Margin rule: RSA Rule 23(b)-1
- A broker or dealer shall not extend credit to a customer in an amount exceeding 50% of the current market value of the security at the time of the transaction.
- A broker or dealer shall not extend new or additional credit in an account where the equity is P50,000 or less.
- A customer’s margin maintained in a margin account must be no less than 25% of the current market value of securities “long” in the account and 30% of the current market value of securities “short” in the account.
- When there is an insufficiency of margin, a broker or dealer must issue a margin call promptly.
- A call for initial margin must be satisfied within five (5) business days from the date the insufficiency is created; a call for maintenance margin must be satisfied within 24 hours after the call is issued.
- If a margin call is not met within the time prescribed, the broker or dealer must liquidate securities sufficient to meet the margin call or eliminate the margin deficiency existing on the day liquidation is required, whichever is less.
- Liquidation must be done through the Exchange on which it is traded or in the best available public market.
- No liquidation action is required if the margin deficiency in the account is less than P10,000.00.
- The required payment date for a call for initial margin may be extended by seven (7) days upon a written request delivered by hand or facsimile transmission by the broker or dealer to the Philippine Stock Exchange (for members) or to the Securities and Exchange Commission (for non-exchange members).
- Extension requests must be acted upon only if the broker or dealer and customer are acting in good faith and exceptional circumstances warrant it; the written request must be received and acted upon before the expiration of the original period or any previous extension.
- The rule raises the allowable initial margin from forty (40) to fifty (50) percent and replaces Rules 12 through 16 of the 1937 Provisional Rules later incorporated into the 1938 Rules.
Subordination agreements: RSA Rule 24(a)-2
- The rule sets minimum and non-exclusive requirements for satisfactory subordination agreements that a broker or dealer uses to satisfy the requirements of RSA Rule 24(a)-1.
- The Philippine Stock Exchange (for exchange members) or the Securities and Exchange Commission may require additional provisions or the broker or dealer may include other provisions necessary or appropriate, so long as they do not cause the agreement to fail the rule’s minimum requirements.
Definitions and core concepts
- A subordination agreement may be either a subordinated loan agreement or a secured demand note agreement.
- A subordinated loan agreement is the agreement(s) evidencing or governing a subordinated borrowing of cash.
- Collateral Value means the market value of pledged securities after reducing market value by 30%, except for securities issued by the Republic of the Philippines, where the broker or dealer applies deductions set in RSA Rule 24(a)-1(d)(2)(F)(iii) instead of the 30% deduction.
- Payment Obligation means the broker or dealer’s obligation (i) to repay cash loaned under a subordinated loan agreement or (ii) to return a secured demand note or reduce unpaid principal and return pledged collateral.
- Payment means performance of the Payment Obligation.
- A secured demand note agreement is the agreement (including the secured demand note) governing the contribution of a secured demand note and pledge of securities and/or cash as collateral to secure payment.
- A secured demand note may provide that the lender and related persons have no personal liability and that, upon default, the broker or dealer looks for payment solely to the collateral.
- The secured demand note must be a promissory note payable on the demand of the broker or dealer, but demand may be conditioned on events acceptable to the Securities and Exchange Commission and the Philippine Stock Exchange (for exchange members).
- Upon unpaid presentment and demand, the broker or dealer may liquidate pledged securities and apply net proceeds plus any cash included in the collateral to payment.
- After liquidation, the lender may retain ownership of collateral and benefit from increases and bear risks of decreases, and the lender may retain rights to vote securities and receive income/distributions, except the broker or dealer, as pledgee, receives and holds dividends payable in securities and partial and complete liquidating dividends.
- The lender may direct sales, purchases, withdrawal of excess collateral, or substitution of cash/other securities only if collateral coverage after the transaction does not fall below the unpaid principal amount, and net proceeds/cash purchased must remain held by the broker or dealer and be included in the collateral.
- When the lender pays (as distinguished from reduction events), the broker or dealer must issue to the lender a subordinated loan agreement, or issue preferred or common stock equal to the payment amount, or issue a combination as provided in the secured demand note agreement.
- A lender is a person who lends cash under a subordinated loan agreement or contributes a secured demand note under a secured demand note agreement.
Minimum requirements, effectiveness, and use
- Subject to the general introductory paragraph, a subordination agreement must be a written agreement between the broker/dealer and the lender that:
- Has a minimum term of one year (except temporary subordination agreements under paragraph (c)(5)), and
- Is a valid and binding obligation enforceable against the broker or dealer and the lender and their successors/assigns, enforceable subject to bankruptcy, insolvency, reorganization, moratorium, and similar laws.
- A subordination agreement must be for a specific peso amount that is not reduced during the agreement except by installments specifically provided in the agreement and as otherwise allowed by the rule.
- The subordination agreement must effectively subordinate the lender’s right to receive any Payment (plus accrued interest/compensation) to prior payment in full of all claims of all present and future creditors arising from matters occurring before the Payment Obligation matures, consistent with RSA Rule 24(a)-1 and this rule.
- The subordination does not subordinate lender claims that rank on the same priority as or junior to the lender’s claim under the subordination agreement.
- The subordinated loan agreement must provide that cash proceeds are treated as part of the broker/dealer’s capital and are subject to business risks.
Rights and collateral limits
- The subordination agreement must give the broker or dealer the right to:
- Deposit loan proceeds and pledged collateral cash in banks in its own name,
- Pledge and repledge pledged securities collateral (with or without other securities/property) without notice for securing broker/dealer indebtedness, and
- Lend to itself or others any pledged securities and cash securing the secured demand note.
- Only fully paid, ready market cash and securities that may be publicly offered/sold without registration and whose offer/sale/transfer is not otherwise restricted may be pledged as collateral for a secured demand note.
- If cash plus Collateral Value falls below the unpaid principal, the broker or dealer must immediately transmit written notice to the lender and either the Philippine Stock Exchange (member) or the Securities and Exchange Commission (non-member).
- After transmittal:
- The lender may, prior to noon on the business day following transmittal, pledge additional cash or securities to restore coverage up to at least the unpaid principal.
- If the lender does not pledge additional collateral under the allowed procedure, the broker or dealer at noon on the following business day must sell for the lender’s account the securities then pledged and apply net proceeds plus applicable pledged cash to eliminate the unpaid principal amount, with the exception that the unpaid principal need not be reduced below the sum of remaining cash plus Collateral Value of remaining securities.
- The broker or dealer may not purchase for its own account any securities subject to such sale.
- The secured demand note agreement may allow, in lieu of the required sale/restore procedures, reduction of unpaid principal with prior written consent of the lender, the broker or dealer, and either the Philippine Stock Exchange or the Securities and Exchange Commission, subject to constraints:
- Aggregate indebtedness cannot exceed 1500% of net capital, and net capital must not be less than 120% of the minimum peso amount required by RSA Rule 24(a)-1(b).
- No secured demand note may be reduced by more than 15% of its original principal amount.
- After reduction, no excess collateral may be withdrawn.
- The subordination rule bars cancellation by either party where cancellation would conflict with the subordination requirements: the agreement must not be subject to cancellation, and payment/termination/rescission/modification by mutual consent or otherwise must not occur if the effect would be inconsistent.
Payments, suspension, prepayment, acceleration
- Prepayment is permitted only at the option of the broker or dealer but not at the option of the lender, if the subordination agreement so provides.
- No Prepayment may be made before the expiration of one year from the date the subordination agreement became effective (temporary subordination agreements that comply with paragraph (c)(5) are exempt from this one-year restriction).
- No Prepayment may be made if, after giving effect to the prepayment and other subordinated payments, either:
- Aggregate indebtedness would exceed 1500% of net capital, or
- Net capital would be less than 120% of the minimum peso amount required by RSA Rule 24(a)-1(b),
- Without reference to projected profit or loss of the broker or dealer.
- Even if those conditions are satisfied, no Prepayment may occur without the prior written approval of the Philippine Stock Exchange (member) or the Securities and Exchange Commission (non-member).
- Payment Obligation must be suspended and must not mature if, after giving effect to Payment, either:
- Aggregate indebtedness would exceed 1500% of net capital, or
- Net capital would be less than 120% of the minimum peso amount required by RSA Rule 24(a)-1(b).
- A subordination agreement may provide that if the suspended condition persists for six months, the broker or dealer must commence rapid and orderly liquidation of its business, while keeping the lender’s right subordinate as required.
- If liquidation is required under the six-month suspension provision, the date liquidation commences is treated as the maturity date for each subordination agreement then outstanding, while lender payment rights remain subordinate.
- A subordination agreement may provide an accelerated maturity upon prior written notice (no earlier than six months after effective date), accelerating to a date no earlier than six months after notice is given, while keeping subordination intact.
- A subordination agreement may provide that upon occurrence of an Event of Acceleration (notice no sooner than six months after effective date), maturity can accelerate to the last business day of a calendar month not less than six months after notice is received.
- If accelerated maturity occurs while the Payment Obligation is suspended per the suspension rule and liquidation has not commenced on or prior to that date, the Payment Obligation matures the day immediately following the accelerated maturity date; lender rights remain subordinate, and all other subordinated agreements’ obligations mature at the same time.
- Permitted Events of Acceleration are limited to:
- Failure to pay interest or any installment of principal as scheduled,
- Failure to pay other money obligations of a specified material amount when due,
- Discovery that a material specified representation or warranty in the agreement was materially inaccurate when made,
- Continued failure to perform agreed covenants related to business conduct or maintenance and reporting of financial position.
- A subordination agreement may provide that Payment Obligation matures upon occurrence of an Event of Default (if liquidation has not already commenced), and that rapid and orderly liquidation commences upon such Event of Default.
- Permitted Events of Default are limited to:
- Aggregate indebtedness exceeding 2000% of net capital throughout a period of 15 consecutive business days, commencing when the broker or dealer first determines and notifies the Philippine Stock Exchange (member) or the Securities and Exchange Commission (non-member) or when the Exchange/Commission first determines and notifies the broker or dealer;
- SEC revokes registration of the broker or dealer;
- PSE suspends (and does not reinstate within 10 days) or revokes the broker’s or dealer’s membership status;
- Receivership, insolvency, liquidation, bankruptcy, assignment for benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or other marshaling of assets and liabilities of the broker or dealer.
- A subordination agreement that includes provisions permitted under acceleration/default cannot also include provisions otherwise permitted under the alternative accelerated maturity option in the specified paragraph structure.
Prohibited cancellation, notice, legends, and pledge form
- The subordination agreement must not be cancellable if it would make it inconsistent with RSA Rule 24(a)-1 and this rule; payment must not be made and the agreement must not be terminated, rescinded, or modified if inconsistent.
- Every broker or dealer must immediately notify the Philippine Stock Exchange (member) or Securities and Exchange Commission (non-member) if, after giving effect to all Payments due/maturing within the following six months (without reference to projected profit or loss), either:
- Aggregate indebtedness would exceed 1500% of net capital, or
- Net capital would be less than 120% of the minimum peso amount required by RSA Rule 24(a)-1(b).
- If all provisions of a satisfactory subordination agreement do not appear in a single instrument, the evidence of indebtedness must bear on its face an appropriate legend stating it is issued subject to a satisfactory subordination agreement, adequately referred to and incorporated by reference.
- All securities pledged as collateral to secure a demand note must be in bearer form or registered in the name of the broker or dealer or its nominee or custodian.
Revolving subordinated loans
- A broker or dealer may enter into a revolving subordinated loan agreement with a financial institution that lends funds to brokers/dealers.
- Such revolving loan agreement may provide for prepayment within less than one year at the option of the broker or dealer, but only upon prior written approval of the Philippine Stock Exchange (member) or the Securities and Exchange Commission (non-member).
- The Exchange/Commission must not approve a revolving prepayment if after giving effect (and considering other subordinated agreements due to mature within six months) either:
- Aggregate indebtedness would exceed 1500% of net capital, or
- Net capital would be less than 150% of the minimum peso amount required by RSA Rule 24(a)-1(b), or if
- Pre-tax losses during the latest three-month period equaled more than 15% of current excess net capital.
- Any revolving subordination agreement entered under the revolving provision is subject to the other provisions of the subordination rule.
Subordination agreement filing and examination
- Proposed subordination agreements must be filed with either the Philippine Stock Exchange (for members) or the Securities and Exchange Commission (for non-members) 30 days prior to the proposed execution date.
- The broker or dealer must file two copies of any proposed subordination agreement, including non-conforming subordination agreements.
- The broker or dealer must also file a statement setting forth the lender’s name and address, the lender’s business relationship to the broker or dealer, and whether the broker or dealer carried funds or securities for the lender at or around the time of filing.
- All agreements are examined by the Exchange/Commission prior to becoming effective.
- No proposed agreement is a satisfactory subordination agreement unless the Exchange/Commission finds it acceptable and it becomes effective in the acceptable form.
- The Philippine Stock Exchange must file with the SEC monthly firm-by-firm reports summarizing subordination agreements it approved, including at minimum the amount of the loan, its duration, and the lender’s name and business relationship.
RSA rule changes; clearing and settlement adoption
- RSA Rule 19-17 requires that in cash dividends, the broker determines beneficial owners and their entitled cash dividends no later than 31 trading days after the dividend record date.
- Within the same period, the broker must furnish transfer agents sworn statements specifying shares not subject to withholding tax.
- The broker must secure its dividend check on the dividend payment date and distribute it promptly to customers, except where the customer has an unpaid account; then credit to the customer’s account with proper notice constitutes prompt delivery.
- The corporation’s stock and transfer books must be closed for not more than 31 trading days from the dividend record date.
- RSA Rule 25-1(a) provides that purchases by a customer in a cash account must be paid in full within three (3) to four (4) business days after the trade date.
- RSA Rule 37(a)-6 sets Annual Audited Financial Reports for brokers/dealers: fiscal year closes on December 31, and the report is due within 105 days after fiscal year close unless the broker/dealer changes the date with notice and written approval.
- RSA Rule 37(a)-6 requires filing one original and one conformed copy of SEC Form 37-AR with the Commission; PSE members must simultaneously provide a copy to the Exchange.
- Reports filed on SEC Form 37-AR are deemed to satisfy Section 141 of the Corporation Code of the Philippines.
Clearing and settlement: clearing agencies and transfer agents
- A broker or dealer must not accept customer orders under arrangements where payment for securities purchased or delivery of securities sold is made to or by a settlement agent, unless the broker or dealer follows specified procedures.
- The broker or dealer must have prior to or at order acceptance: the settlement agent’s name and address and the customer’s account number with the agent.
- Each accepted order must be identified as either delivery against payment trade or receipt against payment trade.
- The broker or dealer must provide the customer confirmation (by electronic/physical/facsimile/verbal means) of all relevant data required for confirmation made under RSA Rule 19-5(b) as early as possible on the next business day following execution, subject to complying with RSA Rule 19-5(b) to the extent not already complied with.
- The broker or dealer must obtain customer agreement that the customer will furnish settlement agent instructions promptly upon receiving each confirmation (even for partial executions) and ensure the settlement agent affirms the transaction no later than the second business day after trade execution.
- The customer and settlement agent must use the facilities or system of a registered clearing agency for affirmation and settlement of all depository eligible transactions, including record-entry or certificated settlement.
- Good delivery of securities eligible to a registered clearing agency’s records-entry system between participants must be made by entries in the clearing agency’s records.
- Trades eligible to the records-entry system operated by a registered clearing agency must be settled through that system in accordance with the rule and the registered clearing agency’s rules.
- A registered clearing agency is a clearing agency registered with the Commission pursuant to Section 40 of the RSA.
- Depository eligible transactions are trades in securities where affirmation and settlement can be performed through a registered clearing agency’s facilities/services.
- A settlement agent is a financial institution acting as custodian of securities or funds (or both) of a person who instructs it to deliver or receive securities/funds to effect settlement for that person.
- The settlement-through-clearing-agency procedures do not apply to trades to be settled outside the Philippines, or where both broker/dealer and settlement agent are not participants in the same registered clearing agency or the same required facilities/system.
- RSA Rule 39-2 requires brokers/dealers to guarantee the signature of customers by using the term “endorsement of owner guaranteed” or simply “endorsement guaranteed” on the stock certificate or stock power.
- The use of these endorsement-guarantee terms means the genuineness of the endorsement and makes the guarantor liable accordingly.
Registration, reporting, and oversight duties
RSA Rule 40-1 requires applications for registration as a clearing agency (or amendments) to be filed with the SEC on FORM 40-CA with one original and one conformed copy.
A filing fee of P3,000.00 and other fees are collected upon filing.
The SEC must grant registration or approve amendments, or require changes to constituting documents/by-laws/contracts/rules/procedures to ensure fair administration or conformity with the RSA’s purposes, or deny registration/amendment if:
- The clearing agency is not organized with capacity/resources to enforce compliance with its proposed/amended documents and procedures, or
- The documents/procedures would be inconsistent with the RSA or inconsistent with development and operation of a prompt/accurate clearance and settlement system and safeguarding of money and securities, or
- The application is incomplete/inaccurate materially, includes untrue statements of material fact, or omits required material facts necessary not to make the application misleading.
The SEC may conditionally or unconditionally exempt registrants from registration and other provisions of the RSA or its rules/regulations.
When reported information on FORM 40-CA becomes inaccurate/misleading/incomplete or requires updating, the registrant must file an amendment within 10 calendar days after the information became inaccurate/misleading/incomplete.
Annual audited financial statements are due within 105 days from the end of the clearing agency’s fiscal year: one signed original and four (4) copies of audited balance sheet and statement of income and expenses, plus all notes/schedules.
Financial statements filed under the clearing agency annual requirement are deemed to satisfy Section 141 of the Corporation Code of the Philippines.
RSA Rule 40-2 prohibits any person from acting as a transfer agent for an issuer whose securities are listed on an exchange without SEC registration under the rule.
Transfer agent registration application requires:
- Being a corporation or partnership,
- Paid-up capital of at least P500,000.00,
- Having a partner or officer who is a certified public accountant, and
- Having a signed agreement with the Philippine Central Depository, Inc. (PCDI).
Applications (and amendments) must be filed on SEC FORM 40-TA with one original and one conformed copy.
A filing fee of P3,000.00 and other fees are collected upon filing.
If information on FORM 40-TA becomes inaccurate/misleading/incomplete or requires updating, the registrant must file an amendment within 10 calendar days after the date of inaccuracy/misleading/incompleteness.
The SEC, after notice and hearing, may deny registration, limit activities/functions, suspend for up to 12 months, or revoke registration if in the public interest or if the transfer agent does not meet qualifications, or if it is:
- Not solvent or not in sound financial condition,
- Violated or did not comply with the RSA provisions or SEC rules/orders,
- Engaged in, is engaging in, or is about to engage in fraudulent transactions,
- Dishonest or not of good repute,
- Not conducting business according to law or engaged in illegal businesses or contrary to government rules/regulations,
- Has a disqualified officer/director/principal shareholder,
- Has a backlog of share certificate transfers showing inability to fulfill responsibilities,
- Repeatedly or materially failed to comply with procedures of itself or a registered clearing agency,
- Filed an application or amendment that is incomplete/inaccurate materially, includes untrue statements, or omits required material facts to prevent misleading.
A transfer agent must maintain in force a Financial Institution Bond insurance policy with amount and coverage appropriate to the number and value of securities it handles and must provide SEC proof of such coverage on request.
A transfer agent cannot be the auditor of an issuer for which it acts as transfer agent.
If an issuer whose securities are listed on an exchange acts as its own transfer agent, the issuer must establish a separate subsidiary to carry out transfer agent activities, notwithstanding the Corporation Code.
Transfer agent procedures are binding and enforceable against issuers, registered securities holders, and transferees who present securities for transfer.
A transfer agent and clearing agency must jointly formulate and abide by written procedures on certificated and uncertificated issuance, transfers, cancellations, registration, confirmation and reconciliation of positions in securities, audit, replacement of lost securities, signature guarantees, delivery processes, and turnaround times.
Every transfer agent must file a registration renewal form within 30 calendar days of June 1 each year and pay an annual renewal fee of P3,000.00 and other fees.
Transfer and clearing reports, logs, retention
RSA Rule 40-3 requires every registered transfer agent to file an annual report on SEC Form 40-AR within 105 days after fiscal year end, with one original and one conformed copy; the filed form satisfies Section 141 of the Corporation Code of the Philippines.
For any security it handles, a transfer agent must report to the SEC within seven (7) days after the occurrence of any of these events, explaining reasons and circumstances:
- Delay in turnaround or processing of an issue, transfer, or replacement of a security,
- Discrepancy between its records and those of the issuer and, if eligible, those of the registered clearing agency,
- Loss of securities reported to it,
- Ceasing to perform transfer agent functions for any security.
The transfer agent must supply the issuer, at regular intervals within each year and upon request, the list of holders of securities as shown in the register, changes to the register of transfers showing holder name/registered address and number or face value held, and other relevant statements/lists/entries/info on issues, transfers, cancellations, and other material undertakings.
A transfer agent must keep at its principal office a complaint log recording each claim/complaint with: holder name, security description, date, complete description, steps taken, how it was resolved, and subsequent action taken or to be taken.
The complaint log must be open for inspection during normal business hours by the SEC and issuers related to securities issued by them.
RSA Rule 40-4 requires that when a registered clearing agency becomes aware of a development indicating a participant firm has breached/is breaching/is about to breach clearing agency rules or procedures, or has material operational or financial difficulties that may adversely affect participant firms, the clearing