Law Summary
Key Definitions
- Extensive definitions cover terms such as advisory board, affiliated person, bank, broker, commission, company, control, dealer, director, government security, insurance company, investment adviser, investment banker, issuer, majority-owned subsidiary, periodic payment plan certificate, person, principal underwriter, promoter, redeemable security, reorganization, sale, sales load, security, short-term paper, underwriter, value, voting security, wholly-owned subsidiary, and Securities Act.
- Control is generally presumed with ownership of more than 30% of voting securities.
- Specific exclusions are provided for government entities and related corporations.
Definition of Investment Company
- Investment company means any issuer primarily engaged in investing, reinvesting, or trading in securities.
- Several exclusions apply, such as entities engaged mainly in non-investment businesses, certain banks, insurance companies, underwriting firms, and small issuers with fewer than 25 security holders.
Classification of Investment Companies
- Two types are recognized: open-end companies, which offer redeemable securities; and closed-end companies, which do not.
Regulation of Investment Company Transactions
- Investment companies with boards must register with the Commission before selling or purchasing securities within the Philippines.
- Unregistered companies or those without a board face restrictions on securities transactions.
Registration Requirements
- Investment companies must file registration statements with detailed disclosures on investment policies, affiliated persons, management experience, and securities to be issued.
- Registration includes publication and is subject to limitations based on investment opportunities.
- Failure to file accurate statements may result in suspension or revocation of registration.
Ineligibility of Certain Persons
- Persons convicted of securities-related crimes or enjoined from related activities are barred from serving as officers, directors, advisers, or underwriters.
- The Commission may grant exemptions if deemed in the public interest.
Restrictions on Affiliations
- Limits on the composition of boards: not more than 50% can be investment advisers, officers, or employees.
- Prohibitions on transactions with affiliated persons in certain capacities to prevent conflicts of interest.
Offers to Exchange Securities
- Exchange offers must be based on relative net asset values and approved by the Commission, with exceptions for reorganizations or conversions outlined in governing documents.
Prohibited Activities and Functions
- Investment companies cannot engage in margin purchases (except for short-term clearance credit), short sales, or joint trading accounts outside underwritings.
- Restrictions on self-dealing in property transactions involving insiders.
Changes in Investment Policy
- Fundamental changes like borrowing, issuance of senior securities, or a shift in business nature require a majority vote of outstanding voting securities.
Minimum Capital and Redemption Requirements
- New companies must have at least ₱500,000 paid-up capital to make public offerings.
- Redemption cannot reduce unimpaired capital below ₱250,000 or 50% of liabilities.
Contracts with Advisers and Underwriters
- Written contracts are required, with terms on compensation, termination, duration, and assignment.
- Contracts must be approved by majority security holders and/or board members.
Board Composition and Compensation
- Directors must be Filipino and elected by outstanding voting securities holders.
- Salary caps are imposed considering company size, experience, and operational volume.
- Operational expenses capped at 10% of total investment funds.
Transactions with Affiliated Persons
- Prohibitions against certain sales, purchases, or loans involving affiliated persons unless approved and consistent with company policy.
- Custody of securities must be with reputable institutions or under Commission-approved rules.
- Fiduciary bonding required for employees with access to funds or securities.
- Liability protections against willful misconduct or gross negligence disallowed.
Capital Structure and Senior Securities
- Closed-end companies must maintain specific asset coverage ratios for issuance and dividend payments relating to senior securities.
- Restrictions on issuing multiple classes of senior securities.
- Open-end companies may borrow only under strict asset coverage conditions.
Dividend Payments
- Dividends must be paid only from accumulated undistributed net income or earned surplus and accompanied by adequate disclosure.
- Advertising dividends must indicate percentage of par value.
Proxy Solicitation and Voting Trusts
- Restrictions on proxy use to prevent management control abuses.
- Voting-trust certificates subject to offering prohibitions unless grandfathered.
Loan Restrictions
- Loans prohibited to persons controlling or under common control with the company unless permitted by investment policy or prior arrangements.
Guarantees Prohibited
- Investment companies cannot guarantee obligations.
Securities Distribution and Redemption
- Redeemable securities must be sold through principal underwriters at public offering prices.
- Restrictions on sales to non-Filipinos preventing constitutional violations on ownership.
- Redemption rights generally must be honored within seven days except under specified conditions.
- Open-end companies cannot restrict transferability or issue securities for services or non-cash property except certain exceptions.
- Closed-end companies have similar prohibitions and additional rules on stock purchases and sales.
Securities Registration
- Investment companies can file simplified registration under the Securities Act referencing their Investment Company Act filings.
- Mandatory filing for sales literature related to public offerings.
Reorganization Plans
- Solicitation related to reorganization plans requires filing with the Commission.
- Reorganization plans need Commission approval before implementation.
Periodic Payment Plans
- Sales loads capped at 8%.
- Limits on payment schedules and minimum payment amounts.
Reporting Requirements
- Regular filing of financial statements, registration updates, and communications with shareholders mandated.
- Independent auditing required, with certificates from certified public accountants.
- Disclosure of remuneration and portfolio turnover.
- Beneficial owners and insiders subject to reporting and liabilities.
Records and Examination
- Maintenance and preservation of accounts and documents required.
- Subject to Commission examinations and production requests.
- Uniform accounting policies may be mandated.
- Exemptions possible upon application.
Accountants and Auditors
- Selection and retention of independent accountants require board and shareholder approval.
- Auditors must keep detailed working papers available for Commission inspection.
- Corporate officers involved in accounting must be properly selected.
Civil Actions and Settlements
- Requirements for reporting settlements or final judgments in derivative suits.
Destruction and False Statements
- Prohibitions on destruction or falsification of required documents.
- Liability for material misstatements or omissions in filings.
Prohibition of Misleading Representations
- Ban on representations implying government guarantee or approval.
- Prohibition on deceptive company or security names.
Commission's Enforcement Powers
- Authority to investigate, subpoena, and enforce compliance.
- Ability to seek injunctions and court assistance.
- Penalties for failure to comply with subpoenas.
- Protection against self-incrimination balanced with perjury liability.
Agent and Investment Solicitor Regulations
- Licensing requirements and renewal for agents soliciting investments, including tests and certificates.
- Revocation of certificates upon criminal conviction related to investment company business.
- Penalties for unauthorized solicitation.
Judicial Review
- Right to judicial review of Commission orders consistent with Securities Act provisions.
Disclosure and Public Access
- Disclosure of filed documents to the public except as exempted by Commission order.
- Confidentiality and prohibition on misuse of nonpublic information.
- Access to copies at reasonable charges.
Commission Reports and Appropriations
- Commission to report periodically to Congress with recommendations.
- Fees prescribed for registration, examination, exemptions, determinations, certificates, and filings.
- Authorized additional personnel with specified salaries to implement the Act.
- Commission's revenue may be supplemented by assessments on investment companies.
Contract Validity
- Waivers of compliance provisions are void.
- Contracts violating the Act or rules are void with respect to rights of violators and knowledgeable third parties.
Prohibitions Against Procuring Violations and Obstruction
- Unlawful to cause others to violate the Act or to obstruct compliance with filing and reporting requirements.
Penalties
- Violations generally punishable by fines up to ₱50,000 or imprisonment up to five years, or both, unless otherwise specified.
Effect on Existing Laws
- The Act supplements existing rights and remedies but limits damage recovery to actual damages.
- Amendments to definitions in other laws to align with Act's provisions.
- Repeals inconsistent laws and rules.
Separability and Effective Date
- Invalidity of any provision does not affect the remainder of the Act.
- The Act is effective upon approval.