Regulation of Securities and Creation of SEC

Law Summary

Securities and Exchange Commission (SEC) Establishment

Establishes the SEC under a commissioner appointed by the President with consent of the National Assembly.
Commissioner must serve exclusively as commissioner without conflicts of interest.
SEC operates under the Department of Justice supervision and can employ necessary staff.
Personnel must refrain from direct participation in stock market transactions regulated by the SEC.
Authority for consolidating government personnel involved in securities regulation under the SEC.
SEC required to report annually or as requested to the President.

Registration of Securities

Securities must be registered with the SEC before sale unless exempted or involved in exempt transactions.
Registration includes rights to subscribe if declared.
SEC maintains a public Register of Securities.
Exempt securities include government securities, banking institution securities under supervision, certain foreign government securities, public utilities securities under regulation, securities of building and loan associations with limits, and others.
Exempt transactions include judicial sales, bona fide debt liquidations by pledge holders, isolated sales by owners, stock dividends, reorganization securities issuance, mergers, bonds secured by real estate sold at single sale, conversions of registered securities, certain transfers to banks or brokers, brokers' customer transactions on exchanges, preliminary subscriptions for incorporation.
Procedure for registration requires a comprehensive sworn statement detailing issuer’s information, financial status, securities description, underwriting, use of proceeds, promotion fees, copies of governing documents, and specific mineral property statements if applicable.
Registration fee imposed based on maximum aggregate offering price.
Upon filing and publication, registration takes effect after seven days unless suspended.
SEC determines if securities are speculative and may issue licenses to sell.

Suspension and Revocation of Registration

SEC may suspend registration if filed information is inadequate or misleading or sale is potentially fraudulent.
Suspension order binding but confidential unless violated.
Parties must be given prompt hearing; final orders may be appealed to the President.
SEC may revoke registration if issuer is insolvent, fraudulent, dishonest, conducts business unlawfully, or has unsound business principles.
SEC can suspend sales pending investigation.

License to Sell Speculative Securities

Speculative securities require an SEC license to sell in the Philippines.
License issued only if issuer is reputable, sale is not fraudulent, and business is sound.
SEC sets commission caps (max 10%) and compensations for mining claims.
Permits subject to additional protective conditions.

Consent to Service

Issuers not domiciled in the Philippines must consent in writing to service of process on the SEC.
Such consent authorizes valid legal service equivalent to personal service.

Ongoing Reporting Requirements

Issuers of registered securities must file annual sworn statements of assets and liabilities.
All advertising materials must be filed with the SEC before publication.

Registration of Brokers, Dealers, and Salesmen

Brokers, dealers, and salesmen must register with SEC before transacting business.
Required to submit application including business details and consent to service.
SEC may require a bond or security for public protection.
Registration renewed annually with fees.
Names and registration status kept in a public Register.
Issuers selling securities are deemed dealers and must register accordingly.

Revocation of Brokers', Dealers', and Salesmen's Registration

SEC may refuse or revoke registration for violations, false statements, fraudulent acts, or unworthiness.
Suspension may precede revocation and is confidential unless violated.
Revocation of a dealer suspends or revokes all affiliated salesmen's registrations.

Registration of Exchanges

Exchanges must register with SEC to lawfully effect or report transactions using their facilities.
Registration involves submitting organizational documents and agreeing to enforce laws and SEC rules.
SEC ensures exchange rules include disciplinary provisions.
SEC has 30 days to approve or deny registration.
Exchanges pay registration and annual fees based on transaction volume.

Margin Requirements and Borrowing Restrictions

SEC sets rules to limit credit extended for securities purchase, based on market price standards.
Limitations on borrowing by members, brokers, and dealers designed to prevent excessive indebtedness and improper hypothecation without customer consent.
Certain loans exempted from these provisions.

Prohibition of Manipulation and Deceptive Practices

Prohibits transactions creating false markets or misleading appearances regarding trading activity or prices.
Prohibits spreading false or misleading information to induce securities trading.
Restricts price pegging and stabilizing transactions.
Prohibits unlawful options trading and guarantees related to securities on exchanges.
Liability imposed on persons causing price manipulation.

Special Restrictions on Trading and Market Conduct

Short sales and use of stop-loss orders controlled under SEC regulations.
Prohibits use of manipulative or deceptive devices via exchange facilities.
Segregation of dealer and broker functions enforced to maintain fair markets.
Specialists and odd-lot dealers regulated to prevent misuse.
Disclosure of order information restricted to maintain market fairness.
Prohibits credit extension in certain new issue distributions.
Transparency required for roles when transacting with customers.

Transactions on Exchanges and Over-the-Counter Markets

Transactions only permitted in registered securities on registered exchanges.
Prohibits unregistered securities transactions on exchanges.
Prohibits unregulated over-the-counter markets and facilitates SEC oversight and registration of such markets and participants.

Reporting by Directors, Officers, and Principal Stockholders

Beneficial owners of over 10% securities, directors, and officers must file ownership statements at registration and monthly for changes.
Profits from unfair use of insider information subject to recovery by issuer.

Recordkeeping, Reports, and Examinations

Exchanges, brokers, dealers, and other regulated persons must maintain prescribed records.
Subject to SEC examinations with prior notice.
Reports required to enable SEC oversight.

SEC Powers Regarding Enforcement and Regulation

SEC can suspend or withdraw exchange registration and expel members for violations.
May suspend trading temporarily for public protection.
May require changes to exchange rules to protect investors, enforce financial responsibility, regulate trading, and ensure fair dealing.

Liability of Controlling Persons and Unlawful Acts

Persons controlling violators are jointly liable unless acting in good faith without inducing violations.
Unlawful to act indirectly to circumvent the Act.
Obstruction of SEC inquiries by directors, officers or owners penalized.

Remedies for Violations

Sales violating the Act or containing false information are voidable at purchaser's election.
Sellers and responsible officers are jointly liable for damages, attorney's fees, and cost.
Purchasers must first accept seller's offer to repurchase securities within 30 days.
Right to sue under bond protection provided.

Investigations, Injunctions, and Prosecutions

SEC authorized to investigate violations, requiring sworn statements.
May publish findings and request evidence.
Can subpoena witnesses and documents; refusal to comply punishable as contempt.
No privilege against self-incrimination except prosecution for perjury.
SEC can seek court injunctions against violations without bond.
May refer evidence for criminal or civil prosecution.
Courts can issue mandatory injunctions upon SEC application.

Hearings, Rules, and Information Disclosure

Hearings may be held before the SEC.
SEC empowered to promulgate necessary rules.
Trade secrets need not be disclosed publicly.
SEC may restrict public access to sensitive information.
Unauthorized disclosure or personal use of nonpublic information prohibited.

Judicial Review of SEC Orders

Aggrieved persons may petition the Supreme Court within 60 days.
SEC record certified and filed with court for review.
No consideration of objections not raised before SEC.
Court decisions are final subject to US Supreme Court review under certiorari.
Court may permit additional evidence and remand for SEC reconsideration.

Effect and Limitations of SEC Actions

SEC acts or inaction does not imply approval or endorsement of securities.
It is illegal to represent SEC action as approval.
Rights under this Act are cumulative and do not preclude other remedies.
Total recovery limited to actual damages.

Voidability of Contracts

Agreements waiving compliance with the Act or rules are void.
Contracts involving violations are void as to parties and affected third parties.
Validity of certain pre-existing loans and liens unaffected unless wrongful knowledge exists.

Fees and Appropriations

Securities exchanges pay annual fees based on sales volume.
Initial appropriation of funds provided for SEC operations, salaries, and expenses.

Penalties

Willful violations punishable by imprisonment up to two years, fines up to twenty thousand pesos, or both.
Exchanges face fines up to one hundred thousand pesos.

Severability and Repeal

Invalid provisions do not affect the remainder of the Act.
Inconsistent prior laws are repealed.

Effective Dates

Key chapters effective immediately upon approval.
Remaining provisions effective January 1, 1937.