next useless to talk about with
recourse when it comes to San Miguel. That is how quasi-bank
operates.
It operates as a facility or a middleman. It facilitates for those
with excess cash and those in need of cash and they meet in a
CP that may be with recourse or without recourse. It’s very
simple. Kana ang imong huna-hunaon.
March 6, 2017 (EEscovilla)
Financial Rehabilitation and Insolvency
Act (FRIA) of 2010
R.A. 10142
Liquidations. And then there is another new rule, which is
earlier than that, and that is the more common proceedings in
FRIA. And that is Financial Rehabilitation Rules of Procedure
2013. April 27, 2013.
Since this is most common, maybe we should go through some
of the features. Why is this the most common? Because
culturally, Filipinos are allergic to being declared insolvent.
Nobody wants to be declared insolvent if you are a Filipino.
The nature of the proceedings is that it is in rem. Jurisdiction
over all persons affected by the proceedings is acquired by
publication upon commencement of the proceedings. And the
commencement order or any similar order of the proceedings
in one newspaper of general circulation in the Philippines for
two consecutive weeks.
So that’s one characteristic, it is in rem and binding against the
whole world
What is published? What is published is the commencement
order. The commencement order is issued by the Court upon
the filing of the petition and within five days, if the petition is
found to be sufficient in form and substance.
Normally if it is not found to be sufficient in form and
substance, the court will not dismiss it. The court will just
return it to the petitioner and say “these are what are lacking”.
Like for instance you have to put down your list of liabilities.
Complete list gyud. That means your creditors. Put down your
list of creditors. The extent of their credit, and the ripening of
these credits. You have to arrange it according to secured
creditors and unsecured creditors.
The next list that you have to attach to your petition for
financial rehabilitation is you list of assets, and also when the
assets ripen.
Third you have to put down your rehabilitation plan. How do
you propose to be rehabilitated financially? Have you invited
some financier to come in, and in what fashion? Is he going to
be just another creditor or is he going to be an owner,
proprietor by selling him shares of stock. Will he gain control of
the petitioner, etc.? These are the issues.
If the court finds the petition sufficient in form and substance,
then the court will issue what is called a commencement order.
The commencement order retroacts to the date of the filing of
the petition. There is a retroactive effect of the
commencement order. Now the rehabilitation proceeding has
commenced.
Together with the commencement order is one, the
appointment of the receiver. There will be a financial
rehabilitation receiver. What is his job? His job is to verify the
liabilities and recommend to the court if they should be
approved. So he examines all those who have credits against
the corporation. Then recommend to the court. Then the court
will issue an order approving or disapproving the liability. If the
court approves or disapproves, that is a final order and that
can be appealed as far as the creditor is concerned.
Another job of the receiver is try to maximize and retrieve the
assets and claims of the petitioner against certain people. So
he has to pursue those claims or look for them if it has not
been recognized. There is a list of assets of the petitioner. He
will round up those assets.
Take note the receiver, especially if the debtor is so big, has
no time to run the debtor, that is why the commencement
order must contain together with the appointment of a
receiver, a management committee.
The management committee takes over the debtor to run the
business pending the proceedings for financial rehabilitation.
Why is that significant? That is significant because during
financial rehabilitation, the debtor continues to function in its
ordinary business. If it is making soft drinks, it continues to
function while it is under the supervision of the court,
principally by the rehabilitation receiver and the management
committee.
And then you say, wa naman kahay kwarta. How can it
continue to function? We go to the Stay Order which comes
together with the Commencement Order. What is a Stay
Order?
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
final judgment. They can no longer enforce. Everyone is
covered, unsecured debtors, secured debtors.
What are the exceptions?
I.
The exceptions are those creditors who have not been paid but
are still the suppliers of the company in its ordinary course of
business. The fact that they have not been paid does not
prevent the court from ordering them to continue to supply the
debtor with the necessary raw materials for it to continue to
operate for as long as the debtor pays the new current credits.
That's a very big favor. “Stay, do not enforce your claims of
the past, but continue to supply.” Ikaw, wa ka bayri sa utang
nimo, pero you must continue to supply. Pila na kamilyon na
asukal na imong gideliver niya wala kay bayri. Karon nikuyog
ka sa mga creditors, nagfile kag Involuntary Petition for
Insolvency. Counter ang respondent ug Petition for Financial
Rehabiliation. Gigrant sa court. Okay, Stay Order. Ikaw,
ordered to stay sa imong pangubra sa past credits. Unya
orderan ka magsupply ug dungag na asukal, basta bayran ka
lang niining bago nimong supply. Can you imagine that?
That’s the power of the court.
That is not covered in the Stay Order, the continuation of
supply to be given to those in order to make the debtor
function in the ordinary course of business.
II.
Second exception is you can enforce the claim that is the
subject of a Stay Order as to a solidary debtor. Not included
because he is considered to be in criminal violation. Suppose
his being a solidary debtor is understood to be a crime, then
you can continue to run after him, prosecute him criminally.
That is not considered in the Stay Order.
Let us say it consists of estafa. You can proceed with the
estafa case because it is a criminal proceeding. Why? Because
a criminal cause of action cannot be compromised. That is the
general rule.
Criminal prosecutions of the creditors of the debtor cannot be
the subject of a Stay Order. So you have a management
committee that is being appointed to continue to run the
office. What are the powers of the finance committee? They
can countermand any resolution of the past Board of Directors.
They can run after iniquitous contracts and move to rescind
the same and so on. They can try to dig up irregular practices.
Like for example you are a bank, you are a corporation and
somebody has taken advantage of you by inflating the market
value of the consideration that it paid to the corporation in
exchange for issuance of shares of stock. You can go after that
particular subscriber to get what is rightfully the corporation's,
namely the fair issued value of the shares of stock. These are
all subject to the assiduous action of the receiver.
After the court has approved or disapproved all the creditors of
the debtor, then the court moves on to determine the
acceptability of the rehabilitation plan. What is the plan
proposed? How is it going to be carried out? The laws says
that if the majority of the committee of the unsecured
creditors plus the majority of the total amount of secured
debts, vote for the plan, then regardless of any objection the
plan is to be carried out. And the court can order that the plan
be enforced despite the objections of the others. Take note of
that: majority of the committee of the unsecured
debtors and the majority of the total amount of
secured debts.
Let us say for example napulo na sila kabuok ang secured
debtors. But one of them in amount is 60% of the entire
secured debts of the debtor. The vote of this one is far
superior to the other 9 because he is more than the majority of
the sum of the secured debts.
If he votes, plus the majority of the committee of the
unsecured debtors, then the court can cram down the
rehabilitation plan and despite the objections it must be
accepted and carried out. So they begin to implement the plan.
Supervision of the court.
Once all the debts are satisfied, once the rehab plan has been
completely executed--by stages man gud na, sometimes it’s
divided into first stage, second stage, third stage--once it is
fully implemented, then the court can ask the receiver. How is
it performing now? Is it completely restored to financial
health? And if the receiver says yes, then the court will issue
an order dismissing the Petition for Financial Rehabilitation.
That is the end game. Order of dismissal. Which means the
debtor corporation can now go back to ordinary life.
Management committee completes its function and retires; the
receiver is gone; the Board of Directors of the corporation
resume their functions and the corporation now resumes as an
ongoing concern in the ordinary course of business.
That is what happens in a financial rehabilitation proceeding.
I told you that the nature of the proceeding is in rem.
Binding against the whole world. There must be publication.
Publication in one newspaper of general circulation in PH for
two consecutive weeks. If you are a creditor and you did not
present your credits in the court where the financial
rehabilitation proceeding is pending, and the time has lapsed
for you to present it, that's too bad because the court will no
longer recognize you. You are considered to have been
informed by publication.
While it is in rem, there is also another characteristic, which is
that it is non-adversarial and summary in nature. Non-
adversarial that means walay kalaban. This debtor, are not
these creditors his opponents? And the answer is no. Why
because they are not named in the title of the case. The title
of the case is In Re: Financial Rehab of XYZ Corp. If you say
voluntary financial rehabilitation, that means it is the debtor
himself who filed the petition. If you say In Re: Involuntary
Petition for Financial Rehabiliation of XYZ Corp., that means
the proceedings were initiated by a group of creditors of the
debtor. And he is summoned. And his reply to his summons is
the mode by which the court obtains jurisdiction over the
debtor. But as to creditors it is by publication.
What is the indication that it is summary in nature? The
indication is that there is this list of pleadings that are not
allowed because it is summary in nature. What are these?
Listed in Section 4 of Rule 1 of the Financial Rehabilitation
Rules of Procedure of 2013.
Sec. 4 xxx
1. Motion to Dismiss
2. Motion for a Bill of Particulars
3. Petition for Relief
4. Motion for Extension
5. Motion for Postponement and other motions of
similar intent
6. Reply
7. Rejoinder
8. Intervention; and
9. Any pleading or motion that is similar to or of like
effect as any of the foregoing
That is an indication that it is summary in nature.
Again, another indication:
xxx
Any pleading, motion or other submission, submitted by any
interested party shall be supported by verified statements that
the affiant has read the submission and its factual allegations
are true and correct of his personal knowledge or based on
authentic records, and shall contain supporting annexes, which
the submitting party shall attest as faithful reproductions of the
originals. An unverified submission shall be considered as not
filed, at the discretion of the judge. Upon motion, the originals
of the annexes to a submission may be produced in court for
examination or comparison by a party to the proceedings.
Every time you submit documentary evidence, it must be
accompanied by a verification. Importante na. And then you
file these pleadings or motions in three printed and two
digital copies in CD format.
This is where the Supreme Court really does not understand
digitalization. Why? You file it in three printed and two digital
copies! Unsa man diay ning digital, back up lang? Kining niang
printed, mao gyud diay ni ang tinuod?
xxx
Annexes to proceedings shall be in printed form. The court
may decide matters on the basis of affidavits, counter-
affidavits, and other documentary evidence, conducting
clarificatory hearings when necessary.
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
is this pleading filed. Then as to the annexes especially if they
are voluminous in nature, you designate the place and time for
other parties to copy those annexes if they so desire, and they
copy them at their expense. It could be a website, and you
just download the facsimiles of these documentary evidence.
Let us say you have audited financial statements for the past
10 years. You do not have to attach it to the pleadings and
give it to all the parties, there are so many creditors. You just
announce to them, “You go to this website, and you can
download the audited financial statements for the past 10
years with this annex to the Voluntary Petition for Financial
Rehabilitation or Involuntary Petition for Financial
Rehabilitation.”
That is basically financial rehabilitation.
Now what happens when something is radically wrong later on
in the financial rehabilitation and it is found to be no longer
possible? What will the court do?
A special feature in FRIA 2010 is that the court can convert
any of the proceedings—whether it is voluntary financial
rehabilitation petition or involuntary financial rehabilitation
petition or whether it is a petition for suspension of payments,
or whether it is a voluntary petition for insolvency—the court
has discretion to convert the proceedings into a liquidation
proceedings. So atoa pa, wa na, end game na ni, patyon na
ning juridical person. He will be dissolved and liquidated. The
court can do that.
In the old system before 2010, that was not possible. Why?
Because the petition for suspension of payments filed by a
corporation, the one that had original and exclusive jurisdiction
was the SEC. So if you file for a suspension of payments,
alleging that you have sufficient assets to meet your liabilities,
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
the assets that you need. So insolvent ka na diay kay kuwang
na kag assets. What is the end result of insolvency?
Liquidation. And your assets will be divided in accordance with
the concurrence and preference of credits of the Civil Code.
Kay wala naman ka.
But then the SEC has no jurisdiction to conduct a liquidation.
So the SEC will just have to dismiss you, and tell the parties,
file a liquidation proceeding with the ordinary courts. That is
what the SEC does because the SEC has no jurisdiction to
conduct liquidation proceedings.
You remember in Corporation Law, we said the SEC approves
dissolution whether the dissolution is voluntary or it is
involuntary. But the moment the SEC approves the petition for
dissolution, the next step is to endorse the same to the regular
courts. Intra-corporate courts. Endorse the same. Why?
Because the SEC has no jurisdiction over the numerous
nominate contracts that are listed in the Civil Code, of which
the petitioner corporation of the debtor has entered into.
Contract of sale, contract of lease, contract of exchange. There
are many contracts. And the ones that have jurisdiction over
these contracts are the regular courts. That is why in the end,
the determination of rights under these various contracts can
only be done by the court. And after the court has made
juridical findings as to the rights of these parties in these
contracts, then it can order the proper liquidation of the
remaining assets.
When under the FRIA can the court order the transformation
of the proceeding to liquidation?
1. Section 25(c)
(c)convert the proceedings into one for the liquidation of the
debtor upon a finding that:
(1)the debtor is insolvent; and
(2)there is no substantial likelihood for the debtor to be
successfully rehabilitated as determined in accordance with the
rules to be promulgated by the Supreme Court.
2. Section 72
Section 72. Period for Confirmation of the Rehabilitation Plan.
- The court shall have a maximum period of one (1) year from
the date of the filing of the petition to confirm a Rehabilitation
Plan.
If no Rehabilitation Plan is confirmed within the said period,
the proceedings may upon motion or motu propio, be
converted into one for the liquidation of the debtor.
Usa na gani katuig unya wa pa gyud naapprove na financial
rehabilitation plan, that is legally the same as it can no longer
be rehabilitated. And therefore the next step is liquidation.
Rehab gud mura gud nang nalumos ang corporation na giCPR
nimo. Isa ka katuig nagbuhat ana wala na gyud siya nibagnon.
Ilubong na na. Liquidation. Patay na na.
3. Section 75
Section 75. Effects of Termination. - Termination of the
proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver subject to his
submission of a final accounting; and
(b) The lifting of the Stay Order and any other court order
holding in abeyance any action for the enforcement of a claim
against the debtor.
Provided, however, That if the termination of proceedings is
due to failure of rehabilitation or dismissal of the petition for
reasons other than technical grounds, the proceedings shall be
immediately converted to liquidation as provided in Section 92
of this Act.
Unsa may example ini? Due to failure of rehabilitation or
dismissal of the petition for reasons other than technical
grounds. Rehab siya nagimpose siyag rehab. Ingon siya. Mao
ni akong assets. My number one assets is my holdings in this
particular other corporation. Gwapo kaayo ing corporation,
dako kaayo kog holdings ani na corporation, and this
constitutes more than 50% of my assets. Now while the court
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
nabankrupt. Zero diay ang balor ngadtong assets na giingon
nimong 50% of the assets of the corporation. Wa nay balor.
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
technical grounds. This is substantial grounds. SO therefore it
is ordered liquidated, and the assets converted to cash by
execution sale and the assets are distributed to its rightful
owners in accordance with the concurrence and preference of
credits.
4. Section 90
Section 90. Voluntary Liquidation. - An insolvent debtor may
apply for liquidation by filing a petition for liquidation with the
court. The petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether as an
attachment or as part of the body of the petition;
(a) a schedule of the debtor's debts and liabilities including a
list of creditors with their addresses, amounts of claims and
collaterals, or securities, if any;
(b) an inventory of all its assets including receivables and
claims against third parties; and
(c) the names of at least three (3) nominees to the position of
liquidator.
At any time during the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the debtor may also
initiate liquidation proceedings by filing a motion in the same
court where the rehabilitation proceedings are pending to
convert the rehabilitation proceedings into liquidation
proceedings. The motion shall be verified, shall contain or set
forth the same matters required in the preceding paragraph,
and state that the debtor is seeking immediate dissolution and
termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient
in form and substance, the court shall issue a Liquidation
Order mentioned in Section 112 hereof.
Because the petition is for voluntary liquidation, unya dili
naman diay kailangan pa tanawon pa ang assets because it's a
very simple corporation. It just has cash assets in the bank.
It’s already frozen. Its liabilities very simple, it’s already
reduced in numbers, it’s represented by promissory notes unya
dili na ko kabayad. Diretso dayon, liquidation. All of these
creditors are the same level. They all suffer the same haircut.
They are not preferred. They are all unsecured debtors. Pareha
ra sila. So their haircut is proportional.
Unsa may pasabot anang haircut? Ang ilang gipautang
100milliom. Unya pila na lang ang assets sa corporation,
20million na lang. Unya pila pa mo kabuok magtunga, daghan
kaayo. Putlon na inyong mga utang, proportionately, pareho ra
man mong rango, unya tagaan mog tagsa tagsa. Sayon ra
kaayo pagsolbad. Wa namay laing problema. This is equivalent
to judgment on the pleadings. Wa nay hearing hearing. Correct
ba nang imo? Klaro na kaayo. Naa namay uncontroverted
evidence of indebtedness.
5. Section 92
Section 92. Conversion by the Court into Liquidation
Proceedings. - During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation
proceedings pursuant to (a) Section 25(c) of this Act; or (b)
Section 72 of this Act; or (c) Section 75 of this Act; or (d)
Section 90 of this Act; or at any other time upon the
recommendation of the rehabilitation receiver that the
rehabilitation of the debtor is not feasible. Thereupon, the
court shall issue the Liquidation Order mentioned in Section
112 hereof.
Recommends to the court, and the court issues an order.
Because the receiver believes that it can no longer be
rehabilitated.
So remember ha, no matter what proceeding it is in,
suspension of payments, voluntary rehabilitation, involuntary
rehabilitation, petition for voluntary insolvency, petition for
involuntary insolvency, they can all be changed into liquidation
if they fall into any of the five instances that are mentioned in
the FRIA law.
What are the exceptions to the stay order? In other words
when does the stay order NOT apply?
1. To appealed cases pending before the Supreme Court
between a debtor and creditor. That creditor is no longer
covered by the Stay Order. Section 18(a).
(a) to cases already pending appeal in the Supreme Court as
of commencement date Provided, That any final and executory
judgment arising from such appeal shall be referred to the
court for appropriate action;
2. Pending cases before specialized court, quasi-judicial
agency. Section 18(b).
(b) subject to the discretion of the court, to cases pending or
filed at a specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim
more quickly, fairly and efficiently than the court: Provided,
That any final and executory judgment of such court or agency
shall be referred to the court and shall be treated as a non-
disputed claim;
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.