SECURITIES REGULATION CODE

1. What are capital markets?

Capital market is a market where buyers and sellers engage in trade of financial securities like
bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and
institutions.

Capital markets help channel surplus funds from savers to institutions which then invest them
into productive use. Generally, this market trades mostly in long-term securities.

Capital market consists of primary markets and secondary markets. Primary markets deal with
trade of new issues of stocks and other securities, whereas secondary market deals with the
exchange of existing or previously-issued securities. Another important division in the capital
market is made on the basis of the nature of security traded, i.e. stock market and bond market.

2. How about non-capital markets?

A type of investment that is not as freely marketable or transferable as a security. Unlike a

security, a non-security does not require the backing of an underwriter or bank, and involves
much less documentation and paperwork. This lack of underwriting reduces the vehicle's
liquidity and makes exchanging it between parties more difficult. Non-security investments
could still hold value, but will not be quoted on any stock exchange or organized financial
market.

3. Who is an insider?

"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.

4. What is an Exchange?
 "Exchange" is an organized market place or facility that brings together buyers and
sellers and executes trade of securities and/or commodities.

5. What are Pre-need plans?

"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.

6. Registration statement?

"Registration statement" is the application for the registration of securities required to

be filed with the Commission.

7. What is the policy of the state in enacting the SRC?

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.

8. What securities are required to be registered?

All securities sold or offered for sale or distribution within the Philippines.

9. What is the Register of Securities?

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.

10. What securities are exempt from registration and why are they exempt?

(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.

11. What are the exempt transactions and why are the securities sold in any of them not
required to be registered?

(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in
insolvency or bankruptcy.

(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling
of offering for sale or delivery in the ordinary course of business and not for the purpose of
avoiding the provision of this Code, to liquidate a bonafide debt, a security pledged in good
faith as security for such debt.

(c) An isolated transaction in which any security is sold, offered for sale, subscription or
delivery by the owner therefore, or by his representative for the owner’s account, such sale or
offer for sale or offer for sale, subscription or delivery not being made in the course of repeated
and successive transaction of a like character by such owner, or on his account by such
representative and such owner or representative not being the underwriter of such security.
(d) The distribution by a corporation actively engaged in the business authorized by its articles
of incorporation, of securities to its stockholders or other security holders as a stock dividend
or other distribution out of surplus.

(e) The sale of capital stock of a corporation to its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or indirectly in connection with
the sale of such capital stock.

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

(g) The issue and delivery of any security in exchange for any other security of the same issuer
pursuant to a right of conversion entitling the holder of the security surrendered in exchange
to make such conversion: Provided, That the security so surrendered has been registered under
this Code or was, when sold, exempt from the provision of this Code, and that the security
issued and delivered in exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration under this Code. Upon
such conversion the par value of the security surrendered in such exchange shall be deemed
the price at which the securities issued and delivered in such exchange are sold.

(h) Broker’s transaction, executed upon customer’s orders, on any registered Exchange or
other trading market.

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

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

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

(l) The sale of securities to any number of the following qualified buyers:

(i) Bank;
 (ii) Registered investment house;

(iii) Insurance company;

(iv) Pension fund or retirement plan maintained by the Government of the Philippines
or any political subdivision thereof or manage by a bank or other persons authorized
by the Bangko Sentral to engage in trust functions;

(v) Investment company or;

(vi) Such other person as the Commission may rule by determine as qualified buyers,
on the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under management.

12. What is the initial procedure for the registration of securities?

All securities required to be registered under Subsection 8. I shall be registered through

the filing by the issuer in the main office of the Commission, of a sworn registration statement
with the respect to such securities, in such form and containing such information and
document as the Commission prescribe. The registration statement shall include any
prospectus required or permitted to be delivered under Subsections 8.2, 8.3, and 8.4.

13. Who are required to sign the registration statement?

The registration statement shall be signed by the issuer’s executive officer, its principal
operating officer, its principal financial officer, its comptroller, its principal accounting officer,
its corporate secretary, or persons performing similar functions accompanied by a duly verified
resolution of the board of directors of the issuer corporation

14. What action may the SEC take in respect of a registration statement?

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.

15. What are the grounds for rejecting a registration statement?

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

(b) The registration statement is on its face incomplete or inaccurate in any material respect
or includes any untrue statements of a material fact required to be stated therein or necessary
to make the statement therein not misleading; or

(c) The issuer, any officer, director or controlling person performing similar functions, or
any under writer has been convicted, by a competent judicial or administrative body, upon
plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is
enjoined or restrained by the Commission or other competent or administrative body for
violations of securities, commodities, and other related laws.

16. What is a tender offer?

19.1.8. "Tender offer" means a publicly announced intention by a person acting alone or in
concert with other persons (hereinafter referred to as "person") to acquire outstanding
equity securities of a public company as defined in SRC Rule 3, or outstanding equity
securities of an associate or related company of such public company which controls the said
public company. (2015 SRC IRR)

17. Under what circumstances is a tender offer mandatory? (2015 SRC IRR)
(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.
(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]
(3)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 through the Exchange trading
system shall not be required to make a tender offer even if such person or group of persons
acting in concert acquire the remainder through a block sale if, after acquisition through the
Exchange trading system, they fail to acquire their target of thirty five percent (35%) or such
outstanding voting shares that is sufficient to gain control of the board.
(4) 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 directly from one or more
stockholders shall be required to make a tender offer for all the outstanding voting shares.
The sale of shares pursuant to the private transaction or block sale shall not be completed
prior to the closing and completion of the tender offer.
(5) If any acquisition that would result in ownership of over fifty percent (50%) of the total
outstanding equity securities of a public company, the acquirer shall be required to make a
tender offer under this Rule for all the outstanding equity securities to all remaining
stockholders of the said company at a price supported by a fairness opinion provided by an
independent financial advisor or equivalent third party. The acquirer in such a tender offer
shall be required to accept all securities tendered.

18. When would a person be presumed to be making a voluntary tender offer?

2015 SRC IRR, Rule 19.2.b: A person shall be presumed to have the intent that would mandate
the making of a tender offer pursuant to paragraph (a) above when the person, respectively:
i. acquires 15% or more of the equity shares of a public company pursuant to an agreement
made between or among the person and the seller or sellers;
ii. acquires 30% or more of the shares of a public company within a period of 12 months; or
iii. acquires shares that result in ownership of more than fifty percent (50%) of the equity
shares of a public company.

19. What is a proxy and why is its solicitation regulated?

Proxy refers to the proxy, consent or authorization referred to in Section 20 of the Code.
[Sec. 20 of SRC provides: 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.
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.]

The solicitation and use proxies can be an effective tool in securing voting and management
control in a corporation. In fact, Section 24 of the Corporation Code mandates that during
the determination of quorum and casting of votes for the election of directors,
representation through proxy should be taken into consideration. Hence, our legislators
deemed it necessary to regulate this, at least for public companies and those involved in
transactions requiring the registration of securities with the Securities and Exchange
Commission.

20. When could the profits made by a stockholder, director or officer in a purchase and sale,
or a sale and purchase, of any equity security be recovered?
Sec 23.2 of the SRC: For the purpose of preventing the unfair use of information which may
have been obtained by such beneficial owner, director or officer by reason of his relationship
to the issuer, any profit realized by him from any purchase or sale, or any sale or purchase, of
any equity security of such issuer within any period of less than (6) months unless such
security was acquired in good faith in connection with a debt previously contracted, shall
inure to and be recoverable by the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period exceeding six (6) months.
Suit to recover such profit may be instituted before the Regional Trial Court by the issuer, or
by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer
shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently
to prosecute the same thereafter, but not such shall be brought more than two years after the
date such profit was realized. This Subsection shall not be construed to cover any
transaction were such beneficial owner was not such both time of the owner or the sale, or
the sale of purchase, of the security involved, or any transaction or transactions which the
Commission by rules and regulations may exempt as not comprehended within the purpose
of this subsection.

21. What are the various ways by which the security prices may be manipulated?
SRC – Sec 24.1 It shall be unlawful for any person acting for himself or through a dealer or
broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in any listed security
traded in an Exchange of any other trading market (hereafter referred to purposes of
this Chapter as "Exchange"):
(i) By effecting any transaction in such security which involves no change in
the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such security
with the knowledge that a simultaneous order or orders of substantially the
same size, time and price, for the sale or purchase of any such security, has or
will be entered by or for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial
ownership.
(b) To affect, alone or with others, a securities or transactions in securities that: (I)
Raises their price to induce the purchase of a security, whether of the same or a
different class of the same issuer or of controlling, controlled, or commonly
controlled company by others; or (iii) Creates active trading to induce such a
purchase or sale through manipulative devices such as marking the close, painting the
tape, squeezing the float, hype and dump, boiler room operations and such other
similar devices.
(c) To circulate or disseminate information that the price of any security listed in an
Exchange will or is likely to rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of raising or depressing the price
of the security for the purpose of inducing the purpose of sale of such security.
(d) To make false or misleading statement with respect to any material fact, which he
knew or had reasonable ground to believe was so false or misleading, for the purpose
of inducing the purchase or sale of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase
and/or sale of any security traded in an Exchange for the purpose of pegging, fixing
or stabilizing the price of such security; unless otherwise allowed by this Code or by
rules of the Commission.

22. What is an insider prohibited from doing and what is his duty when trading?
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, unless: (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: 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.

27.3. 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.
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).
23. Could an insider be liable even if he does not trade? Yes. (SRC)
Section 61. Civil Liability on Account of Insider Trading. – 61.1. Any insider who violates
Subsection 27.1 and any person in the case of a tender offer who violates Subsection 27.4
(a)(I), or any rule or regulation thereunder, by purchasing or selling a security while in
possession of material information not generally available to the public, shall be liable in a
suit brought by any investor who, contemporaneously with the purchase or sale of securities
that is the subject of the violation, purchased or sold securities of the same class unless such
insider, or such person in the case of a tender offer, proves that such investor knew the
information or would have purchased or sold at the same price regardless of disclosure of
the information to him.
61.2. An insider who violates Subsection 27.3 or any person in the case of a tender offer who
violates Subsection 27.4 (a), or any rule or regulation thereunder, by communicating material
nonpublic information, shall be jointly and severally liable under Subsection 61.1 with, and
to the same extent as, the insider, or person in the case of a tender offer, to whom the
communication was directed and who is liable under Subsection 61.1 by reason of his
purchase or sale of a security.

24. Is there a presumption of insider trading? Yes.

SRC- Sec 27.1. 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: 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.

25. What is material nonpublic information?

SRC Sec. 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.

26. Who are the market professionals and entities required to register with the SEC?
(2015 SRC IRR)
Rule 28.9 - Register of Securities Market Professionals The names and addresses of all
persons approved for registration as brokers, dealers, associated persons or salesmen and all
orders of the Commission with respect thereto shall be recorded in a Register of Securities
Market Professionals kept in the office of the Commission which shall be open to public
inspection.

27. Who is an independent director?

(2015 SRC IRR)
SRC Rule 38.1 Definition of “Independent Director”
1. As used in Section 38 of the Code, independent director means a person who, apart from
his fees and shareholdings, is independent of management and free from any business or other
relationship which could, or could reasonably be perceived to, materially interfere with his
exercise of independent judgement in carrying out his responsibilities as a director in any
corporation that meets the requirements of Section 17.2 of the Code and includes, among
others, any person who:chanroblesvirtuallawlibrary
a. Is not a director or officer of the corporation or of its related companies or any of its
substantial shareholders (other than as an independent director of any of the foregoing);
b. Is not a substantial shareholder of the corporation or of its related companies or any of its
substantial shareholders;
c. Is not a relative of any director, officer or substantial shareholder of the corporation, any of
its related companies or any of its substantial shareholders. For this purpose, relatives includes
spouse, parent, child, brother, sister, and the spouse of such child, brother or sister;
d. Is not acting as a nominee or representative of any director or substantial shareholder of
the corporation, any of its related companies or any of its substantial shareholders;
e. Has not been employed in any executive capacity by that public company, any of its related
companies or by any of its substantial shareholders within the last five (5) years;
f. Is not retained as professional adviser by that public company, any of its related companies
or any of its substantial shareholders within the last five (5) years;
g. Is not retained as professional adviser, by that public company, any of its related companies
or by any of its substantial shareholders, either personally or through his firm; or
h. Has not engaged and does not engage in any transaction with the corporation or with any
of its related companies or with any of its substantial shareholders, whether by himself or
with other persons or through a firm of which he is a partner or a company of which he is a
director or substantial shareholder, other than transactions which are conducted at arms length
and are immaterial.
When used in relation to a company subject to the requirements of this Rule and Section 38
of the CodeV
a. Related company means another company which is: (a) its holding company, (b) its
subsidiary, or (c) a subsidiary of its holding company; and
b. Substantial shareholder means any person who is directly or indirectly the beneficial owner
of more than ten percent (10%) of any class of its equity security.

28. Who are required to have independent directors?

SRC 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.

29. What transactions of brokers and dealers are prohibited?

SRC Section 30. Transactions and Responsibility of Brokers and Dealers. – 30.1 No brokers
or dealer shall deal in or otherwise buy or sell, for its own account or for its own account or
for the account of customers, securities listed on an Exchange issued by any corporation
where any stockholders, director, associated person or salesman, or authorized clerk of said
broker or dealer and all the relatives of the foregoing within the fourth civil degree of
consanguinity or affinity, is at the same time holding office in said issuer corporation as a
director, president, vice-president, manager, treasurer, comptroller, secretary or any office
trust and responsibility, or is a controlling of the issuer.
30.2. No broker or dealer shall effect any transaction in securities or induce or attempt to
induce the purchase or sale of any security except in compliance with such rules and
regulations as the Commission shall prescribe to ensure fair and honest dealings in securities
and provide financial safeguards and other standards for the operations of brokers and
dealers, including the establishments of minimum net capital requirements, the acceptance of
custody and use of securities of customers, and the carrying and use of deposits and credit
balances of customers.

30. What is the suitability rule?

(2015 SRC IRR)SRC Rule 30.2-4 Suitability Rule
1. In recommending to a customer the purchase, sale or exchange of any security, a Broker
Dealer or an associated person or salesman of a Broker Dealer, shall have reasonable grounds
for believing that the recommendation is suitable for such customer upon the basis of the
facts disclosed by such customer as to his other security holdings and as to his financial
situation and needs.
2. Except as provided in SRC Rule 52.1-6, prior to the execution of a transaction
recommended to a customer, a Broker Dealer shall execute a customer account information
form which complies with SRC Rule 52.1-6.

31. Can the SEC suspend trading in a security or all trading on any securities exchange?

Yes. The commission shall act with transparency and shall have the powers and functions
provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment
Houses law, the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:

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(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and
other SROs;

32. What is margin trading and why is it regulated?

A method of buying shares that involves borrowing a part of the sum needed from the broker
executing the transaction. The collateral for the loan is normally securities in the investor’s
account. The investor must deposit an initial amount of cash or securities into a margin
account with the broker, and must thereafter maintain a minimum amount of cash or securities
in the account as collateral. If the balance of a margin account falls below the minimum
maintenance account, the broker makes a margin call to the investor for the funds needed.

Its purpose is to prevent the excessive use of credit for the purchase or carrying of securities,
the Commission, in accordance with the credit and monetary policies that may be promulgated
from time to time by the Monetary Board of the Bangko Sentral ng Pilipinas.

33. What administrative sanctions may the SEC impose?

Section 54. Administrative Sanctions. – 54.1. If, after due notice and hearing, the Commission
finds that: (a) There is a violation of this Code, its rule, or its orders; (b) Any registered broker
or dealer, associated person thereof has failed reasonably to supervise, with a view to
preventing violations, another person subject to supervision who commits any such violation;
(c) Any registrant or other person has, in a registration statement or in other reports,
applications, accounts, records or documents required by law or rules to be filed with the
Commission, made any untrue statement of a material fact, or omitted to state any material
fact required to be stated their or necessary to make the statements therein not misleading; or,
in the case of an underwriter, has failed to conduct an inquiry with reasonable diligence to
insure that a registration statement is accurate and complete in all material respects; or (d) Any
person has refused to permit any lawful examinations into its affairs, it shall, in its discretion,
and subject only to the limitations hereinafter prescribed, impose any or all of the following
sanctions as may be appropriate in light of the facts and circumstances:

(i) Suspension, or revocation of any registration for the offering of securities;

(ii) A fine of no less than Ten thousand pesos (P10,000.00) nor more than One million
pesos (P1,000,000.00) plus not more than Two thousand pesos (P2,000.00) for each
day of continuing violation;

(iii) In the case of a violation of Sections 19.2, 20, 24, 26 and 27, disqualification from
being an officer, member of the Board of Directors, or person performing similar
functions, of an issuer required to file reports under Section 17 of this Code or any
other act, rule or regulation administered by the Commission;

(iv) In the case of a violation of Section 34, a fine of no more than three (3) times the
profit gained or loss avoided as result of the purchase, sale or communication
proscribed by such Section, and

(v) Other penalties within the power of the Commission to impose.

34. What is settlement offer?

Section 55. Settlement Offers. – 55.1. At any time, during an investigation or proceeding under
this Code, parties being investigated and/or charged may propose in writing an offer of
settlement with the Commission.

55.2. Upon receipt of such offer of settlement, the Commission may consider the offer based
on timing, the nature of the investigation or proceeding, and the public interest.

55.3. The Commission may only agree to a settlement offer based on its findings that such
settlement is in the public interest. Any agreement to settle shall have no legal effect until
publicly disclosed. Such decision may be made without a determination of guilt on the part of
the person making the offer.

55.4. The Commission shall adopt rules and procedures governing the filing, review,
withdrawal, form of rejection and acceptance of such offers.

35. Who may be sued on account of a false registration statement?

(a) The issuer and every person who signed the registration statement:

(b) Every person who was a director of, or any other person performing similar functions, or
a partner in, the issuer at the time of the filing of the registration statement or any part,
supplement or amendment thereof with respect to which his liability is asserted;

(c) Every person who is named in the registration statement as being or about to become a
director of, or a person performing similar functions, or a partner in, the issuer and whose
written consent thereto is filed with the registration statement;

(d) Every auditor or auditing firm named as having certified any financial statements used in
connection with the registration statement or prospectus.

(e) Every person who, with his written consent, which shall be filed with the registration
statement, has been named as having prepared or certified any part of the registration
statement, or as having prepared or certified any report or valuation which is used in
connection with the registration statement, with respect to the statement, report, or valuation,
which purports to have been prepared or certified by him.

(f) Every selling shareholder who contributed to and certified as to the accuracy of a portion
of the registration statement, with respect to that portion of the registration statement which
purports to have been contributed by him.

(g) Every underwriter with respect to such security.

36. What is the prescriptive period for the enforcement of actions under Sections 56 ( re: civil
liabilities arising in connection with prospectus, communications and reports?

No action shall be maintained to enforce any liability created under Section 56 or 57 of this
Code unless brought within two (2) years after the discovery of the untrue statement or the
omission, or, if the action is to enforce a liability created under Subsection 57.1 (a), unless,
brought within two (2) yeas after the violation upon which it is based. In no event shall an
such action be brought to enforce a liability created under Section 56 or Subsection 57.1 (a)
more than five (5) years after the security was bona fide offered to the public, or under
Subsection 57.1 (b0 more than five (5) years after the sale.

37. What are the damages that may be awarded in suits to recover damages under Sections
56-60?

Section 63. Amount of Damages to be Awarded. – 63.1. All suits to recover damages pursuant to
Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court, which shall
have exclusive jurisdiction to hear and decide such suits. The Court is hereby authorized to
award damages in an amount not exceeding triple the amount of the transaction plus actual
damages.

Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or
wantonness in the violation of this Code or the rules and regulations promulgated thereunder.

The Court is also authorized to award attorney’s fees not exceeding thirty percentum (30%) of
the award.

63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be jointly and
severally liable for the payment of damages. However, any person who becomes liable for the
payment of such damages may recover contribution from any other person who, if sued
separately, would have been liable to make the same payment, unless the former was guilty of
fraudulent representation and the latter was not.

63.3. Notwithstanding any provision of law to the contrary, all persons, including the issuer,
held liable under the provisions of Sections 56, 57, 58, 59, 60 and 61 shall contribute equally
to the total liability adjudged herein. In no case shall the principal stockholders, directors and
other officers of the issuer or persons occupying similar positions therein, recover their
contribution to the liability from the issuer. However, the right of the issuer to recover from
the guilty parties the amount it has contributed under this Section shall not be prejudiced.

38. May compliance with any provision of the SRC be waived and would such waiver be valid?
No. Section 71. Validity of Contracts. – 71.1. Any condition, stipulation, provision binding any
person to waive compliance with any provision of this Code or of any rule or regulation
thereunder, or of any rule of an Exchange required thereby, as well as the waiver itself, shall
be void.

39. How does the Philippines define foreign corporations?

A foreign corporation is one formed, organized or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and corporations to do business in
its own country or state. It shall have the right to transact business in the Philippines after it
shall have obtained a license to transact business in this country in accordance with this Code
and a certificate of authority from the appropriate government agency.

40. What is the general policy of the government for foreign investments?

It is the policy of the State to attract, promote and welcome productive investments from
foreign individuals, partnerships, corporations, and governments, including their political
subdivisions, in activities which significantly contribute to national industrialization and
socioeconomic development to the extent that foreign investment is allowed in such activity
by the Constitution and relevant laws. Foreign investments shall be encouraged in enterprises
that significantly expand livelihood and employment opportunities for Filipinos; enhance
economic value of farm products; promote the welfare of Filipino consumers; expand the
scope, quality and volume of exports and their access to foreign markets; and/or transfer
relevant technologies in agriculture, industry and support services. Foreign investments shall
be welcome as a supplement to Filipino capital and technology in those enterprises serving
mainly the domestic market.

41. Can a foreign company invest in the Philippines?

Yes.

42. What is the percentage of foreign equity allowed under the FIA?

As a general rule, there are no restrictions on extent of foreign ownership of export enterprises.
In domestic market enterprises, foreigners can invest as much as one hundred percent (100%)
equity except in areas included in the negative list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to undertake measures that will gradually increase
Filipino participation in their businesses by taking in Filipino partners, electing Filipinos to the
board of directors, implementing transfer of technology to Filipinos, generating more
employment for the economy and enhancing skills of Filipino workers.

43. What are those businesses with foreign investment restrictions?

Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign
Investment Negative List). - The Foreign Investment Negative List shall have three (3)
component lists: A, B, and C.

44. What is the coverage of Negative List A?

1. All areas of investment in which foreign ownership is limited by mandate of Constitution

and specific laws.

45. What is the coverage of Negative List B?

1. Manufacture, repair, storage and/or distribution of firearms, ammunitions, lethal weapons,

military ordinance, explosives, pyrotechnics and similar materials required by law to be licensed
by and under the continuing regulation of the Department of National Defense; unless such
manufacturing or repair activity is specifically authorized with a substantial export component,
to a non-Philippine national by the Secretary of National Defense;

2. Manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars,
beerhouses, dance halls; sauna and steam bathhouses, massage clinic and other like activities
regulated by law because of risks they may pose to public health and morals;

3. Small and medium-size domestic market enterprises with paid-in equity capital or less than
the equivalent of US$500,000, unless they involve advanced technology as determined by the
Department of Science and Technology, and

4. Export enterprises which utilize raw materials from depleting natural resources, and with
paid-in equity capital of less than the equivalent US$500,000.

46. What requirements must be complied with before a foreign corporation

can do business in the Philippines?

If the foreign corporation itself intends to do business in the Philippines under its foreign
charter, the foreign corporation must first secure a “License to do Business in the Philippines”
from the Philippine Securities & Exchange Commission (SEC). If the foreign corporation
intends to do business in the Philippines by incorporating a Philippine company, the foreign
corporation must first secure the approval of the SEC by filing its incorporation papers,
together with authenticated copies of its foreign charter and by-laws.

47. Is there a need for the foreign corporation to appoint its local agent in
the Philippines?

Yes, if the foreign corporation intends to do business in the Philippines under its foreign
charter. Among the things to be stated in the verified application are the name and address of
the foreign corporation’s resident agent authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local office, all notices affecting the
corporation.

48. What is the effect of failure to appoint or maintain a local agent?

The failure to appoint or maintain a resident agent in the Philippines, or after change of its
resident agent or his address, failure to submit to the SEC a statement of such change, are
grounds for revocation of a license granted to a foreign corporation to do business in the
Philippines.

49. Is there any Reciprocity Compliance?

Yes. Attached to the application shall also be a duly executed certificate under oath by the
authorized official or officials of the jurisdiction of incorporation of the foreign corporation,
attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens
and corporation to do business therein.

50. Is there a need to deposit Securities?

Yes. Within sixty (60) days from issuance of the license to do business, such foreign
corporation shall deposit with the SEC, for the benefit of its present and future creditors,
Philippine securities in the actual market value of at least Php100,000.00, subject to further
deposit of additional securities every six months after each fiscal year equivalent in actual
market value to two percent (2%) of the amount by which the foreign corporation’s gross
income for that fiscal year exceeds Php5,000,000.00.

51. What is the effect of being issued a “License to Do Business in the

Philippines”?
When a foreign corporation is issued the license to do business in the Philippines, it may
commence to transact its business in the Philippines and continue to do so for as long as it
retain its authority to act as a corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered, revoked, suspended, or annulled.

52. What are the consequences of not obtaining a license to do business?

A foreign corporation doing business in the Philippines without first obtaining the license to
do business (a) shall not be permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines; (b) but such foreign corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

52. Are there any tax incentives for foreign corporations investing in the
Philippines?
Yes. There are several tax incentives available to foreign corporations depending on the
government office or export zone under which such foreign corporation intends to undertake
or register its investment. Please refer to “The Investor’s Guide to Doing Business in the
Philippines” for a more comprehensive list of the investment options available to foreign
corporations.

53. Can foreign corporations acquire or own land in the Philippines?

Yes, provided the following requirements are met: (a) it must be a private land, which means
any land of private ownership; and (b) the foreign equity in the corporation must not exceed
forty percent (40%).

54. What will happen if foreign ownership exceeds forty percent (40%)?
The effect would be that the foreign corporation would lose its capacity to hold the private
land. They may, however, be granted temporary rights such as a lease contract which is not
prohibited by the Constitution.

55. What are the other exceptions to the ownership of land by foreign
investors and corporations?
a. Acquisition through hereditary succession;
b. Purchase by a former natural-born Filipino citizen pursuant to the Dual Citizenship Law
which states that a former Filipino re-acquiring his Filipino Citizenship shall be deemed not
to have lost his Philippine citizenship, thus enabling them to enjoy all the rights and privileges
of a Filipino;
c. If a former natural-born Filipino who has become a naturalized citizen of another state opts
not to re-acquire Filipino citizenship according to the Dual Citizenship Act, he may
nonetheless own land but limited to the following according to BP 185 and RA 8179):
i. For residential use:
1. Up to 1,000 square meters of residential land
2. Up to 1 hectare of agricultural land
ii. For business or commercial use
1. Up to 5,000 square meters of urban land
2. Up to 3 hectares of rural land
d. Purchase of not more than 40% interest in a condominium project; and
e. Ownership through Filipinos who are married to aliens who retain their Filipino citizenship

56. Can foreign corporations own real properties in the Philippines other
than land?
Yes. Foreign corporations can acquire other immovable or real properties such as buildings
and other improvements on the land, including condominium units.

57. Are foreigners and foreign corporations allowed to lease lands in the
Philippines?
Yes. Foreign investors investing in the Philippines can now lease private lands up to 75 years.
Based on R.A. No. 7652, entitled “Investor’s Lease Act”, lease agreements may be entered
into with Filipino landowners. Lease period is 50 years, renewable once for another 25 years.
For tourism projects, the lease shall be limited to projects with an investment of not less than
US$5M, 70% of which shall be infused in said project within 3 years from signing of the lease
contract.

58. Are arbitration clauses accepted in the Philippines?

Yes. Consistent with UNCITRAL Model Law, the Alternative Dispute Resolution (ADR) Act
of 2004 was recently enacted. The Law promotes the use of different modes of ADR for the
speedy and impartial dispensation of justice. The ADR Act expressly adopted under Section
19 thereof the UNCITRAL Model Law as the law governing international commercial
arbitration in the Philippines. /in short, the ADR Act has now opened the window for the
Philippines to be a venue for international commercial arbitration and mediation.

59. Can foreign corporations participate in bidding for projects by the

Philippine Government?
Yes. Under the “Government Procurement Reform Act of 2003”, all procurement shall be
done through competitive bidding, a method of procurement which is open to participation
by any interested party.