SECURITIES REGULATION CODE (R.A. No.

8799)
-enacted and approved on July 19, 2000
- principal purpose is to protect investors in securities by regulating the trading activities in these forms
of investments

Exchange

 Defined by law, as an organized marketplace or facility that brings together buyers and sellers,
and executes trades of securities and/ or commodities (Section 3.7, SRC)
 Basically, a place where securities are traded (ex. Makati Stock Exchange)
 Can be in the form of a capital or non-capital market

Capital vs Non-Capital Market

Capital Market – may either be an equity capital market or debt capital market.

 Equity CM – the trader Invests his money by buying securities like shares of stocks.
 Debt CM – the trader Lends his money by engaging in either:
 money market transactions (short term debt payment arrangement)
 bond market transaction (long term debt payment arrangement)

Non-Capital Market – Agricultural Products, Precious Metals

 the form of investment in a non-capital market is called a “futures contract.”

 Includes: Commodities, Option, Foreign Exchange

The SRC’s purpose is put into operation by requiring three levels of Registration:

Registration of:
1.) The Exchange
2.) The Securities Market Professionals
3.) Securities to be traded in the Exchange, in which these securities market professionals
are involved in.

Basic rule: (Sec. 32 of SRC)

“No broker, dealer, salesman, associated person of a broker or dealer, or Exchange, directly
or indirectly, shall make use of any facility of an Exchange in the Philippines to effect any
transaction in a security, or to report such transaction, unless such Exchange is registered.”

Furthermore, the law provides that for the protection of the investors, the SEC may withdraw the
registration of an Exchange or suspend its operations or resume the same (Sec. 33.6 of the SRC).

Documentation Requirements

 In Registration:

-Any Exchange may be registered as such with the S.E.C. under the terms and conditions provided for in
the SRC, by filing an application for registration in such form and containing such information and
supporting documents as the SEC by rule shall prescribe, including the following:
a.) An undertaking to comply and enforce compliance by its members with the provisions of the SRC
Law, its implementing rules or regulations and the rules of the Exchange;

b.) The organizational charts of the Exchange, rules of procedure and a list of its officers and members;

c.) Copies of the rules of Exchange; and

An undertaking that in the event a member firm becomes insolvent or when the Exchange shall have
found that the financial condition of its member firm has so deteriorated that it cannot readily meet the
demands of its customers for the delivery of securities and/or payment of sales proceeds, the Exchange
shall, upon Order of the SEC, take over the operation of the insolvent member firm and immediately
proceed to settle the firm’s liabilities to its customers (Sec. 33, SRC Law)

 Other Requirements in Registration (Sec 33.2 of SRC)

a.) Structure of the Exchange
-it must be organized as a stock corporation with the following characteristics:
1.) No person may beneficially own or control, directly or indirectly, more than 5% of its voting
rights;
2.) No industry or business group may beneficially own or control, directly or indirectly, more than
20% of its voting rights; and
3.) Not to engage in any other business other than operating an Exchange.

b.) Board of Directors of the Exchange

 The composition of the BOD:
1.) Brokers in its BOD shall consist of not more than 49% of such Board, and shall
proportionately represent the Exchange membership in terms of volume or value of trade
and paid up capital;
2.) Included in its Board are:
a.) The President of the Exchange and
b.) Not less than 51% of the remaining members to be comprise of 3 independent
directors and persons who represent the interests of the issuers, investors, and other
market participants who are not associated with any broker or dealer or member of
the Exchange for a period of two (2) years prior to his/her appointment. **No officer
or employee of a member, its subsidiaries or affiliated or related interest shall
become an independent director.
c.) The Officers of the Exchange
-The President and other management of the Exchange shall be persons who are not
members and are not associated in any capacity, directly or indirectly with any broker
or dealer or member or listed company of the Exchange. Provided that the Exchange
may only appoint, and a person may only serve, as an officer of the Exchange if such
person has not been a member or affiliated with any broker, dealer, or member of
the Exchange for a period of at least two 2 years prior to such appointment.
 d.) Rules of Conduct and Discipline to be Complied:
1.) The expulsion, suspension, or disciplining of a member and associated persons,
for the conduct or proceeding inconsistent with just and equitable principles of
fair trade, and for violations of the provisions of the SRC, or any other act
administered by the SEC, rules, regulations and orders thereunder, or rules of
the Exchange.
2.) Fair procedure for the disciplining of members and persons associating with the
members, the denial of membership to any person seeking to be a member, the
barring of any person from association with a member, and the prohibition or
limitation of any person from access to services offered by the Exchange.
3.) The transparency of transactions on the Exchange.
4.) The equitable allocation of reasonable dues, fees, and other charges among
members and issuers and other persons using any facility or system which the
Exchange operated or controls;
5.) Prevention of fraudulent and manipulative acts and practices, promotion of just
and equitable principles of trade and, in general, protection of investors and the
public interest; and
6.) The transparent, prompt and accurate clearance and statement of transactions
effected on the Exchange.

SECURITIES MARKET PROFESSIONALS (Sec. 3.3,3.4,3.5 and 3.13, SRC)

-persons must be registered in the SEC as professionals before lawfully participating in trading activities

-should they fail to register, any trading activities in the market shall be deemed unlawful.

Consists of:

 Brokers – a person engaged in the business of buying and selling of securities for the
account of others.
 Dealers – any person who buys and sells securities for his/her account in the ordinary course
of business.
 Associated Person of a Broker or Dealer (employee of the broker/dealer) – he/she directly
exercises control of supervisory authority, but does not include a salesman, or agent, or a
person whose functions are solely clerical or ministerial.
 Salesman- a natural person, employed as such or as an agent, by a dealer, issuer, or broker
to buy and sell securities.

Issuer (Not a Securities Market Professional)

-an issuer is the originator, maker, obligor, or creator of the security,
-the maker of the stocks traded in the stock exchange

Securities
-shares, participation or interests in a corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instrument, where written or electronic in character
(Sec 3.1 SRC)
SECURITIES consists of: (D.E.P.O.S.I2.T.S.)

D –ebt instruments such as bonds, debentures and notes;

E-quity instruments;
P-roprietary or non-proprietary membership certificates in corporations;
O-ptions and other derivatives
S-hares of stocks
I-nvestment contracts;
I-nterests in oil, gas or other mineral rights which are fractionally undivided;
T-rust Instruments such as Voting Trust Agreements; and
S-uch other instruments which the SEC may determine in the future

- The Securities must also be registered with the SEC.

- The registration means the disclosure of all material and relevant informations regarding the
issuer of such security to the SEC.
-
The Registration of Securities is accomplished through:
a.) A sworn registration statement with respect to the securities is filed in the Office of the SEC by
the issuer, dealer, or underwriter;
b.) Payment of the corresponding fee is made
c.) There must be publication of the filing in two (2) newspapers of general circulation for two (2)
consecutive weeks;
**The underlying reason for such registration is to make the public aware in order for them to make
good business judgement on the securities that they are going to buy or invest in.

**Non-registration of covered securities will result to the inability of the securities in becoming objects
of any transaction in the Philippines. The Law mandates that not security can be sold, offered for sale,
traded or distributed within the Philippines unless accompanied by a registration statement filed with
and approved by the SEC (Sec 8, SRC).

“EXEMPT SECURITIES” (Sec. 9)

 not required to be registered
 includes the following:
1.) Securities issued or guaranteed by the Government, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and acting as instrumentality of said
Government.
2.) Security issued or guaranteed by the government of any country with which the Philippines
maintains Diplomatic relations, or by any state, province or political subdivision thereof on the
basis of RECIPROCITY; Provided that the Commission may require compliance to be prescribed
3.) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body;
4.) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and
regulation of the Office of the Insurance Commission Housing and Land Use Regulatory Board, or
the Bureau of Internal Revenue;
5.) Any security issued by a bank except its own shares of stock.
EXEMPT SECURITIES Summary (R.B.G.F. S. )

Issued by:
 Receiver/Trustee (Certificates in Bankruptcy)
 Bank (Securitites)
 Government of the Philippines
 Foreign Governments w/ Diplomatic Relations

 Transfer/Sale-is under the supervison and regulation of the Insurance Commission Housing and
Land Use Regulatory Board, or the Bureau of Internal Revenue;

NON-EXEMPT SECURITIES but are subject matters of “EXEMPT TRANSACTIONS” (Sec 10)
-transactions made by non-Exempt Securities (D.E.P.O.S.I.T.S)
-also not required to be registered
-includes the following:
Sale of any security:
1.) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trusted in
insolvency or bankruptcy.
2.) By, for the account of a pledge holder, or mortgagee or any other, similar lien holder selling or
offering for sale or delivery in the ordinary course of business and not for the purpose of
avoiding the provisions of this Code, to liquidate a bona fide debt a security pledged in good
faith as security for such debt;
3.) An Isolated transaction in which any security is sold, offered for sale, subscription or delivery by
the owner thereof, or by his representative for the owner’s account, such sale or offer for sale,
subscription or delivery not being made in the course of repeated and successive transactions of
a like character by such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security;
4.) The distribution by a corporation actively engaged in business authorized by its articles of
incorporation, of securities to its stockholders or other security holder AS A STOCK DIVIDEND or
other distribution out of surplus.
5.) The sale of capital stock or a corporation to ITS OWN STOCKHOLDERS exclusively, where no
commission or other remuneration is paid or given directly/ indirectly in connection with the
sale of such capital stock;
6.) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal
property, where the entire mortgage together with all the bonds and notes secured thereby are
sold to a SINGLE PURCHASE AT A SINGLE SALE.
7.) The issue and delivery of any security in exchange for any other security of the same issuer
pursuant to a right of conversion entitling the holder of the security surrendered in exchange to
make such conversion. Provided, that the security so surrendered has been registered under
this Code or was, when sold, exempt from the provision of this Code, and that the security
issued and delivered in exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration under this Code. Upon such
conversion the par value of the security surrendered in such exchange shall be deemed the price
at which the securities issued and delivered to such exchange are sold;
8.) Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other
trading market;
 9.) Subscription of shares of the capital stock of a corporation prior to the incorporation thereof or
in pursuance of an increase in its authorized capital stock under the Corporation Code when no
expense is incurred, or no commission, compensation, or remuneration is paid or given in
connection with the sale or disposition of such securities, and only when the purpose for
soliciting, giving or taking of such subscriptions is to comply with the requirements of such law
as to the percentage of the capital stock of a corporation which should be subscribed before it
can be registered and duly incorporated, or its authorized capital increased;
10.) The exchange of securities by the issuer with its existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such
exchange;
11.) The sale of securities by an issuer to FEWER THAN TWENTY (20) PERSONS in the Philippines
during ANY TWELVE-MONTH PERIOD;
12.) The sale of securities to any number of the following qualified buyers
a.) Bank
b.) Registered Investment House
c.) Insurance Company
d.) Pension fund or retirement plan Maintained by the Government or any political subdivision
thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage
in trust functions;
e.) Such other person as the Commission may, by rule determine as qualified buyers, on the
basis of such factors as financial sophistication, net worth, knowledge and experience in
financial and business matters, or amount of assets under management

Other Terms Defined: (Sec 3.10, 3.11, 3.14-3.15, SRC)

a.) Underwriter- a person who guarantees on a firm commitment and/or declared best effort basis
the distribution and sale of securities of any kind by another company.
b.) Prospectus- the document made by or on behalf of an issuer, underwriter or dealer to sell or
offer securities for sale to the public through registration statement filed with the SEC
c.) Promoter – a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receive consideration thereof.
d.) Uncertified Security – a security evidenced by electronic or similar records

*One of the underlying purposes of the SRC is to protect investors against manipulation of prices.
Manipulation – is an artificial control of security prices; it is an attempt to force securities to sell at
prices either above or below those which would exist as a result of the normal operations of supply and
demand. The manipulator hopes to profit by creating fictitious prices at the expense of the general
trading public. (Ojeda, Securities Regulation Code with Annotations 50, 2002 ed.)

The Law provides that it shall be unlawful for any person acting for himself or through a dealer or
broker, directly or indirectly:

a.) To create a false or misleading appearance of active trading in any listed security traded in an
Exchange or any other trading market:
- WASH SALE -By effecting any transaction in such security which involves no change in the
beneficial ownership thereof;
- MATCHED ORDERS- By entering an order or orders for the purchase or sale of such security with
the knowledge that a simultaneous order or orders of substantially the same size, time and
 price, for the sale or purchase of any such security, has or will be entered by or for the same or
different parties or
- MARKET RIGGING or JIGGLING -By performing similar acts where there is no change in
beneficial ownership
Market Rigging/ Jiggling is effected by a series of transactions which have one of the following
results:
a.) Creating Actual or apparent activitiy
b.) Raising or Depressing Prices

Legal effect of Manipulation of Security Prices in the Market

a.) It is unlawful and therefore, a crime if committed (Sec. 24.1 SRC)
b.) It is a ground for revocation, refusal or suspension of registration of brokers, dealers, salesmen
and associated persons of a broker or dealer (Sec 29, SRC)
c.) It constitutes a ground for the PERMANENT disqualification of a stockholder from becoming a
director of his corporation (Article 3(E), Revised Code of Corporate Governance).

Different Forms of Market Manipulation of Prices: (Sec 24b of SRC)

a.) Marking the Close – buying and selling securities at the CLOSE of the market in an effort to
alter the closing price of the security
b.) Painting the Tape - engaging in a series of transactions that are reported publicly to give
the impression of activity or price movement in a security;
c.) Squeezing the Float – taking advantage of a shortage of securities in the market by
controlling the demand side, and exploiting market congestion during such shortages in a
way as to create artificial prices;
d.) Hype and Dump – Engaging in buying activity at increasingly higher prices and then selling
the securities in the market at higher prices;
e.) Boiler Room Operations – these are well-organized operations where in a room, there
would be well-trained salesmen operating over several phones and using high-pressure
sales talk to get investors to invest in securities offered
f.) Other Forms: (Villanueva, Commercial Law Review 918, 2012 ed.)
 Scalping – Where a person, like an investment advisor, purchases securities for his own
account before recommending that security, and then sells the share at a profit upon
the rise in the market price following the recommendation;
 Daisy chain – A pattern of fictitious trading activity by a group of persons who lures
innocent people into the scheme;
 Flipping - Operated where one office buys a particular stock for customers, while
another office simultaneously recommends that its customers sell the stock, with the
stock being shifted from one office to another, and the firm makes a profit and the
brokers earn their commissions

Short Sale – a contract for sale of shares of stock which the seller does not own, or certificates for which
are not within his control, so as to be available for delivery at the time when, under the rule of exchange
delivery must be made. There is a short sale when the seller does not own or control the securities he is
selling, and therefore, cannot himself supply the securities for delivery.

A short sale is perfectly valid, provided the parties contemplate an actual purchase or actual sale by or
through the broker and not a mere settlement by payment of differences.
Insider
– a person who has corporate material information not generally available to the public
- Being an Insider is not unlawful. An INSIDER TRADING is considered prohibited by law
- It is the duty of the Insider when trading in securities to observe fairness and transparency by
disclosing to the public material information, of which he has prior knowledge, with respect to
the issuer or the security itself. Failure to do so, renders his trading activity, in relation to such
securities, unlawful.

Insider Trading – unlawful transaction of a person, who takes advantage of a Fact of Special Significance
pertaining to the issuer of the security or the security itself, in selling or buying such security.

Fact of Special Significance- information referring to either:

a.) A material fact which would be likely, on being made generally available, to affect the market
place of a security to a significant extent
b.) One which a reasonable person would consider especially important in determining his course
of action with regard to the share of stock.
Those that may be found guilty of Insider Trading include:
a.) The Issuer
b.) A director or an officer (or person performing similar functions) of, or a person controlling the
issuer;
c.) A person whose relationship or former relationship to the issuer gives or gave him access to
material information about the issuer or the security that is not generally available to the public
d.) A person who learns such information by a communication from any of the foregoing insiders