Revisiting the changes in SRC Rules: A year since

Business World (09/19/2016; p. S1/4)

By Ma. Luz Victoria A. Ballesteros

(First of two parts)

On Aug. 4, 2015, the Securities and Exchange Commission (SEC) released the 2015 Implementing Rules and Regulations (IRR) of Republic Act No. 8799, otherwise known as the Securities Regulation Code (SRC). This came after various stakeholder inputs from as early as 2011, when the proposed amendments were made open to public comment. The 2015 IRR was published on Oct. 25, 2015, and took effect 15 days later, on Nov. 9, 2015. It modified the 2003 IRR with the introduction of significant changes geared towards transparency in dealing with brokers, dealer and securities ownership, as well as relaxing the rules to give investors easier access to capital.

One year later, the IRR has drawn high compliance from stakeholders, including stock brokers and trading participants. Despite resistance on some provisions from the Philippine Association of Brokers and Dealers, Inc. (“PASBDI”), the SEC has been firm in pushing for compliance, and has in fact recently imposed penalties on several brokerage companies which were found to be non-compliant with the IRR. Sanction letters will also be sent to market participants who are likewise non-compliant.

The SEC has also recently indicated that it may submit amendments to the SRC for Congress to approve, in a bid to strengthen its law enforcement function. The amendments would allow it to initiate litigation before the courts for civil and criminal cases, in addition to its exclusive jurisdiction over administrative proceedings for violations of the SRC. Moreover, the SEC, through Chairperson Teresita J. Herbosa, is working to relax rules on corporate governance.

In light of these imminent changes in the SRC, it may be essential to revisit the salient features of the 2015 IRR.

Previously, any person or group of persons acting in concert, who intended to acquire 35% of equity shares in a public company was required to disclose such intention and make the tender offer. While this rule still holds, the new IRR sets another rule for lower thresholds. Now, if the intention is to acquire only 15% of the equity securities in a public company in one or more transactions within 12-month period, said person or persons only need to file with the SEC a declaration to that effect. Effectively, this allows for two levels of action depending on the percentage of equity shares intended to be acquired.

Moreover, guidelines have been set for accredited firms regarding the conduct of valuation and issuance of fairness opinions in relation to tender offers. Pursuant to Rule 19 of the IRR these include, among others:

• The individual who acts on behalf of the accredited firm shall be a licensed professional who has at least 10 years of experience in the field of accounting, finance or economics and holds a relevant advance degree;

• The firm shall use in its assessment relevant and current data or those that are not more than three months from date of valuation;

• If the firm’s valuation of a company materially differs from the market price of the company’s securities prior to the announcement of a proposed transaction, the firm shall comment on the difference and the factors underlying it;

• The firm shall not include prospective financial information (including forecasts and projections) unless it has made sufficient inquiries to satisfy itself that the information on which it relied on was prepared on a reasonable basis;

• The firm shall notify the party commissioning the report within two days from date of its knowledge of a significant change which may affect the contents of the report or from the date of its conclusion that a material statement in the report is misleading or deceptive. A copy of such a report shall be furnished to the SEC within the same period;

• The firm’s discussion on any material difference between the valuation set and the market price of the company’s securities prior to the announcement of the proposed transaction;

• A written declaration of compliance by the firm’s representative with the Code of Ethics applicable to his or her profession;

• A brief description of the firm and the education and professional qualifications of its representative who conducted the valuation; and

• The Fairness Opinion Report shall be signed by the firm’s representative of a rank not lower than a partner or a Vice-President or their equivalent respectively. He shall indicate his complete name, Professional License Number, Tax Identification Number, firm name and address, the PSE Accreditation Number of the firm (if any) and other technical information.

These requirements are laid out to ensure the proper and accurate valuation of securities offered to the public, for the protection of investors.

Shelf registration or shelf offering is a type of registration that allows companies to raise capital without undergoing a separate registration for each act of offering. The single registration is recognized as sufficient for future public offerings of the security.

Under the 2003 IRR, shelf registration required the filing of an updated registration statement for each subsequent offering. Essentially, this meant going through the same processing time and submission of requirements for every offering. Now, under the new rules, securities which are intended to be issued in subsequent tranches after the registration statement has been rendered effective by the SEC, may be registered for an offering to be made on a continuous or delayed basis in the future, for a period not exceeding three years from the effective date of the registration statement under which they are being offered and sold. This allows companies to immediately make an offering if market conditions are favorable, without having to file an updated registration statement each time. However, disclosure of any subsequent sale at least seven business days before the sale of each subsequent tranche is required.

The 2003 IRR distinguished between short-term and long-term commercial papers, but the new rules do not. A commercial paper is merely defined as evidence of indebtedness of any person with a maturity of 365 days or less. Under the new rules, selling a commercial paper is also made easier with the requirement of an issuer rating instead of a separate rating for each issuance, thus allowing issuers more leeway in raising capital.

While the list of exempt securities under the 2003 IRR was retained in the new rules, a new category has been added. The new category includes any security issued or guaranteed by multilateral financial entities established through a treaty or any other binding agreement to which the Philippines is a party or subsequently becomes a member. The issuer is referred to as Multilateral Financial Entities (“MFE”), and the exempt papers include securities of international financial institutions, multilateral development banks, development finance institutions or any other similar entities; or by facilities or funds established, administered, and supported by MFEs. To qualify as an exempt security, the issuer is required to file an offering circular/memorandum in a format prescribed by the SEC and containing among others; (1) information about the issuer and the security to be issued, (2) information about the MFE, and (3) information about the guarantee.

It is evident from this addition to the list of exempt securities that the SEC may add to the list of exempt securities through the issuance of rules or regulation, after public hearing, as has been done in this instance.

In next week’s article, we will continue to discuss the significant changes to the IRR for the SRC, including additions to exempt transactions, qualified buyers, underwriting, and the period within which to sell securities.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Ma. Luz Victoria A. Ballesteros is a Tax Senior Director of SGV & Co.