COMPLIANCE ISSUES & IMPORTANT POINTS II.

SECURITIES REGULATION CODE (SRC)

October 17, 2006
Who are the Market Participants?
OUTLINE:
 “Broker” is a person engaged in the business of buying and selling securities for the account of
1. Introduction to Securities Regulation others.
2. Securities Regulation Code (SRC)  “Dealer” any person who buys and sells securities for his/her own account
3. Anti-Money Laundering (AMLA)  “Associated Person” of a broker or dealer is an employee who directly exercises control of
supervisory authority, but does not include a salesman, or an agent or a person whose functions
are solely clerical or ministerial
I. INTRODUCTION  “Salesman” is a natural person, employed as such or as an agent, by a dealer, issuer or broker to
buy and sell securities
Why is there a need to regulate the market?  Government Securities Eligible Dealers (Gases), a person or entity engaged in buying and
selling of government securities
Because the business dealings in a securities market involve using Other Peoples’ Money.  Investment House, a corporation which engages in the underwriting of securities of another
person, including government securities
Objectives of Securities Regulation
 Transfer Agents, any person who engages on behalf of an issuer of securities, registering the
transfer of such securities.
 Protect the investors
 Exchange, organized marketplace that brings together buyers and sellers and executes trades of
 Ensure that the markets are fair, efficient and transparent securities
 Reduce systemic risk  Clearing Agency, any person who acts as an intermediary in making deliveries upon payment
to effect settlement in securities transactions
Pyramid of Regulation
 Investment Company Adviser / Fund Manager, the firm that manages the funds of the
st investment company
1 Level : Individual Firms – The Management of every Broker Dealer establish and maintain an
 Investment Company, a company that pools from numerous investors through the issuance of
appropriate and effective compliance function within the firm which is independent of all operational
its shares to the public
and business functions.

2nd Level: SROs - The Exchange “comply and enforce” compliance to its members with the
Registration of Broker Dealer (BD)
provisions of the SRC, its implementing rules and regulations and the rules of the Exchange.
Implementing Rules and Regulation (IRR):
3rd Level: Securities & Exchange Commission – The Commission: (a) regulate, investigate, or
supervise the activities of persons to ensure compliance; (b) supervise, monitor, suspend or take over  Should be registered as Broker / Dealer with SEC
the activities of the Exchange and clearing agencies; and, (c) impose sanctions for the violation of  Registered BD shall not employ any salesman or AP who is not registered as such with SEC
laws and the rules, regulations and orders issued.  BD applicant should satisfy a minimum net capital and provide a bond or other security
 Registration of a salesman or AP shall be automatically terminated upon the cessation of his
affiliation with the said registered BD
Associated Person or Compliance Officer
Requirements for Registration:
Employed by the Broker Dealer on a full-time basis to supervise other employees, agents, salesmen,  An applicant for registration as BD shall be solely engaged in the business of broker dealer
officers, directors, clerks and stockholders for compliance with the SRC rules and regulations. In  Every application for registration shall be filed on SEC Form 28-BD
addition, he/she cannot perform other duties (aside from compliance functions) without the approval  Written supervisory and control procedures
of SEC.  Yearly schedule/timetable on the implementation of the training program for the staff
 membership in good standing in an Exchange
Duties of Associated Person  Membership or participation in a Trust Fund
 Have a general knowledge of the operations  Fulfillment of its obligation to contribute to the guarantee fund
 Supervise and provide training  Capitalization requirement of P100 million, P10 million, or P2.5 million
 Oversee compliance with legislative and other regulatory requirements  Net Capital requirement of P5 million or 5% of aggregate indebtedness whichever is higher
 Ensure that all salesmen are registered  Annual renewal, payment of filing fee, clearance by SEC and/or PSE
 Develop procedures and monitor on a daily basis compliance with financial resource
requirements
 Ensure that there is an audit trail which enables compliance with applicable laws Registration of Salesmen (SM) and Associated Person (AP)

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IRR and Requirements  avoid conflict of interest. If can’t be avoided, T/S should subordinate interests to that of
 May not be employed as SM or AP unless registered with SEC customer; material facts disclosed to customer for fair treatment
 Application form:  inform client of relevant market news, disclosures, developments in timely and accurate
 SEC Form 28-S, SEC 28-AP manner
 verified under oath by BD
 prescribed fee Obligation of Traders and Salesmen to their Firm:
 pertinent papers and documents  Promote and maintain integrity of Firm and market
 only natural persons  Observe all applicable laws, rules and regulations
 at least 18 years old for SM, 21 years old for AP  Employed by only one broker at any given time
 for SM, no disciplinary history
 For AP, must not have been censured or reprimanded by a professional or regulatory body Trading for One’s Personal Account (IRR)
 Taken and passed the applicable examination within the last 3 years immediately preceding the  don’t abuse or put customers at disadvantage
date of his application  transact only through their firm
 any applicant who has not been engaged as SM or AP for a continuous period of at least 3 years,  maintain one personal dealing account, and only with his firm which should be under his
shall not be allowed to renew his license until he has undergone training and passed the related real name
examination  prior written approval of firm’s AP
 The registration of SM or AP shall cease when he is no longer employed by BD  won’t open joint or solo account with any person in any other BD
 License is renewed annually in November of each year  ensure sufficient funds exist to cover the transaction
 certificates or shares of stock are available for immediate delivery
 switches are immediately corrected
 Order Ticket Rule followed
PSE CODE OF CONDUCT AND PROFESSIONAL ETHICS FOR TRADERS & SALESMEN  T/SM ID or account number reflected in inputting orders for their own account

Trading for One’s Personal Account (Prohibited Transactions)

Objective:  Combining an order for their own account with client orders for the same security
 commingling of securities
Protect interest of investing public by preventing and discouraging abuse, exploitation,
 Securities transactions with their firm’s clients in their personal capacity
misrepresentation, manipulation and other fraudulent and illegal acts and practices in securities
transactions by all concerned market players.  Sharing in the profits and losses from trading in an account other than their own
 Posting orders for their own accounts during the pre-opening, first 10 minutes, last 10
General Principles: minutes of regular trading period
 Dividing profits or other compensation in connection with the purchase or sale of
 Honesty: Traders & Salesmen should adhere at all times to the principles of honesty, integrity, securities with any other person not licensed as a T/S
fairness and good business practice in the conduct of their business affairs.  Borrowing of money or securities from a client in connection with any transaction in
securities
 Knowledge & Skills: As professionals, they should always strive hard to gain more knowledge  For those who know that client has placed a buy or sell order, buying or selling in the
of the market and to improve their trade skills and know-how. same way, including buy or sell orders made for a discretionary account, until the client’s
order or decision to buy or sell has been executed.
 Fairness: As responsible persons, they should not buy and/or sell or cause any other person to  Foregoing excludes discretionary accounts where there is an express order to trade from
trade any security in relation to which they have acquired non-public material information that the client owning the account
would give them undue advantage vis-à-vis the general investing public.  Taking advantage of confidential material (should not be given to anyone including
relatives)
 Prudence: They shall not speculate or overtrade in any security, which may prejudice the  when allocating securities, from apportioning said securities among themselves without
interest of the investing public, their companies or the Exchange. first satisfying all client orders

 No Conflict of Interest: They must not enter into any transaction or act in any manner under any
circumstance which would otherwise adversely affect his duties to the investing public, the
SEC, his company or the Exchange. SALES PRACTICE AND BUSINESS CONDUCT RULES

All registered persons, namely: BD, AP and SM are required to follow the ethical standards.

Obligation of Traders and Salesmen to their Customers: 1. Honesty and Fairness

 Keep customers’ interest paramount  Advertisements and Communications with the Public
 there’s a sound basis

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  no material fact or qualification may be omitted
 exaggerated, unwarranted or misleading statements or claims are prohibited  where a registered person has a material interest in a transaction, he shall neither advise,
 communications with the public shall not contain promises of specific results; nor deal in relation to the transaction unless he has disclosed that material interest or
an opinion for which there is no reasonable basis; forecasts of future events conflict to the client and has taken all reasonable steps to ensure fair treatment of the
which are unwarranted, or which are not clearly labeled as forecasts. client.

2. Diligence  Client assets

 take all reasonable steps to execute promptly client orders in accordance with the  ensure that client assets are accounted for properly and promptly
instruction of clients  ensure that client positions or assets are adequately safeguarded
 execute client orders on the best available terms
 ensure that done transactions are promptly and fairly allocated to the accounts of the 7. Compliance
clients  comply with SRC, rules and regulations
 when providing advice, one shall act diligently and ensure that his advice and  have a policy, which has been communicated to employees, in writing, on whether
recommendations are based on thorough analysis and take into account available employees are permitted to deal for their own accounts
alternatives  ensure that complaints are adequately addressed and sufficient records of such complaints
are made
3. Capabilities  responsible for the acts or omissions of his employees and agents
 Shall employ or appoint qualified persons only. The person should have relevant training  undertake in writing to uphold the SRC, rules and regulations
or experience to act in the capacity so employed or appointed
 ensure that at all times has:
 adequate resources to supervise diligently CONFIRMATION OF CUSTOMER ORDERS (IRR)
 satisfactory internal control procedures and financial and operational capabilities to  Send the customer a written confirmation of purchases and sales as promptly as possible
protect his operations, his clients and other registered persons from financial loss on the day on which they are made
 employee or salesman is NOT authorized to accept a confirmation on behalf of a customer
4. Information About Clients  give clients the option to choose whether confirmation will be done by way of courier,
 seek relevant information from clients specifically: financial situation, investment facsimile, or electronic mail
experience and investment objectives  for fax & email, client should attest accuracy of confirmation by replying back via fax or
 take all reasonable steps to establish the true and full identity of each client email not later than 12:00pm of the next business day
 when making a recommendation or solicitation, ensure the suitability of such  keep a printout of such reply together with the file notifications and transaction data being
recommendation for that client based from the information and profile taken confirmed
 one shall be satisfied on reasonable grounds about the identity, address, and contact details
of the person ultimately responsible for originating the instruction in relation to a
transaction, the person who stands to gain the commercial or economic benefit or risk CLIENT AGREEMENT (IRR)
 records should be kept in the Philippines and provide SEC with access to those records  Ensure that a written agreement is entered into with a client before any service is provided
upon request to that client
 shall not effect any transaction unless information about the client is completed  should be in a language understood by the client
 explained by the salesperson who deal directly with the client
5. Information for Clients  contains the following information:
 written agreement  full name and address of the client
 adequate information about the firm, such as, business address, any relevant conditions or  full name and address of the BD
restrictions, identity or status of employees  BD’s registration status
 confirm promptly, in writing, the essential features of the transaction to the client  undertaking by BD and client to notify the other of any material change in the
 disclose the financial condition of the firm upon client’s request and other material information given
changes which can adversely affect the firm’s financial condition  description of nature of services available to the client
 description of any remuneration
6. Conflicts of Interest  client’s authorization to pledge his securities
 client priority  risk disclosure statement
 orders of clients shall have in all cases priority over orders for the account of the
registered person
 on aggregated orders, give priority to satisfying orders of clients SUITABILITY RULE
 shall not deal in any securities based upon advance knowledge that a client has a
pending transaction BD / SM shall have reasonable grounds for believing that the recommendation to purchase or sell
 client promptly notify of registered person’s withdrawal of service; transfer to such securities is SUITABLE upon the basis of the facts disclosed by the client as to his other
another registered person security holdings and as to his financial situation and needs.

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  Statement of Income
 Statement of Cash Flows
CHARGES FOR SERVICES PERFORMED (IRR)  Statement of Changes in Stockholders’ Equity
 Miscellaneous services such as collection of monies due for principal, dividends, or  Statement of Changes in Liabilities Subordinated to Claims of General Creditors
interest  Computation of Net Capital
 exchange or transfer of securities  Statement of Management’s Responsibility
 appraisals, safekeeping or custody of securities  Information relating to Possession or Control Requirements
 Computation for the Determination of Reserve Requirements
 Report describing any material inadequacies found to exist or found to have existed since
BOOKS AND RECORDS RULE the date of the previous audit
 Results of Monthly Securities Count
General IRR:
 Current and maintained in the principal office
 what books and records must be maintained by BD 2. Customer Account Information Form (CAIF)
 Maintain a Logbook on Material Compliance and Non-Compliance  Provide the minimum information needed
 Compliance Reports should be maintained and submitted by the AP  special rules are provided for trust accounts, more than one party, and numbered accounts
 AP prepares, signs and file Compliance Report with SEC not later than 15 days after the  practice the KYC as prescribed under AMLA
end of each quarter  BD should develop clear customer acceptance policies and procedures and adopt adequate
 BD shall immediately make available, furnish copies, and submit reports of its books and internal control measures
records upon request of SEC or PSE  anonymous accounts, accounts under fictitious name is absolutely prohibited
 failure to do so shall result in immediate suspension of BD’s registration  numbered accounts are allowed provided ultimate owner is clearly identified in CAIF
 Retention of books and records:  BD cannot create new accounts without face-to-face meeting
Retention  BD is primarily responsible in keeping current all material information contained in the
Books and Records Period CAIF
 BD, its directors, officers, and APS are required to report any suspicious client transaction
Books 1 to 4 enumerated in 5 years, 1st 2 years to AMLC
the Books and Records Rule in accessible place
3. Customer Account Statements
Rest of the books enumerated 3 years, 1st 2 years  General rule: not less than monthly
in the B/R Rule in accessible place  exceptional case: quarterly and upon written request by the customer
 for inactive accounts:
Records of terminated AP 3 years
and SMs
 quarterly, provided BD made at least 3 attempts at sending postal mail to last known
address
Closed Accounts 5 years from account  BD must continue maintaining monthly closing balances
closing
4. Customer Complaint Rule
BD that ceases operations* 5 years from SEC's  All customer complaints, correspondences and action taken should be maintained by BD
approval of cessation of  “Complaint” - any written statement and/or transcript/written summary of the oral/verbal
business statements of a customer or any person acting on behalf of a customer alleging grievance
in connection with the solicitation or execution of any transaction, the disposition of
securities or funds, or any other aspect of the BD’s business
1. Annual Audited Financial Reports
5. Monthly Securities Count
IRR:  General rule: monthly securities count
 Annual submission of FS audited by a SEC-accredited independent CPA  activities covered:
 should include Statement of Management Responsibility signed by the representatives of  physical examination and count of securities
BD  accounting for all securities subject to BD control / direction but not in its physical
 Closing fiscal year is December 31 of each year possession
 due date: 110 days after the close of fiscal year  compare results of counts and verification with records
 all supporting papers shall be kept in possession of BD for at least 5 years  record in books the differences not later than 7 days

Items included in the Report: 6. Monthly Aging of Customers Receivables

 Statement of Financial Condition  Filed together with the FINOP on or before the 15th month of the following month

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  certified by the firm’s AP and President / Nominee Director and also submitted to the
BD’s Audit Committee 4. Prohibition on Guarantees Against Loss
 indicate the monetary and securities collateral values broken down as follows:  no BD shall guarantee a customer against loss in any securities account
 Current : due in 3 days
 less than 30 days
 30 to 365 days List of Manipulative Practices:
 1 to 3 years
 more than 3 years  Painting the Tape - engaging in a series of transactions in securities
 Detailed explanations shall be provided for those accounts which remain outstanding for that are reported publicly to give the impression of activity or price
more than 3 days movement in a security.
 establish appropriate Allowances for Doubtful Accounts and basis for such computation  Marking the close - buying and selling at the close of market in an
effort to alter the closing price
 Improper Matched Orders - both buy and sell orders are entered at the
MANIPULATIVE AND OTHER SALES PRACTICES same time with the same price and quantity by different colluding
parties.
Principles of Markets:  Hype and Dump - buying activity at increasingly higher prices and then selling at the
 should reflect the free interplay of the forces of supply and demand higher prices or vice-versa
 generally, any distortion to the market forces is prohibitive and unacceptable  Wash Sales - there is no genuine change in actual ownership
 a sustainable of the market is dependent on the perception that it is fair, efficient and  Squeezing the Float - taking advantage of a shortage in securities in the market by
transparent controlling the demand side and exploiting market congestion during such shortages
 Disseminating false or misleading market info thru media to move the prices in a direction
Several Ways to Distort the Market: that is favorable to a position held or a transaction
 employing trading schemes that creates a false or misleading appearance relative to the  Creation of temporary funds to engage in manipulative practices
price or activity in a security
 circulating false information about the security or the unusual movement of a security
 practicing other trading methods contrary to rules
III. ANTI-MONEY LAUNDERING ACT (AMLA)
Most Common Reasons Why Market is Manipulated:
 to gain immediate profit
 to window dress trading or loan portfolio BASIC INFORMATION
 to avoid breaching regulatory requirements or business contracts
Money Laundering - is a crime where the proceeds of an unlawful activity are transacted making
Why is Manipulative, Fraudulent or Deceptive Market Practices Wrong? them appear to have originated from legitimate sources.
 Erodes confidence in market as investment venue as the presence of such practices results
in financial losses to victims Money Laundering Process:
 destroys the credibility of market as a venue for price discovery as it results in inefficient Stage I: Placement
price levels  depositing cash into different account
 robs the nation of an efficient mechanism in allocating and distributing its resources  multiple cash deposits of smaller accounts
 buying monetary instruments and financial products
Rules on Manipulative Practices:  international funds transfers

1. It shall be unlawful to make a bid or offer or deal in securities with the intention of creating a Stage 2: Layering
false or misleading appearance of active trading in any security  involves moving money away from point of origin
 complex layers of financial transactions to obstruct the audit trail, disguise origin of funds,
2. It shall be unlawful for any BD, AP, or SM (“registered person”) to deal in securities where: provide anonymity.
 the registered person intends to create  use of widely scattered and fictitious accounts; dummies and nominees, corporations
 the registered person is aware that the other person intends to create
 the registered person reasonably suspects that a person has placed the order with the Stage 3: Integration
intention of creating  putting money back into circulation in a way that creates appearance of funds are legal
 income generated appears clean
3. Payment to influence market prices  Real estate, jewelry, precious metals/stones, investments, insurance, cars
 no BD shall give anything of value to any person for the purpose of influencing or
rewarding the action of such person in connection with the publication of any matter
which has the intention to have an effect upon the market price Unlawful Activities
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 refers to any act or omission or series or combination thereof involving or having relation, to the  Special power of attorney in favor of the nominee or agent issued by the
following: principal owner
 Kidnap for ransom  Identification cards of both parties
 Drug addiction
 Anti-Graft and corrupt practices b. Policy on Number Accounts
 Plunder The Company allows numbered accounts provided that:
 Robbery and extortion  The customer complies with all required documents
 Jueteng and Masiao  The beneficial owner is properly identified
 Piracy on the high seas
 Qualified Theft 2. Record Keeping and Maintenance
 Swindling  Document Custodian – responsible for the maintenance of a complete set of documents
 Smuggling  All client records shall be maintained and safely stored for 5 years
 Violation of E-commerce Act  All closed accounts should be preserved at least 5 years from the dates when they were
 Hijacking closed
 Violation of SRC
3. Reporting Covered and Suspicious Transactions

Basic Principles:  Covered Transactions

 Single, series, or combination of transactions in CASH
1. Know Your Customer (KYC)
 In excess of Php500,000 within one banking day
ASC Procedures & Requirements:
 Suspicious Transactions
a. Customer Reference Card & New Application Form (Data Required)  No underlying legal or trade obligation, purpose or economic justification
 Legal name and age  Client not properly identified
 Residence and business address and telephone number  Amount involved not commensurate with the business or financial capacity of the
client
 Date of Birth
 Transaction which is structured in order to avoid audit trails
 Nationality
 Transaction that deviates from the client’s transaction profile
 Employer or Name of Business
 Transaction that is related to any unlawful activity
 Annual Income

 Net Worth
 Reportorial Requirements
 Bank Reference
 Assets Owned
Associated Person/Compliance Officer - responsible for reporting both suspicious and covered
 Investment Objective transactions after approval by the Chairman of the company.
 Affiliation with Other Broker Reported clients shall not be notified or warned in any communication either directly or
 Manner by which trade invoices are delivered indirectly
 Specimen Signature
 One Primary ID or 2 secondary ID No criminal or civil shall be filed against any person who reported such transaction provided he
 For Institutional Accounts reports according to his function and that the report was made in good faith.
 Latest Audited FS
 SEC Registration 4. Compliance and Training
 Articles of Incorporation
 Latest General Information Sheet which lists the names of directors/partners An annual compliance training should be conducted for salesman/traders and Associated person.
and principal stockholders List of attendees must be submitted to SEC copy furnished the Exchange to secure the annual
 Secretary’s Certificate authorizing the account opening and authorized implementation on trainings.
signatories
 Above documents should be certified by Corporate Secretary as true copy **********END OF REPORT**********

 For Trust Accounts

 Trust Agreement
 Authorized Signatories of the trust accounts
 Articles of Incorporation and By-Laws of trustee bank

 For Nominee and agent accounts

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