Revisiting the changes in SRC Rules: A year since

Business World (09/26/2016; p. S1/4)

SUITS THE C-SUITE By Ma. Luz Victoria A. Ballesteros

(Second of two parts)

In last week’s article, we began the discussion on the 2015 Implementing Rules and Regulations (IRR) for the Securities Regulation Code (SRC). The new IRR modifies significant parts of a 2003 IRR geared towards increasing transparency for dealers with brokers, dealer and securities ownership, as well as relaxing the rules to give investors easier access to capital. We also discussed the first few points which were changed — new rules for mandatory tender offers, expanded shelf registration, the new definition of a commercial paper, and exempt securities. We will now continue with the other salient changes in the 2015 IRR.

Pursuant to its general framework of enhancing the ease of raising capital, the new rules have included public offerings that have a limited character as an exempt transaction, subject to compliance with various requirements. For a public offering to be considered of limited character, the covered securities should be available only to the parties or persons named in the application for exemption, for a specified period. The issuer is also required to submit, among others, a list of the persons and their corresponding position(s) in whose favor such grant or issuance of options is to be made, indicating the number of shares to be given to each, or, if this could not yet be ascertained, the formula to be used in determining the number of shares, and issue price.

Securities issued pursuant to an employee stock option plan by a corporation to its employees fall under this category, for example.

The 2015 IRR has also revised the definitions of qualified buyers. Previously, the annual gross income required was P25 million, now the requirement has been decreased to P10 million at least two years prior to registration, or a total portfolio investment in securities registered with the SEC of at least P10 million. For juridical persons, the requirement is that such person must have gross assets of at least P100 million or a total portfolio investment in securities registered with the SEC or financial instruments issued by the government of at least P60 million. Note that the two-year requirement for this amount of gross assets has been removed.

Likewise, the new rules no longer mandate the submission of income tax returns for registration as a qualified buyer. Any verifiable document may now be submitted to prove financial capacity. Moreover, the validity of registration as qualified buyer has been extended to three years.

This may result in more buyers being eligible to participate in the purchase of registered securities, and eventually a more robust market.

Under the new rules, underwriters are no longer required to underwrite securities solely on a firm commitment basis, which is expected to lower the cost of raising capital. Instead, they can agree on a different plan of distribution, but subject to the approval of the SEC. However, issuers of registered securities, except issuers of proprietary/non-proprietary membership certificates or shares, are still required to enter into an underwriting agreement with an investment bank or investment house.

Where the 2003 rules provided for two days within which to sell securities which are the subject of a registration statement, the new rules have extended this period to 10 business days to allow issuers more time to raise capital from the public.

In addition to these significant changes, the greatest and perhaps most controversial overhaul is the imposition of stricter rules upon brokers and dealers, in an obvious effort to comply with the Anti-Money Laundering Act (AMLA).

In fact, after the final IRR was released by the SEC, certain brokers and dealers of securities represented by the Philippine Association of Brokers and Dealers, Inc. (PASBDI) went to court with an application for a Temporary Restraining Order (TRO) on Jan. 12. PASBDI sought to have certain provisions, particularly on the disclosure and transparency requirements regarding beneficial ownership of stocks, as well as requirements on brokers and dealers, nullified and invalidated. The application for the TRO was given due course, and lapsed within the prescribed period after receipt by the SEC.

Subsequently, PASBDI filed a Petition for Declaratory Relief with a Mandaluyong Regional Trial Court, which case is still currently undergoing presentation of evidence.

The new rules, under Rule 52, include the following:

· Brokers and dealers are not allowed to maintain a numbered account for trading or investment purposes of a client or his own account. All existing numbered accounts are ordered to comply within 30 days from effectivity of the new rules.

· Anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited.

· Brokers and dealers are required to maintain an electronic database of the information, which should include the trading account code or client code, in such form or system wherein any information may be easily obtained or extracted. Client information in the database shall be made and kept current or as the need arises. The database shall be made available to the Commission during the conduct of an audit, for valid reasons or upon request at any time.

· Brokers and dealers cannot create new accounts without a face-to-face meeting.

· Brokers and dealers must have basic knowledge of each customer or client, and shall maintain, for each account, information on the customer’s name, residence address, office address, principal business address and their corresponding phone numbers and e-mail addresses, mobile phone number; trading account code, occupation, and the name, address, and phone number of employer (if employed), identification card, sources of funds, nationality, signature of the salesman of brokers who introduced the account, and signature of the partner, officer, or manager who accepted the account.

· Brokers and dealers must have on file all AMLA resolutions and such file shall be updated with any new AMLA resolutions released by the Anti-Money Laundering Council.

· Brokers are required to host Web sites showing the names, current photos and contact details of its directors, principal officers, associated persons, and salesmen to allow the investing public to easily verify if the person transacting with them are indeed licensed and connected with the brokerage firms.

· The SEC is authorized to conduct effective surveillance and investigation of trade events by requiring brokers to provide them access to particular accounts, orders, trading account codes, and the names of clients corresponding to such codes.

In retrospect, it is evident that these rules have been generally welcomed by stakeholders through compliance. Hopefully, such compliance, hand in hand with more permissive governance rules, would lead towards a more active and dynamic Philippine securities market in the long-term as it incorporates global best practices.

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