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De La Salle University College of Law 3rd term, AY 2012-2013 Course: Day and time: Units: Professor: Consultations: Course

Description: The course will cover the regulation of securities in the Philippines, focusing on the most important concepts as contained in the Securities Regulation Code (SRC), the SRC implementing rules promulgated by the Securities and Exchange Commission (SEC) and the rules of the Philippine Stock Exchange (PSE). There will also be focus on good corporate governance. Where necessary, relevant provisions of the Corporation Code and the National Internal Revenue Code as amended (NIRC) will also be discussed. Learning outcome Securities are important tools or instruments for the raising of capital needed for corporate growth, development and stability. They are essential in todays business world, but may be subject to abuse, which could damage the integrity of the capital market and affect the economys financial stability. The objective of the course is for students to gain an understanding of the fundamental concepts of securities regulation; the possibilities for abuse and fraud; the rationale of securities regulation and how they prevent fraud; how the rules are implemented principally by the SEC and the PSE; and how the stock market works. Course output (1) Students will prepare reports on specified topics which they will present to the class. Due to time constraints, not all students will have the opportunity to make a presentation to the class, so assignment of class reports will be on a voluntary basis. (2) There will be recitation at every class, and it is expected that at the end of the course, students will be able to intelligently discuss the basic concepts of securities regulation and how the capital market works. It is expected that the depth of the students understanding will be reflected in the quality of recitation. (3) There will be mid-term and final exams. Grading: (1) Recitation: (2) Mid-term exam: (3) Final exam: 40% 20% 40% Advanced Securities Regulation (3rd year/GO1) Mondays, 1800-2000; Room 1202 Two (2) Atty. Barbara Anne C. Migallos Land line: (02) 899 2123 Email: bcm@migalloslunalaw.com As requested by students, subject to scheduling considerations

Outline - Securities Law 3rd Trimester AY 2012-2013 I. Overview; general concepts 1. History; rationale and state policy of securities regulation - the case of BW resources

See: Hall v. Geiger-Jones Co. 242 U.S. 539 (1917)

People v. Rosenthal, 68 Phil 328 (1939) The case of BW Resources 2. Laws and Regulations (4) (5) (6) (7) (8) Securities Regulation Code (SRC), RA 8799, effective 8 August 2012 Implementing Rules and Regulations of SRC (Rules) February 2004 Prior laws: Securities Act (CA 83 [1936]; Revised Securities Act (BP Blg 178 [1982]) Philippine Stock Exchange (PSE) Listing Rules; PSE Disclosure Rules Revised Code of Corporate Governance (SEC Memo Circular 6, series of 2009) the CG Code

3. Some important concepts in securities regulation (4) Issuer SRC Sec. 3.2 (5) Public company Rule 3.1(M) (6) Beneficial owner or beneficial ownership Rule 3.1(A) See: SEC v. Interport Resources Corporation, et al., 567 SCRA 354 (Oct. 6, 2008) (7) Affiliate Rule 19.1(A) (8) Control Rule 3.1(E) (9) Registration Statement (RS) SRC Sec. 3.12 (10) Prospectus SRC Sec. 3.11 (11) Material information Rule 3.1(I); Rule 14.1; PSE Disclosure Rules, Sec. 4.3 & 4.4; (12) Institutional investor SRC Sec. 10(L) (13) Stock exchange SRC Sec. 3.7 (14) Brokers and dealers SRC Sec. 3.3; 3.4 (15) Insider SRC Sec. 3.8 (16) Scripless trading II. Types of securities 1. Definition and types of securities - SRC Section 3.1 (a) to (g); see IRR; Dizon, Chapter 1, pages 1-28

a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities b) Investment contracts, certificates of interest or participation; certificates of deposit for future subscription c) Derivatives such as options (put, call, straddle) and warrants d) Proprietary or non-proprietary membership certificates (country clubs, golf clubs, etc.) e) Evidences of indebtedness (promissory notes, commercial papers, etc.) f) Other instruments as may be determined by the SEC See: Reves v. Ernst & Young, 494 U.S. 56 (1990) SEC v. W. J. Howey Co., 328 U.S. 293 (1946) Power Homes Unlimited v. SEC, 546 SCRA 567 (2008) SEC v. Glenn W. Turner Enterprises, 474 F.2d 476 (1973) Gabionza v. Court of Appeals, 565 SCRA 39 (2008) SEC v. Koscot Interplanetary Inc., US Court of Appeals, 497 F 2d 587 (1974) SEC v. Life Partners, Inc., D.C. Circuit, 1996, 102 F. 3d 587 (1996) Proctor & Gamble v. Bankers Trust, 925 F. Supplement 1270 (1996) International Brotherhood of Teamsters v Daniel, 429 US 551 (1979) People v. Balasa, 295 SCRA 49 [1998] SEC Opinion dated 21 February 1984 re multi-level marketing In the Matter of Octopus Network, Inc., PED (SEC) Case 98-2220, 22 May 1998 III. The Securities and Exchange Commission Dizon, pages 29-68 1. Composition; qualifications of Chairman and Commissioners; term of office; chief executive officer; salaries; meetings; authority to delegate SRC Sections 4.1 to 4.6 2. Powers and functions SRC Sec. 5.1(a) to 5.1(n); SRC Sec. 5.2; SRC Sec. 53 to 53.4 See: CEMCO v. National Life, 529 SCRA 355 (2007) SEC v. Interport Resources Corporation, et al., 567 SCRA 354 (2008) GSIS v. Court of Appeals 585 SCRA 679 (2009) PASTRA v. Court of Appeals, 536 SCRA 61 (2007) Philippine Stock Exchange v. Court of Appeals, 281 SCRA 232 (1997) 3. Transfer of jurisdiction over intra-corporate disputes from the SEC to the RTC See Speed Distribution, Inc. v Court of Appeals, 425 SCRA 691 (2004) Intestate Estate of Alexander Ty v. Court of Appeals, 356 SCRA 661 (2001) Andres et al v. Cuevas et al., 460 SCRA 38 (2005) Calleja v. Panday, 483 SCRA 680 (2006) Orendain v. BF Homes, 506 SCRA 349 (2006) Yujuico et al. v. Quiambao, et al., 513 SCRA 243 (January 29, 2007) Baviera v. Paglinawan, 515 SCRA 170 (2007) Consuelo Metal Corporation v. Planters Bank, 555 SCRA 465 (2008)

SEC v. Interport Resources Corporation, et al., 567 SCRA 354 (2008) 3. Indemnification and responsibilities of Commissioners SRC Sec. 6 IV. Registration and listing
When no subsection is indicated, all subsections are included, e.g., when the reference is to SRC Sec. 8, the student must also read SRC Sections 8.1 to 8.5 inclusive

1. Registration a) Registration SRC Sec. 8; Rule 8.1 to 8.3 b) Exempt securities SRC Sec. 9; Rule 9.2 c) Exempt transactions SRC Sec. 10; Rule 10.1 See: Nestle Philippines v. Court of Appeals and SEC, 203 SCRA 504 (1991) Rivilla v. Intermediate Appellate Court, 175 SCRA 773 (1989) Union Bank v. SEC, 358 SCRA 479 (2001) Timbershare Realty Corp. v. Lao and Cortez, 544 SCRA 254 (2008) SEC Opinions: (See Dizon, Chapter 3) 6 February 1996 to Mr. Jorge Yuson 16 February 1996 to Air Liquids Asian Management 7 November 1995 to Atty. Roberto O. Parel 19-04 dated 30 March 2004, to Mr. Manuel Morato

d) e) f) g) h) i)

Commodities futures contract SRC Sec. 11; Rule 11 Procedure for registration SRC Sec. 12 Prospectus Rejection and revocation of RS SRC Sec. 13 Amendments to RS SRC Sec. 14 Suspension of registration SRC Sec. 15

2. Listing of securities a) Why listing is necessary See: Philippine Stock Exchange v. Court of Appeals, 281 SCRA 232 (1997) b) General requirements - Art. III, Part A, PSE Listing Rules (i) Underwriter definition; duties; due diligence (ii) Transfer agent definition; duties and obligations (iii) Full disclosure (iv) Full payment of shares (v) Minimum number of directors (vi) Offering price (vii) Offering prospectus

c) Methods of initial listing Art. III, Part C, PSE Listing Rules (i) Primary offering (initial public offering or IPO) (ii) Secondary offering (iii) Listing by way of introduction Art. III, Part H, PSE Listing Rules d) First Board listing Art. III. Part D, PSE Listing Rules

e) f) g) h)

Second Board listing Art. III, Part E, PSE Listing Rules Shares issued pursuant to rights offering; stock dividends Minimum Public Ownership (MPO) rule Special rules for companies engaged in mining; petroleum and renewable energy (i) Philippine Mineral Reporting Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves Main principles: Art. II(4): transparency, materiality; competence Definition of Competent Person, Art. III(10) (ii) PSE Rule - Supplemental Listing and Disclosure Requirements for Petroleum and renewable energy companies

3. Stock transaction tax for shares traded on the PSE Sec. 127, NIRC Note: Exemption from documentary stamp tax Tax rate when the corporation does not meet the MPO rule V. Regulation of pre-need plans SRC Sec. 16 Supervision and regulation transferred to Insurance Commission (RA 9829) VI. Reportorial requirements 1. Who are subject to reportorial requirements SRC Sec. 17.2; SRC Sec. 18; SRC Sec. 23 2. Types of reports - SRC Sec. 17; Rule 17 a) b) c) d) j) k) 17-A report (Annual Report); Rule 17.1(2)(A)(1) 17-Q report (Quarterly Report; Rule 17.1(2)(A)(2) 17-C report (Current report; what must be reported see 3[i] of this outline) 17-L report (report on inability to file) 18-A report - beneficial owners of 5% or more (SRC Sec. 18; Rule 18) 23A and 23B reports - directors, officers, beneficial owners of 10% or more

3. Disclosure a) Basic principle Preamble, SRC; PSE Disclosure Rules, Sec. 1 b) Material information; material non-public information - Rule 3.1(I); PSE Disclosure Rules, Sec. 4, 4.1, 4.2, 4.3, 4.4; Sec. 27.2, SRC c) How disclosure is made (i) To the SEC (ii) To the PSE Odisy system (iii) To the public See: SEC v. Interport Resources Corporation, et al., 567 SCRA 354 (Oct. 6, 2008). Basic v. Levinson, 485 U.S. 224 (1988) Rivilla v. Intermediate Appellate Court , 175 SCRA 773 (1989) Union Bank v. SEC, 358 SCRA 479 (2001)

VII. Protection of shareholder interests

1. Tender Offers SRC Sec. 19; Rule 19 See: CEMCO v. National Life, 529 SCRA 355 (2007) a) b) c) d) e) f) Definition Rationale Mandatory tender offers (Rule 19.2[A][B][C][D]) Exemptions from mandatory tender offer (Rule 19.3[A][B]) Buy back of shares Rule 19.4[A] to [E] Filing and other requirements Rule 19.6 et seq.

2. Proxy solicitation SRC Sec. 20; Rule 20 a) Information Statement (Form 20-IS) b) Form of proxy Rule 20.5 c) Distribution to shareholders 3. Transactions of Directors, Officers and principal stockholders SRC Sec. 23 a) Reporting requirements (i) SRC Sec. 23.1 (ii) PSE Disclosure rules Sec. 13.1, 13.2 b) Short swing profits; short sales - SRC Sec. 23.2; 23.3; 23.4 First (and only) short swing profits case in Phil: Ongkiko v. Roberto V. Ongpin, et al., SEC Case No. 11-156, Branch I58, Pasig City See: Smolowe v. Delendo Corporation, 136 F.2d 235 VIII. Fraud, manipulation, insider trading 1. Manipulative devices and practices a) Creating false or misleading appearance of active trading - SRC Sec. 24.1(a) b) Series of transactions intended to raise/depress prices SRC Sec.24.1(b) (i) making the close (ii) painting the tape (iii) squeezing the float (iv) hype and dump (v) boiler room operations c) Dissemination of false or misleading information SRC Sec. 24.1(c) d) False or misleading statements with respect to material facts SRC 24.1(d) e) Fixing, pegging or stabilizing the price of securities SRC Sec. 24.1(e) See: SEC v. Court of Appeals, 246 SCRA 738 (1995) 2. Insider trading a) Who is an insider? - SRC Sec. 3.8 b) What constitutes material information? See Sec. V(3) of this outline Rule 3.1(I); Rule 14.1; PSE Disclosure Rules, Sec. 4.3 & 4.4; Sec. 27.2, SRC

c) Insiders duty to disclose when trading SRC Sec. 27; PSE Disclosure Rules 13.1, 13.2 See: SEC v. Interport Resources Corporation, et al., 567 SCRA 354 (Oct. 6, 2008) Union Bank v. SEC, 358 SCRA 479 (2001)

IX. Independent directors 1. Definition of independent directors SRC Sec. 38; SRC Rule 38.2 - 38.5; CG Code Art. 1(e); 2. Qualifications and disqualifications SRC Rule 38.6; cooling off period 3. Requirement for independent directors SRC Sec. 38 4. Nomination and election of independent directors SEC Memo Circular 16, Series of 2002 X. Uncertificated securities See: SRC Sections 43; 43.1; 43.2, 43.3; SRC Sec. 44 1. Rationale for uncertificated securities 2. How scripless trading works 3. Transfers of uncertificated shares; evidentiary value -records of securities intermediaries SRC Sec. 43.3; SRC Sec. 44 4. Concerns re scripless trading and the need for a direct registry system a) Proxy solicitation and corporate actions b) Prevention of fraud XI. Self-regulatory organizations 1. The Philippine Stock Exchange SRC Sec. 33 to Sec. 37 2. Others brokers and dealers; transfer agents; custodians; etc. SRC Sec. 39.1 XII. Corporate Governance the Good Housekeeping Seal 1. Definition CG Code Article 1(a) 2. Who are covered by the Governance Code See preamble to CG Code 3. Why corporate governance is essential - The ENRON scandal 4. Principles See OECD Corporate Governance Principles

5. Corporate Governance best practices See PSE Corporate Governance Guidelines 6. Essential Board committees See CG Code; see also SEC Memo Circular 4 (2012) XIII. Special Accounting rules SRC Sec. 68; Rule 68; Philippine Financial Reporting Standards (PFRS) XIV. Liabilities for violation of SRC 1. Civil liability SRC Sec. 57 to 63, inclusive 2. Administrative and criminal liabilities SRC Sec. 51 to 55, inclusive