SECURITIES

REGULATION CODE
LIBERTAS ET IUSTICIA
This is a product of the 2013 Academics Committee of Libertas Et Iusticia.

This is not for sale.

Libertas encourages the free circulation of this material.

This material is a compilation of notes from the lecture of Dean Nilo T. Divina, cases from his book,
Handbook for Commercial Law and from the book of Timoteo B. Aquino, Philippine Corporate Law
Compendium.

For corrections, comments, and suggestions, you may send them to [email protected]

Thank you.

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 LIBERTAS ET IUSTICIA
SECURITIES REGULATION CODE

PRELIMINARY MATTERS the investing public; he only agrees to act as

an agent of the issuer.
Persons involved in the Issuance and Distribution
1. Issuer is the originator, maker, obligor or Securities Market
creator of the security. A. Primary Transaction
It involves the issuance of the
2. Broker is a person engaged in the business unsubscribed portion of the authorized
of buying and selling securities for the capital stock of the corporation.
account of others
B. Secondary Transaction
3. Dealer means any person who buys and It involves the sale of previously
sells securities for his/her own account in issued and subscribed shares.
the ordinary course of business.
C. Over-the-counter Transaction
4. Clearing agency is any person who acts as It refers to transactions done
intermediary in making deliveries upon outside the stock exchange.
payment to effect settlement in securities
transactions. — oOo —

5. Exchange1 is the organized marketplace or SECURITIES REGULATIONS CODE

facility that brings together buyers and It was enacted because of the policy of the state to:
sellers and executes trades of securities 1. Establish a socially conscious, free market
and/or commodities. It covers only listed that regulates itself,
shares. 2. Encourage the widest participation of
ownership in enterprises,
6. Promoter is a person who, acting alone or 3. Enhance the democratization of wealth,
with others, takes initiative in founding and 4. Promote development of the capital market
organizing the business or enterprise of the 5. Protect investors
issuer and receives consideration therefore. 6. Ensure full and fair disclosure about
securities
7. Underwriter is a person who guarantees on 7. Minimize if not totally eliminate insider
a firm commitment and/or declared best trading and other fraudulent or manipulative
effort basis the distribution and sale of devices and practices which create
securities of any kind by another. distortions in the free market. (Sec. 2, SRC)
Underwriting Blue Skies Laws
It is the process of marketing new issues of securities. Laws that regulate securities because they seek to
There are three types of underwriting. prevent the public from being victimized into
1. Firm Commitment investing into speculative schemes which have no
The underwriter agrees to purchase all or more basis than so many feet of the blue skies. (Hall
specific amount of the offering for cash, v. Geiger-Jones Co.)
subject to certain market-outs
Securities Regulations Code (SRC) is intended to
2. Stand-by protect the public and also to strengthen the capital
It is one where a new issue is offered only to markets through regulations.
existing shareholders. The underwriter
agrees to ‘stand-by’ and purchase any shares Manners by which SRC protects the public:
not purchased by existing shareholders at the 1. By imposing a continuing duty of full
expiration of a specified period. disclosure of information to the public;
2. By requiring registration of securities;
3. Best Efforts 3. By requiring close monitoring of securities;
The underwriter neither purchases the 4. By requiring the registration of and
securities from the issuer nor resells them to monitoring the activities of persons involved
to ensure compliance with the law;
1
In our jurisdiction, it is the Philippine Stock Exchange.

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5. By prohibiting and penalizing different The term solely must not be given a strict
fraudulent practices and transactions; and interpretation as it would lead to unrealistic
6. By providing the SEC with and results.
strengthening its powers and functions.
(Philippine Stock Exchange v CA, 281 SCRA Therefore, to be a security subject to regulation
232) by SEC, an investment contract in our
jurisdiction must be proved to be:
Note: Securities are regulated because of their a. An investment of money
peculiar nature that they are created rather than b. In a common enterprise
produces. They can be issued in unlimited amounts, c. With expectation of profits
virtually without a cost. d. Primarily from the efforts of others.
Thus, a corporation allowing a principal investor
Two Levels of Regulation to enrol in its program by paying a certain
1. Regulation by the Securities and Exchange amount, which in turn entitles him to be paid in a
Commission (SEC) certain amount if recruit was able to get a
2. Self-regulation by the stock exchange minimum recruitment of 4 investors. (Power
Homes Unlimited Corporation v. SEC)
— oOo —
A presumption that a contract is an investment
SECURITIES contract arises whenever a person seeks to use
They are shares, participation or interests in a the money of others on the promise of profits.
corporation or in a commercial enterprise or profit
making venture and evidenced by a certificate, III. Fractional undivided interest in oil, gas, or
contract, instrument, whether written or electronic in other mineral rights
character (Sec 3.1, SRC)
They are included because they are notorious
Kinds of Securities subjects of speculation and fraud. The law
I. Shares of stocks, bonds, debentures, notes, prohibits the forms of splitting mineral interest
evidences of indebtedness, asset-backed which had been mostly utilized for speculative
securities purposes.

Asset-backed Securities Interest included are those regarded as giving

Definition here ownership of oil or gas in place as well as to
Caused the financial meltdown… interests which merely afford the owner the right
to produce oil or gas. There is no fractional
undivided interest if the whole landowner’s
II. Investment contract, certificates of interest or royalty is transferred, even though under the
participation in a profit sharing agreement, terms of the lease holder may be entitled to only
certificates of deposit for future subscription a fraction of the production.

Investment contract IV. Derivatives like options and warrants

It is a contract, transaction or scheme whereby a
person invests his money in a common enterprise Derivative means a financial instrument whose
and is led to expect profits primarily from the value depends on the interest in or performance
efforts of others. of an underlying security, but which does not
require any investment of principal in the
Howey Test underlying security.
It requires a transaction, contract or scheme
whereby a person: Options are contracts that give the buyer the
1. Makes an investment of money right to buy or sell an underlying security at a
2. In a common enterprise predetermined price (exercise/ strike price) on or
3. With the expectation of profit before the expiry date which can only be
4. To be derived solely from the efforts of extended in accordance with the Exchange rules.
others. (SEC v W.J. Howey Co, US Case 1. Call options are rights to buy. It is a
1946) transferrable option to buy a specified

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SECURITIES REGULATION CODE

number of shares at a stated price. It a. Detachable warrant may be

entitles the holder to buy securities at a sold, transferred or assigned to
predetermined price within a specified any person by the
period of time. warrantholder separate from
and independent of, the
An option that in consideration of corresponding Beneficiary
premium paid entitles buyer the right to Securities2.
compel seller to deliver to him a certain
number of share of named stock within b. Nondetachable warrant may
a given time at a stipulated price which not be sold, transferred or
is usually higher than the prevailing assigned to any person by the
market price at the time the “call” is warrantholder separate from
bought and independent of, the
corresponding Beneficiary
2. Put options are rights to sell. It is a Securities.
transferrable option or offer to deliver a
given number of shares of stock at a 2. Warrant Instrument is a written
stated price at any given time during a document containing the terms and
stated period conditions of the issue and exercise of a
Warrant, which include
An option that, in consideration of a. A maximum underlying
premium paid, gives the purchaser the shares3 that can be purchased
right to make the seller take from him a upon the exercise
b. The exercise period
given number of shares of a named
c. Other provisions required by
stock between a given time at a the Commission.
stipulated price, which is usually below
a prevailing market price of the stock at V. Certificates of assignments, certificates of
the time the “put” is purchased. participation, trust certificates, voting trust
certificates or similar instruments
3. Straddle option is a double privilege of
a “put” and a “call”, and secures to VI. Proprietary or non-proprietary membership
holder the right to demand of seller at a certificates in corporations
certain price within a certain time a
certain number of shares of specified VII. Other instruments as may in the future be
stock, or to require him to take, at the determined by the SEC.
price within the time, the same shares of
stock. The enumeration can be broadly classified into:
1. Equity securities (shares of stocks,
Regulation of Option Trading (Sec 25) investment contract, etc.)
The SRC prohibits members of an Exchange 2. Debt securities (bonds, debentures, notes,
from directly or indirectly endorsing or etc.)
guaranteeing the performance of a put, call, a. Long term commercial paper
or staddle. means an evidence of indebtedness
of any person with a maturity of
Warrants are rights to subscribe or purchase more than 365 days.
new or existing shares in a company before the b. Short term commercial paper
expiry date which can only be extended in means an evidence of indebtedness
accordance with the Exchange rules. Generally,
they have longer exercise periods than options.
2
Beneficiary Securities means the shares of stocks and other
1. Warrant Certificate represents the securities of the Issuer which form the basis of the entitlement in a
right to a Warrant Warrant. (Rule 12.1 (7) Amended IRR of SRC)
3
Underlying Shares means the unissued shares of a corporation
which may be purchased by the Warrantholder upon the exercise
of the right granted under the warrant. (ibid)

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of any person with a maturity of  Income projection for the next 5 years
365 days or less.  Assets
 Actual or contingent liabilities
Registration of Securities
Securities shall not be sold or offered for sale or The registration statement shall be signed by the
distribution within the Philippines, without a issuers:
registration statement duly filed and approved by the a. Executive officer
SEC. b. Principal operating officer
c. Principal financial officer
The SEC is concerned with the requirement of full d. Comptroller
disclosure of information to the public, prior to and e. Principal accounting officer
after the certificates are registered with the SEC, and f. Corporate secretary
the merits of the securities themselves and the issuer. g. Persons performing similar functions
accompanied by a duly verified resolution.
Mere registration as a corporation does not
automatically authorize it to deal with unregistered B. The issuer shall pay to the Commission a fee of
timeshares. Corporate registration is just one of not more than 1/10 of one percent of the
several requirements before they may deal with time maximum aggregate price at which such
shares. (Timeshare Realty Corporation v Lao and securities are proposed to be offered.
Cortez, 544 SCRA 254)
C. Notice of filing of the registration statement shall
Disclosure be immediately published in two (2) newspapers
Initially, information is disclosed in Registration of general circulation in the Philippines, once a
Statement and the Prospectus. Thereafter, there are week for two consecutive weeks or in such other
periodic and other reports submitted to the SEC. manner as the Commission by rule shall
prescribe.
Periods for Disclosure
1. Pre-filing period D. Within 45 days after the filing or any later date
2. The period between the filing of registration to which the issuer consented, the commission
statement and the effective date shall declare it effective or rejected, unless the
3. Post-effective period. applicant is allowed to amend the registration
Thus, disclosure is a continuing requirement statement.

Procedure for Registration of Securities E. If approved, the commission shall enter an order
A. All securities required to be registered shall be declaring such effective.
registered through the filing by the issuer in the
main office of the Commission, of a: F. Upon effectivity of registration, the issuer shall
 Sworn registration statement with respect to state under oath in every prospectus that all
such securities registration requirements have been met and all
 In such form and containing information and the information are true and correct.
documents as prescribed
 It shall include any prospectus required or Prospectus
permitted to be delivered. It is a document made by or on behalf of an issuer,
underwriter or dealer to sell or offer securities for the
Registration Statement sale to the public through a registration statement
It is the application for registration of securities filed with the SEC.
required to be filled with SEC which contains all
information about the issuer and the securities it will Gun Jumping
issue. It shall contain among others the: It is the prohibited practice of selling or offering to
 Name of the corporation sell securities before the effective date of registration.
 Directors
 Officers Types of Securities
 Nature of business 1. Exempt – can be sold even without the
 Income for the past 5 years requisite registration

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2. Not exempt – cannot be sold within the

Philippines unless registered They are exempt securities because they are already
3. Sold on exempt transactions – need not be under the supervision of another government agency.
registered; must pay a fee equivalent to 1/10
of 1% of the minimum aggregate price or Exempt Transactions
issued value of the securities The requirement of registration shall not apply to the
sale of any security in any of the following
Exempt Securities transactions:
The requirement of registration does not apply to the 1. Judicial sale by executor, administrator,
following classes of securities: guardian/receiver in insolvency or
a. Any securities issued or guaranteed by the bankruptcy;
government of the Philippines or any or its 2. Sale of pledged or foreclosed property to
political subdivision or agency or by any liquidate debts;
person controlled or supervised by, and 3. Sale on isolated transactions by owner;
acting as an instrumentality in said 4. Distribution of stock dividends;
government 5. Sale of capital stock to stockholders where
no commission is paid;
b. Any securities issued or guaranteed by any 6. The issuance of bonds or notes secured by
country with which Philippines maintain a mortgage upon real estate or tangible
diplomatic relations, or by any state, personal property, where the entire mortgage
province, or political subdivision thereof on together with all the bonds or notes secured
the basis of reciprocity: provided that the thereby are sold to a single purchaser at a
Commission may require compliance with single sale;
the prescribed form and content of 7. Issuance of security in exchange of any
disclosures security from same issuer pursuant to right
of conversion;
c. Certificates issued by a receiver or trustee in 8. Broker’s transactions, executed upon
bankruptcy duly approved by the proper customer’s orders on any registered
adjudicatory body Exchange or other trading market;
9. Pre-incorporation subscription;
d. Any security or its derivatives the sale or 10. Exchange of securities by issuer with
transfer of which, by law, is under the securities holders exclusively;
supervision and regulation of the Office of 11. Sale to less than 20 persons during any 12
the Insurance Commission, Housing and month period;
Land Use Regulatory Board, or the Bureau 12. Sale of securities to any number of the
of Internal Revenue following qualified buyers:
a. banks;
e. Any security issued by a bank, except its b. registered investment houses;
own shares. c. insurance company;
d. pension fund or retirement plan
While the law exempts from registration the maintained by the Government of the
securities issued by banks, it does not mean Philippines or any political subdivision
that it is exempted from complying with the thereof or managed by a bank or other
reports or reportorial requirements. The persons authorized by the Bangko
exemption enjoyed by banks is confined Sentral to engage in trust functions;
merely to the initial requirement of e. investment company;
registration of securities for public offering f. such other person as the Commission
and not to the subsequent filing of various may rule determine
periodic reports. (Union Bank of the
Philippines v SEC, 358 SCRA 479) The SEC may add exempt transactions if it finds that
the requirements of registration under this Code is
The SEC, after public hearing, may add exempt not necessary in public interest and for the protection
securities if it finds that the enforcement of the Code of the investors.
with respect to such securities is not necessary in
public interest and for the protection of the investors.

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These transactions are exempt because of the Omission of a material fact may result not only in the
following reasons: revocation of registration but also in criminal
 it involves small amount liability.
 limited character of the offering
 it does not involve the public. If a person committed fraudulent acts like non-
liquidation of cash advances which constitute the
A person applying for an exemptions shall file with offense of estafa under RPC, the criminal case may
the Commission a notice identifying the exemption be prosecuted independently and simultaneously with
relied upon on such form and at such time as the the corporate/ civil case for such violation. The
Commission by rule may prescribe and with such doctrine of primary jurisdiction no longer precludes
notice shall pay the commission a fee equivalent to filing of the criminal case with the corporate/ civil
1/10 of one percent of the maximum aggregate price case (Fabia v CA, 388 SCRA 574)
or issued value of the securities.
It is one thing for a corporation to issue checks to
The issuance by a corporation of previously satisfy isolated individual obligations, and another for
authorized but unissued capital stock to existing the corporation to execute an elaborate scheme where
stockholders is not automatically exempt from it would comport itself to the public as pseudo-
registration and requires an application for investment house and issue postdated checks instead
exemption. (Nestle Philippines, Inc. v CA, 203 SCRA of stocks or traditional securities to evidence the
504) However, under the IRR, notice of confirmation investments of its patrons. (Gabioza v CA, 565 SCRA
of exemption and payment of the fee are sufficient. 38)

Revocation/ Rejection of Registration Grounds for Suspension or Cancellation of

The SEC may reject a registration statement and Certificate of Registration (Sec. 6 [L])
refuse registration of the security thereunder, or 1. fraud in procuring registration;
revoke the effectivity of the registration statement 2. serious misrepresentation as to objectives of
and registration of the security thereunder after due corporation;
notice and hearing by issuing an order to such effect 3. refusal to comply with lawful order of SEC;
if it finds that: 4. continuous inoperation for at least 5 years;
1. The issuer 5. failure to file by-laws within required
a. Has been judicially declared period;
insolvent 6. failure to file reports; and
b. Has violated any provisions of law 7. other similar grounds.
c. Has been or is engaged or is about
to engage in fraudulent transaction Suspension of Registration (Sec. 15):
d. Has made any false or misleading 1. If any time, the information contained in the
representation of material facts in registration statement filed is or has become
any prospectus misleading, incorrect, inadequate or
e. Has failed to comply with any incomplete in any material respect; or
requirement imposed as a 2. The sale or offering for sale of the security
condition for registration registration there under may work or tend to
work a fraud;
2. The registration statement on its face is 3. Pending investigation of the security
incomplete or inaccurate in any material registered to ascertain whether the
respect registration of such security should be
revoked on any ground specified in this
3. The issuer4 has been convicted of an Code; and
offense involving moral turpitude and/or 4. Refusal to furnish information required by
fraud and is enjoined or restrained for the Commission.
violations of laws.
— oOo —

4
Issuer, any officer, director or controlling person of the issuer, or
person performing similar functions or any underwriter.

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UNLAWFUL ACTS C. To circulate and disseminate information that the

price of any security listed will or is likely to rise and
I. In Connection with Manipulation of Security fall because of manipulative market operations of any
Prices (Sec 24) person conducted for the purpose of raising or
depressing the price for the purpose of inducing the
A. The SRC prohibits schemes or practices to create purchase or sale of such security.
a falls or misleading appearance of active trading
in any listed security. D. To make false or misleading statements with
1. Wash Sale respect to material fact, which he knew or had
By effecting any transaction in reasonable ground to believe that was false or
such security which involves no misleading, for the purpose of inducing the purchase
change in the beneficial ownership or sale of any security listed.
thereof
E. To effect any series of transactions for the
2. Matched Orders purchase and sale of any security listed and traded for
By entering an order/s for the the purpose of pegging, fixing or stabilizing the price
purchase of sale of such security of such security, unless otherwise allowed by this
with knowledge that a simultaneous code or by the rules of the Commission.(Active
orders or orders substantially the Trading through a manipulative device or
same size, time and price, for the scheme)
sale or purchase of any such
securities, has or will be entered by F. To use or employ, in connection with the purchase
or for the same or different or sale, any manipulative or deceptive device or
colluding parties contrivance. Short sale and Stop-loss order5 cannot be
effected except in accordance with the rules of the
3. Market rigging or jiggling Commission
By performing similar acts where
there is no change of beneficial II. In Connection with the Sale of Securities
ownership A. Short Selling Transaction
It is the selling of securities that the seller
B. Practices to effect, alone or with others a series of does not own or those securities that the
transactions that: seller owns but he cannot deliver within 20
1. Raises their price to induce the purchase of
days from the transaction.
securities
2. Depresses their price to induce the sale of
B. Short Swing Transaction
securities
It is the buying and selling or selling and
3. Creates active trading to induce a purchase
buying of securities within a period of six
or sale through manipulative devices such as
months.
a. marking the close
 Buying or selling at the Any profit realized by the owner of more
last minute of the trading. than 10% of any class of equity security of a
b. painting the tape, corporation with assets of at least P50
 painting a rosy picture Million and with at least 200 stockholders
about the security to each holding 100 shares of a class of its
induce buying. security, director, or officer of such
c. squeezing the float, corporation, from any purchase and sale or
 limits the supply of any sale and purchase of any equity security
securities. of the corporation in less than 6 months shall
d. hype and dump, inure to the benefit of the corporation, unless
 hype the shares so that the the security was acquired in good faith in
price will increase and
then dump it.
e. boiler room operations and such
5
other similar devices Stop-loss order is an order to broker to sell or buy stock as soon
as the market price reaches a designated figure.

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connection with a debt previously c. relatives by affinity or

contracted. consanguinity within the second
degree of an insider
The prescriptive period to file an action to d. common law spouse of an insider
recover shall be two years.
Insider6 means:
C. Over the Counter Transactions a) The issuer
It is the buying and selling of securities b) A director or officer (or person
outside the facilities of the accredited Stock performing similar functions) of,
Exchange. It also refers to creating your own or a person controlling the issuer
market place. c) A person whose relationship or
former relationship to the issuer
D. Insider Trading gives or gave him access to
It is the buying or selling or securities by an material information about the
insider while in possession of material issuer or the security that is not
information with respect to the issuer or the generally available to the public
security that is not generally available to the d) A government employee, or
public, unless: director, or officer of an exchange,
a. The insider proves that the clearing agency and/or self-
information was not gained from regulatory organization who has
such relationship; or access to material information
b. If the other party selling to or about an issuer or a security that is
buying from the insider is not generally available to the
identified, the insider proves: public, or
- That he disclosed the e) A person who learns such
information to the other information by a communication
party, or from any of the foregoing insiders
- That he had reason to (Sec. 3.8)
believe that the other party
otherwise is also in The duty to disclose or abstain is based on
possession of the two factors: first, the relationship giving
information. access, directly or indirectly, to information
intended to be available only for a corporate
The insider can raise as a defense that the purpose and not for the personal benefit of
information is “generally available.” anyone; and second, the inherent unfairness
involved when a party takes advantage of
Requisites such information knowing it is unavailable
1. There must be buying and selling to those with whom he is dealing.
of securities
2. It must be done by an insider Material Non-Public
3. It must be done while in the 1. It has not been generally disclosed
possession of a material non-public to the public and would likely
information. affect the market price of the
security after being disseminated to
Presumptions the public and the lapse of a
A purchase or sale of security by the reasonable time for the market to
following persons shall be presumed to have absorb the information
been effected while in possession of material 2. It would be considered by a
non-public information if transacted after reasonable person important under
such information came into existence but the circumstances in determining
prior to dissemination to the public and the
lapse of reasonable time for the market to
absorb such:
6
a. an insider The insiders enumerated from letters a to e are considered actual
b. spouse of an insider insiders while those insiders which fall under letter e is considered
as a constructive insider.

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the course of action whether to buy, giving them the opportunity to sell their
sell or hold a security. shares at the same price as those of the
majority shareholders.
It shall be unlawful for any insider to
communicate it to any person, who by virtue Public Company
of the communication, becomes an insider The following are considered public:
where the insider communicating knows or 1. Those listed in the Philippine Stock
has reason to believe that such person will Exchange
likely buy or sell a security while in 2. Those not listed in the Philippine Stock
possession of such information. Exchange where the asset of the
corporation is at least P50,000,000 with
Test of Materiality at least 200 stockholders each owning at
The materiality concept is judgmental in least 100 shares.
nature and is not possible to translate into a
numerical formula. A fact is material if it Mandatory Tender Offer
induces or tends to induce or otherwise Tender offer is mandatory when:
affect the sale or purchase of securities. If 1. any person or groups of persons acting
the facts of a certain nature and reliability in concert, who
can influence a reasonable person’s decision a. intends to acquire 35% or more
to retain, sell or buy securities. of equity shares of public
company
Section 23 imposes an obligation to submit a b. intends to acquire 35% or more
statement indicating ownership of the of equity shares in a public
issuer’s securities and such changes to his or company in one or more
her ownership upon: transactions within a period of
a. A beneficial owner of more than 12 months.
10% of any class of an equity 2. If any acquisition of even less than 35%
security, or would result in ownership of over 51%
b. A director or any officer of the of the total outstanding equity securities
issuer of a public company8.

E. Tender Offer Mandatory tender offer shall not apply in

The take-over movement in the United the following cases:
States gave birth to this rule to protect the 1. Any purchase of shares from:
investing public against misleading a. The unissued capital stock
statements made in the course of a struggle provided that the acquisition
for corporate control. This led to the does not result to a 50% or
regulations on “take-over bid.” It includes more ownership of shares by
regulations for the protection of the purchaser
shareholders’ interests of proxy solicitation7 b. an increase in the authorized
and tender offers. capital stock
2. Purchase in connection with:
It means a publicly announced intention by a a. foreclosure proceedings
person acting alone or in convert with other involving a duly constituted
persons to acquire equity securities of a pledge or security arrangement
public company. It is otherwise known as when the acquisition is made
take-over bids. by the debtor or creditor
b. privatization undertaken by the
It is intended to protect the minority government of the Philippines
shareholders against any scheme that dilutes c. corporate rehabilitation under
the share value of their investments. It also court supervision
gives the minority shareholders the chance
to exit the company under reasonable terms,
8
The tender offer shall be at a price supported by a fairness option
provided by an independent financial advisor or equivalent third
7
See Sec 20, SRC party.

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3. Purchase through an open market at the 2. Obtain money or property by means of any
prevailing market price; and untrue statement of a material fact or any
4. Merger or consolidation. omission to state a material fact necessary in
order to make the statements made, in the
Procedure light of the circumstances under which they
A person who is making a tender offer is were made, not misleading; or
required to make an announcement of his 3. Engage in any act, transaction, practice or
intention in a newspaper of general course of business which operates or would
circulation, prior to the commencement of operate as a fraud or deceit upon any person.
the offer. At least 2 business day prior to the
date of the commencement of the tender
offer, he must: — oOo —
a. File with the SEC a required form
for the tender offer, including all Margin Trading
exhibits, with the prescribed filing It happens when a customer purchases stocks by
fees. advising only a portion of the purchase price with the
b. Hand deliver a copy thereof to the broker extending credit or making loan for the
target company at its principal balance due. It allows investors to buy more
executive office and to each securities than their cash position would normally
exchange where such class of the allow. Investors pay only a portion of the purchase
target company’s securities are price; their broker advances for them the balance of
listed for trading; and the purchase price and keeps the securities as
c. Report the results thereof, by filing collateral for the advance or loan.
with the SEC, not later than 10
calendar days after the termination The law requires payment of traded shares within
of the tender offer, copies of final specified period in order to protect and stabilize the
amendment to the form. economy from excessive stock market speculations
and are thus mandatory. The main purpose for such
Ownership acquisition covers both direct regulation is to give a government credit agency an
and indirect acquisition. The determination effective method of reducing the aggregate amount of
of the power of control is the decisive factor. the nation’s credit resources which can be directed by
The rules apply even if one will acquire the speculation into the stock market and out of other
shares in a corporation that owns the shares more desirable uses of commerce and industry.
of a public company, including subsidiary.
(CEMCO Holdings, Inc. V National Life The Broker Dealer shall not extend credit to a
Insurance Company, Inc., August 7, 2007) customer in an amount that exceeds 50% of the
current market value of the security at the time of the
Tender offer can be avoided by lending transaction. In no event shall new or additional credit
money instead of buying the shares with an be extended in to an account in which the equity is
option to buy the same after one year. less than P50,000.00.9
Option contract with the right to vote should
be executed in the meantime. The margin maintained is a margin account of a
customer shall be no less than:
Penalty a. 25% of the current market value of all
The court, at its discretion, may impose a securities ‘long’ in the account; and
penalty of 7 years to 21 years of b. 30% of the current market value of all
imprisonment and/ or P50,000 to 1,000,000 securities ‘short’ in the account
fine.

III. Other Unlawful Acts

9
It shall be unlawful for any person, directly or From Aquino. Please verify according to 2006 Libertas corpo
notes and Marx Notes: Credit extended must not be greater than
indirectly, in connection with the purchase or sale of whichever is higher of: 65% of current market price of the security
any securities to: 100% of lowest market price of security during preceding 36
1. Employ any device, scheme or artifice to calendar months but not greater than 75% of the current market
defraud; price. Although hindi ata ito diniscuss ni dean sa atin.

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SECURITIES REGULATION CODE

Mandatory Close-out Rule injury to the investing public. No lifetime is

- A call for additional margin shall be issued expressly specified, a respondent may file a
by the broker to the customer when there is formal request for the lifting thereof. The SEC
an insufficiency of margin. must hear within 15 days from filing and
- A call for initial margin must be satisfied
within 5 business days from the date of The following are the instances where CDO
insufficiency created. under this provision may be issued:
- A call for maintenance of margin shall be a) After proper investigation or
satisfied within 24 hours after the call is verification
issued. b) Motu proprio
c) Upon verified complaint by an
If parties violate the limitations on margin trading, aggrieved party
they may be considered in pari delicto. The broker
violated the law at his own peril. Hence, he cannot It is an error on part of the SEC in granting a
complain for failing to obtain full amount of its claim CDO without stating which kind of CDO as it is
for other transactions. an act that contravenes due process. Also, the
fact that the CDO was signed by only one
— oOo — commissioner likewise renders the order totally
infirm. (GSIS v CA, 585 SCRA 679)
REMEDIES
A. Administrative There are two essential requisites before the SEC
The SEC may impose administrative sanctions may issue CDO. First, it must conduct proper
like: investigation and second there must be a finding
 Imposition of fine or penalty that the act or practice, unless restrained, will
operate as fraud on investors or is otherwise
 Revocation of license of any stock
likely to cause grave or irreparable injury to the
broker
investing public. The act of SEC in referring to
 Revocation of the corporate
the BSP whether or not the business activities
registration
amount to foreign exchange trading is an
 Disqualification from holding any essential part of verification process. (SEC v
position from any corporation Performance Foreign Exchange Corporation,
 Revocation of a stock and transfer 495 SCRA 579)
book erroneously issued.

B. Civil C. Criminal
The SEC may issue a Cease and Desist Order A criminal complaint for any violation of the
(CDO). The order must specify the provision of code and its implementing rules and regulations
law as basis for such issuance. It may be issued must first be filed with the SEC and if
ex parte or without necessity of hearing. It must commission finds that there is probable cause,
also be signed by majority on the commissioner. then it should refer the case to the Department of
Justice. A criminal charge for violation of SRC
There are three bases for the issuance of such. is a specialized dispute. Hence, it must first be
1. Section 5(i) – predicated on the necessity to referred to an administrative agency of special
“prevent fraud or injury to the investing public.” competence. (Baveria v Standard Chartered
No other requisite or detailed is tied to this CDO. Bank, et. al, 515 SCRA 170)
2. Section 53.3 – any person has engaged or is The filing of civil/ intra-corporate case with the
about to engage in any act constituting the SEC does not preclude the simultaneous and
violation of the code and that there is a concomitant filing of criminal actions before the
reasonable likelihood of continuing further or regular courts.
future violations. Maximum duration of CDO
issued under his section is 10 days.
— oOo —
3. Section 64 – an act will operate as fraud or
is otherwise likely to cause grave or irreparable

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 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

Concomitant to the power of the RTC to hear and

INTRACORPORATE CONTROVERSY decide intra-corporate controversies is the authority
An intra-corporate controversy is a conflict between to issue orders necessary or incidental to the carrying
stockholders, members or partners and the out of the powers expressly granted to it, including in
corporation, association or partnership regarding the appropriate cases, the holding of a special
regulation of the corporation. The controversy must stockholders meeting. (Yujuico v Quiambao, 513
arise out of intra-corporate or partnership relations of SCRA 243)
the parties; or between such corporation, partnership
or association and the State insofar as it concerns Thus, a case is not considered intra-corporate even if
their individual franchises. It is further required that dispute is among stockholders if the issue is
the dispute be intrinsically connected with the determination and distribution of successional rights
regulation of the corporation (2006 Bar Question). to the shareholdings or of a deceased shareholder.
(Reyes v RTC of Makati, 561 SCRA 593)
TESTS:
1. Relationship Test Before a dismissal or removal of an employee could
The controversy must pertain to any of the properly fall within the jurisdiction of RTC acting as
following relationships between: special commercial court, it has to be first established
a. The corporation, partnership, or that the persons removed or dismissed was a
association and the public; corporate officer. Corporate officers are those
b. The corporation, partnership, or officers of the corporation who are given that
association and its stockholders, character by the Corporation Code or by the
partners, members or officers corporation’s by-laws. (Garcia v Eastern
c. The corporation, partnership, or Telecommunications Philippines, Inc. 585 SCRA 450)
association and the state in so far as
its franchise, permit or license to
operate is concerned; and — oOo —
d. Among the stockholders, partners
or associates themselves. (Union
Glass & Container Corporation v REGULATORY JURISDICTION
SEC, 126 SCRA 21) The regulator and supervisory powers of the
Commission were broad enough to include the power
2. Nature of the Controversy Test to regulate securities-related organization’s fee.
It is not the mere existence of relationship Charging exorbitant processing fee could discourage
that gives rise to an intra-corporate many small prospective investors and curtail the
controversy. Under this test, the incidents of infusion of money into the capital market and hamper
that relationship must also be considered. its growth. (Philippine Association of Stock Transfer
The controversy must not only be rooted in and Registry Agencies, Inc. v CA, 539 SCRA 61)
the existence of the relationship, but must as
well pertain to enforcement of correlative The SEC can only reverse the decision of PSE in
rights and obligations under the Corporation matters of application for listing in the market when
Code. (DRMC Enterprises v Esta del Sol it the decision is attended by bad faith. The stock
Mountain Reserve Inc, 1984) exchange cannot be compelled by the SEC to allow
the share of sales of a corporation where there are
Jurisdiction serious questions regarding the ownership of the
The enactment of RA 8799 transferred the shares and that properties of the corporation belong
jurisdiction of the SEC over intra-corporate to naval and forest reserves. (PSE v SEC, 281 SCRA
controversies and other cases enumerated in Section 232)
5 of PD 902-A has been transferred to RTC acting as
a special commercial court. SEC has jurisdiction over corporations organized
pursuant to Corporation Code even if the majority or
RTC, not designated as a special commercial court, controlling shares are owned by the government.
hearing on an intra-corporate dispute has only one While SEC may not have authority over government
action to take. It has to dismiss the petition for lack of corporations with original charters or those created
jurisdiction. (Calleja v Panday, 483 SCRA 60) by special law, it does have jurisdiction over

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SECURITIES REGULATION CODE

acquired asset corporation10. (PNCC v Pabion, 320

SCRA 188)

There is no requirement that a stockholder of a

corporation must be a registered one in order for the
SEC to take cognizance of a suit seeking to enforce a
right of a stockholder. Needless to say, any problem
encountered in securing the certificates of stocks
must be expeditiously dealt with through
administrative madamus proceedings with SEC,
rather than through the usual tedious court procedure.
(TCL Sales Corporation v CA, 349 SCRA 35)

The SEC has jurisdiction to entertain a complaint

when an ultra vires act of a corporation is the thrust
of the complaint. When a corporation engaged in
pawnbroking, even though its articles does not allow
it, the complaint should be treated as violation of the
corporate franchise. (Pilipinas Loan Company, Inc v
SEC, 356 SCRA 193)

SEC is the administrative agency responsible for the

registration and monitoring of stock and transfer
book (STB). Considering that SEC, after due notice
and hearing, has the regulatory power to revoke
corporate franchise, the SEC must likewise have the
lesser power of merely recalling and cancelling a
STB that was erroneously registered. (Provident
International Resources, Corp. v Venus, 544 SCRA
540)

10
It is a corporation which is under private ownership, the voting
or outstanding shares of which were conveyed to the government
in satisfaction of debts whether foreclosure or otherwise.

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