Regulation of Securities and Creation of SEC

Securities Act policy and framework

The Act requires that no securities be sold within the Philippines unless the securities are registered and/or licensed or the transaction/securities are covered by an exemption under Section 4.
The Act creates a regulatory structure for issuers, dealers, brokers, salesmen, and exchanges under Chapters III–V.
The Act imposes controls to prevent fraud, misleading disclosures, and unfair market practices through registration rules, suspension/revocation, and market-protection provisions under Sections 8, 9, 12, 18–20.
The Act requires public disclosure through registration statement publications and accessible registers under Section 7 and Section 4.

Definitions governing the Act

“Securities” includes stock certificates, treasury stock certificates, bonds, debentures, certificates of participation and subscription rights, investment contracts, voting trust certificates, certificates of deposit, profit-sharing certificates/tickets, preorganization certificates, shares/interests in trust estates, profit-participation instruments, and many other instruments evidencing beneficial interest in profits, earnings, or property, including interim or temporary instruments under Section 2.
“Speculative securities” include securities promoted by unusually promised profit/gain/advantage, securities whose value materially depends on future promotion/development, securities promoting sale with a commission more than five per centum, securities where chance/speculative profit predominates over certainty/safety, and certain mineral-property and intangible-asset–based securities, subject to specific exclusions under Section 2.
“Person” includes natural persons, firms, corporations, copartnerships, limited partnerships, sociedad anonima, joint stock companies, syndicates, unincorporated organizations/associations, and trusts/trustees with listed exceptions, plus government or political subdivision under Section 2.
“Sale” / “sell” / “Sale or asell” includes any disposition or attempt to dispose for value and broad equivalents such as contracts to sell, exchanges, options, solicitations, subscriptions, offers, and advertisements, with specific conversion and subscription-right carve-outs and conversion limits under Section 2.
“Dealer” covers persons (other than salesmen) that deal in securities for profit, including persons trading in futures/differences and accepting margins, with a carve-out for persons without a place of business selling exclusively to actual brokers/dealers under Section 2.
“Issuer” means the person issuing or proposing to issue securities, with detailed trust/depositary/manager and fractional mineral-rights tailoring under Section 2.
“Broker” means a person effecting securities transactions for the account of others but excludes a bank under Section 2.
“Commission” means the Securities and Exchange Commission established under the Act under Section 2.
The Commission may define technical/trade/accounting terms by rules and regulations under Section 2.

Securities registration and licensing rules

Section 4 requires that no securities be sold within the Philippines unless the securities are of a class exempt under Section 5 or sold in an exempt transaction under Section 6, otherwise the securities must be registered and/or licensed under the Act.
Registration of stock includes registration of rights to subscribe to that stock when the registration statement filed under Section 7 includes a statement that such rights are to be issued under Section 4.
The Commission must keep a Register of Securities recording securities registration and Commission orders related to them, and it must be open to public inspection under Section 4.
Section 5 exempts defined classes of securities from the Act, including described government and public-instrumentality securities, certain banking-institution certificates, certain foreign government obligations recognized at the time of offer, certain public-service-regulated issues, building-and-loan/savings-and-loan–confined securities with a 3 per centum limitation on fees/cash value devices, receiver/trustee bankruptcy certificates with court approval, insurance/endowment/annuity contracts under Insurance Commissioner supervision, exclusive issuer exchanges with no commissions/remuneration, and additional classes added by Commission rules subject to limits under Section 5.
The Commission may add additional exempt security classes only if enforcement is not necessary for public interest and investor protection due to small amounts/limited offerings, and no issue may be exempted where the aggregate amount offered exceeds PHP 200,000 under Section 5.
Section 6 exempts defined transactions from the Act, including judicial/executor/administrator/guardian/receiver/trustee-in-insolvency or bankruptcy sales; pledge holder or mortgagee ordinary-course liquidation of a bona fide debt; an isolated non-repeated transaction by the owner/not an underwriter; certain stock dividends/reorganizations/distributions/consolidation-merger transfers; specified single-purchaser real-estate/mortgage bond/note sales; conversion exchanges subject to registration/licensing conditions and conversion price rules; sales/transfers/delivery to banks, savings institutions, trust companies, insurance companies, corporations, and registered brokers/dealers; brokers’ transactions executed on customers’ orders on an exchange or market without solicitation; and pre-incorporation subscriptions made solely to meet incorporation subscription-percentage requirements with no expense and no commission/remuneration under Section 6.

Procedure for registration under Section 7

All securities must be registered through filing a sworn registration statement by the issuer or any dealer interested in the sale in the Commission office under Section 7.
The registration statement must include or attach specified information, including issuer identity, incorporation/place and agent in the Philippines when needed, officers/directors/promoters, underwriters, business description, issuer capitalization/payments and rights, the actual security copy, copies of public offering communications, purposes/amounts and fund sources, last fiscal year income/expenses/fixed charges, a balance sheet dated not more than sixty days prior, specified remuneration data exceeding PHP 6,000, issue amount and estimated net proceeds, proposed sale price and maximum commission/remuneration, itemized expenses, items of consideration for securities, promotion fee/capital stock set aside as promotion stock, and detailed mineral-engineer sworn statement requirements for speculative mineral-claim securities as required by Commission regulations under Section 7.
The registration statement must include organizational documents (articles of incorporation with amendments and by-laws, trust instruments, partnership/association organization papers) unless previously filed and registered and updated under Section 7.
For certificates of deposit/voting trust/collateral trust/interest shares in unincorporated investment trusts/equipment trust certificates/interim receipts and similar securities, the Commission establishes rules requiring submission of like character information about the actual issuer or depositor/manager under Section 7.
The Commission may by rules exempt particular information/documents if inapplicable to a class and disclosure is fully adequate for investor protection within the registration statement filed under those rules under Section 7.
Upon filing, the issuer or dealer must pay a registration fee to the Treasury of the Philippines equal to one-tenth of one per centum of the maximum aggregate price, with a minimum of PHP 50 and maximum of PHP 1,000 under Section 7.
Immediately upon filing, the Commission must publish notice at the issuer/dealer’s expense in two newspapers of general circulation in the Philippines—one English and one Spanish—once a week for two consecutive weeks, stating that a registration statement was filed and is open to inspection under Commission regulations; copies must be furnished to applicants at reasonable charges under Section 7.
Filing, fee payment, and the required publication constitute registration; the registration takes effect seven days after the expiration of the publication period, and the security may be sold subject to further Commission orders, with the Commission determining by order whether the security is speculative under Section 7.
The Commission must advise the issuer/dealer forthwith upon filing as to whether the security sought to be registered is speculative under Section 7.

Suspension, hearing, and appeal mechanics

If information in the registration statement is misleading, incorrect, inadequate, or incomplete, or if sale/offer may work/tend to work a fraud, the Commission may require further information and may suspend the right to sell pending investigation, by order specifying grounds and notifying the filer and every dealer who notified intent to sell under Section 8.
Refusal to furnish required information within a reasonable Commission-fixed time is a proper ground for the suspension order under Section 8.
Upon suspension, no further sales may be made until further Commission order under Section 8.
The Commission must give a prompt hearing upon entry of suspension; if revocation is justified on grounds in Section 12, it must issue a final order prohibiting sales with findings under Section 8.
While suspension is in effect and before any final revocation order, the suspension is confidential and not published unless violated after notice under Section 8.
Appeals from a final order may be taken to the President within thirty days from notification under Section 8.
If, after hearing, the Commission finds no fraud and no resulting fraud, it must enter an order revoking suspension and the security is restored to registered status as of the suspension order date under Section 8.

Licensing speculative securities and limits

The Commission must record registration of speculative securities in the Register of Securities if it finds the issuer is of good repute, the sale would not be fraudulent or work/tend to work fraud, and the issuer’s enterprise/business is not based on unsound business principles under Section 9.
After the effective date of speculative registration, the Commission must issue to the issuer or dealer a license to sell those securities in the Philippines and issue a certificate of permit stating that the person, and its brokers or agents, are entitled to offer the named securities for sale under Section 9.
Each permit must recite in bold type that issuance is permissive only and does not constitute a recommendation or endorsement of the permitted securities under Section 9.
For speculative securities, the Commission must, by duly recorded order, fix the amount of commission or other remuneration paid in connection with the sale in the Philippines not to exceed ten per centum of the value of the securities sold under Section 9.
The Commission must also fix the maximum compensation payable for mining claims and/or mineral rights provided the issuer makes payment in cash or securities under Section 9.
Mining-claims/mineral-right compensation must be a fair valuation fixed by the Commission after consultation with the Bureau of Mines and after receiving technical information submitted by the issuer/dealer and/or claim owners under Section 9.

Consent to service of process for non-domiciled issuers

For dealer or registration applications when the issuer is not domiciled in the Philippines, the issuer must file an irrevocable written consent authorizing service on the Commission in actions arising from violations of the Act as valid as if due service were made under Section 10.
Any such action must be brought either in the province of the plaintiff’s residence or in the City of Manila under Section 10.
The written consent must be authenticated by the issuer’s seal (if any) and an acknowledged signature of the appropriate authorized corporate/partnership/officer signatory by resolution, and accompanied by a certified board resolution copy when applicable under Section 10.
If process/pleadings are served on the Commission, the Commission must file one duplicate in its office and immediately forward another to the issuer’s principal office by registered mail under Section 10.

Annual filings and advertising copies

While a person whose securities were sold under registration and/or permit is engaged in business in the Philippines, it must file with the Commission not later than February fifteen each year a sworn statement of assets and liabilities as of December thirty-first of the last previous year under Section 11.
The Commission may grant an extension of time not to exceed thirty days upon request by the person or its duly authorized agent/officer/agent or member under Section 11.
Such person must file with the Commission, before or at the time of issuance for publication, copies of all circulars, prospectuses, and other advertising matter issued from time to time by or on behalf of such person under Section 11.

Revocation and suspension of securities registration

The Commission may revoke registration of any security and license to sell speculative securities by order with findings if, after examination of the issuer’s affairs, the issuer is insolvent; has violated any Act provision or Commission order of which it has notice; has engaged/is engaged or is about to engage in fraudulent transactions; is dishonest or has made fraudulent representations in prospectuses/circulars or literature distributed about the issuer or its securities; is of bad business repute; does not conduct business in accordance with law; has affairs in an unsound condition; or has its enterprise/business based on unsound business principles under Section 12.
In its examination, the Commission may access and compel production of the issuer’s books and papers, administer oaths, examine officers and other connected persons, and require balance sheets and/or income statements certified by a certified public accountant under Section 12.
The Commission may require additional specificity or to bring statements down to the latest practicable date when necessary under Section 12.
Refusal to permit examination is a proper ground for revocation under Section 12.
The Commission may enter a confidential order suspending the right to sell pending investigation, stating grounds, and after such suspension no further sale may occur until further order under Section 12.
Notice of a suspension order must be given to the issuer and every dealer who notified intent to sell by mail, personal service, telephone confirmed in writing, or telegraph under Section 12.
Before any order is made final, the issuer or dealer is entitled to a hearing; within thirty days after notification to the issuer and/or dealer, the order may be appealed to the President under Section 12.

Promotion fees disclosure requirements

If the registration statement discloses that securities (or senior securities) are intended to be issued for good-will or for organization or promotion fees or expenses, or that payment will be made for those purposes, the amount and nature must be fully set forth in the Commission-published notice required under Section 7 and must appear in all prospectuses/circulars/advertisements and on the face or back of the security itself under Section 13.

Broker, dealer, salesman registration

Section 14 prohibits any broker, dealer, or salesman from engaging in business in the Philippines or selling securities (including exempt securities) except in exempt transactions under Section 6, unless the broker/dealer/salesman is registered with the Commission under Section 14.
Applications for registration must be in writing, verified by oath, state principal office and all Philippine branch office locations, the firm/business name, names/residences/business addresses of principals/partners/officers/directors with their capacities, the general plan/character of business, and the length of time the dealer has been engaged, and the Commission may require additional information on the applicant’s prior history/record/associations to establish good repute under Section 14.
The application must include an irrevocable written consent to service of process on the Commission in actions against the broker/dealer as provided under Section 10 under Section 14.
If the Commission finds the applicant is of good repute and complied (including fee payment), it must register the applicant upon filing a bond or other security in a sum fixed by the Commission for public protection, running to the Government of the Philippines, and conditioned on faithful compliance by the broker/dealer and all registered salesmen while acting for the broker/dealer under Section 14.
The bond must be executed by a surety company authorized to do business in the Philippines; or in lieu of bond, bonds of the Government of the Philippines or the United States or other acceptable security may be filed under Section 14.
Persons damaged by failure to comply by the broker/dealer or salesmen while acting for him may sue the sureties on the bond and recover damages under Section 14.
On written application of a registered dealer/broker with general satisfactory showing and payment of the fee prescribed, the Commission registers salesmen requested; salesman registration ceases upon termination of employment under Section 14.
The Commission records names/addresses of approved brokers/dealers/salesmen and orders in a Register of Brokers, Dealers and Salesmen open to public inspection under Section 14.
Broker/dealer/salesman registration expires December 31 each year; renewals for the succeeding year require written application and payment of the fee without further filing unless specifically required by the Commission under Section 14.
Renewal applications must be made not less than 30 nor more than 60 days before January 1 of the ensuing year; otherwise they are treated as original applications under Section 14.
Registration and annual renewal fees are PHP 50 for brokers, PHP 50 for dealers, and PHP 10 for salesmen under Section 14.
Changes due to changes in partnership personnel or principals/officers/directors must be updated by written application setting out the facts under Section 14.
A registered broker/dealer intending to offer any security for sale must notify the Commission in writing of its intention with the broker/dealer name and security name; after forwarding by registered mail (postage prepaid, properly addressed), compliance is deemed satisfied for the contents and filing under Section 14.
An issuer selling securities required to be registered, except in exempt transactions under Section 6, is deemed a dealer and must comply with the broker/dealer provisions under Section 14.

Revocation of broker/dealer/salesman registration

The Commission may refuse or revoke broker/dealer/salesman registration after reasonable notice and a hearing if the applicant/registrant has violated Act provisions or regulations; made a material false statement in the registration application; engaged in fraudulent acts in connection with securities sales; made or is about to make fictitious or pretended securities sales/purchases; or engaged or is about to engage in fraudulent practices or sales in violation of law; or demonstrated unworthiness to transact the business under Section 15.
For charges against a salesman, notice must be given to the broker or dealer employing such salesman under Section 15.
Pending hearing, the Commission may order suspension of broker/dealer/salesman registration, and the order must state the cause under Section 15.
Until final order, suspension is confidential and not published unless the suspension order is violated after notice under Section 15.
If the Commission refuses or revokes registration, it must enter a final order with findings on the Register of Brokers, Dealers and Salesmen under Section 15.
Suspension or revocation of a dealer or broker also suspends or revokes all salesmen’s registrations under Section 15.
In partnerships/corporations/unincorporated associations, it is sufficient ground for refusal/cancellation if any member (in a partnership) or any officer/director (in a corporation/association) committed acts/omissions that would be grounds to refuse/revoke an individual under Section 15.

Unregistered exchange facility use prohibited

It is unlawful for any broker, dealer, salesman, or exchange to use any facility of an exchange in the Philippines to effect a transaction or report such transaction unless the exchange is registered as a securities exchange under Section 17 or is exempted from registration upon application by the exchange because, in the Commission’s opinion, the limited volume makes registration impracticable/not necessary for public interest/investor protection under Section 16.

Registration of securities exchanges

Any exchange may register with the Commission as a securities exchange by filing a registration statement containing specified agreements, data, and documents under Section 17.
The registration statement must include: an agreement to comply/enforce compliance by its members with the Act and amendments and rules/regulations; data on organization, rules of procedure, membership, and other required information; copies of constitution/articles and existing by-laws/rules of the exchange; and an agreement to furnish Commission copies of rule amendments promptly under Section 17.
No exchange registration shall be granted or remain in force unless the exchange rules include expulsion/suspension/disciplining of members for conduct inconsistent with just and equitable principles of fair trade, and a declaration that willful violation of the Act or rules/regulations is inconsistent with just and equitable principles of fair trade under Section 17.
Nothing in the Act prevents an exchange from adopting and enforcing rules not inconsistent with the Act and rules/regulations and other law under Section 17.
The Commission must cause an exchange to be registered if it appears the exchange can comply with the Act/rules and the rules are just, adequate, and ensure fair dealing and protect investors under Section 17.
Within 30 days after filing of the application, the Commission must issue an order granting or, after appropriate notice and opportunity for hearing, denying registration unless the exchange withdraws or consents to deferring action for a longer period after filing; filing is deemed upon receipt; amendments may be made under Commission-prescribed terms under Section 17.
Upon registration, the exchange must pay a registration fee of PHP 1,000 under Section 17.
An exchange may withdraw its registration by application in accordance with Commission rules and terms necessary for investor protection under Section 17.

Margin requirements for securities purchases

The Commission must prescribe rules to prevent excessive use of credit for purchase or carrying of securities (other than exempted securities) registered on a securities exchange under Section 18.
For initial credit extension, the rules must use the standard that initial credit must not be greater than whichever is higher: (1) 50% of the current market price, or (2) 100% of the lowest market price during the preceding 36 calendar months, but not more than 65% of the current market price under Section 18.
It is unlawful for any exchange member or broker/dealer transacting through such member to extend or maintain credit or arrange for extension/maintenance to or for any customer in contravention of the Commission’s rules under Section 18.
The Section 18 restrictions do not apply to: (A) a loan not in ordinary course of business, (B) a loan on an exempted security, (C) a loan to a dealer to aid financing distribution to customers not through a securities exchange, (D) a loan by a bank on a security, or (E) other loans exempted by the Commission by rules/regulations either unconditionally, on specified terms/conditions, or for stated periods in the public interest or for investor protection under Section 18.
The Section 18 restrictions do not apply to any loan or extension of credit made prior to the effective date of the Act under Section 18.

Restriction on borrowing and hypothecation

It is unlawful for any exchange member or broker/dealer to permit, in ordinary course as a broker, aggregate indebtedness to all persons (including customers’ credit balances) excluding indebtedness secured by exempted securities, to exceed a Commission-prescribed percentage of net capital (exclusive of fixed assets and value of exchange membership), and in no case may it exceed 2,000% under Section 19.
It is unlawful to hypothecate or arrange hypothecation of securities carried for a customer under circumstances permitting: commingling with other customers’ securities without written consent; commingling with persons other than a bona fide customer; or hypothecation or placing a lien/claim for a sum in excess of the aggregate indebtedness of those customers regarding those securities, in contravention of Commission rules for investor protection under Section 19.
It is unlawful to lend or arrange for lending any security carried for a customer without the customer’s written consent under Section 19.

Manipulation of security prices

It is unlawful for any person, directly or indirectly, to create a false or misleading appearance of active trading in any security registered on a securities exchange or a false or misleading appearance regarding the market for such security under Section 20.
It is unlawful to effect transactions involving no change in beneficial ownership for that purpose under Section 20.
It is unlawful to enter purchase orders knowing that substantially the same sized orders at substantially the same time and price for sale have been or will be entered for the same or different parties under Section 20.
It is unlawful to enter sale orders knowing that substantially the same sized orders at substantially the same time and price for purchase have been or will be entered for the same or different parties under Section 20.
It is unlawful, alone or with others, to execute a series of transactions creating actual or apparent active trading or raising or depressing the price of such security for the purpose of inducing others to purchase or sell under Section 20.