ANNUAL REPORT CY 2000

Promulgation of the IRR

Even as the Chairperson and the Commissioners were occupied with the reorganization and consequent separation of about one half of the SEC human resource, they spearheaded a team that studied, discussed and drew up the Implementing Rules and Regulations (IRR) of the new Securities Regulations Code. Working drafts were circulated, including posting through the SEC Webpage, and the Chairman, with the Commissioners and selected SEC officials, actively presided over many work group sessions, consultations and a public hearing participated in by the players in the capital market.

On December 15, 2000, the Commission approved and published the Implementing Rules and Regulations for the SRC.

The key areas covered by the IRR provide strong fundamentals for good corporate governance essential to the competitiveness of the Philippine capital market.

The Commission adopted 94 new regulations, of which 45 amended the regulations previously adopted under the Revised Securities Act to conform to requirements under the Code, 35 implemented new reforms under the Code, five (5) addressed issues concerning the newly reorganized Commission, and nine (9) were definitional in nature.

The Rules on definitions reflect improvement over those provided under the old RSA Rules. Thus, the term “investment contract” in SRC Rule 3.1-1 clarifies when a transaction or scheme, which might not traditionally be viewed as a security, should be treated as a security in order to protect investors and impose liability for fraud in connection with the sale thereof under the SRC. Another example is SRC Rule 3.6 which defines “clearing agency“ consistently with other sections of the SRC, as the term applies to securities depositories.

The Commission’s new organizational structure is described in SRC Rule 4. The Code of Conduct for the Commissioners and staff is set forth in SRC Rule 6.2 to address conflict of interest situations and notify the public of the high standards of conduct imposed on the Commission.

Further, the IRR retained a substantial number of the old rules under the RSA pertaining to the full and fair disclosure approach to regulation of the public distribution of securities, appropriately revised to conform to the SRC. Some are entirely new, such as: SRC Rule 13 which clarifies the obligation of issuers where the registration of securities has been suspended during a public offering. SRC Rule 14 governs amendments to the registration statement. SRC Rule 10.1, concerning exempt transactions, significantly changes previous requirements for claiming exemptive relief by providing that such relief, except in the case of private placements to non qualified investors, are self executing and imposing notification requirements to the Commission for monitoring purposes. Moreover, to streamline the disclosure rules, specific items of disclosure have been moved from the rules to annexes, which are attached to the rules.

The most significant reforms introduced by the SRC and the corresponding portions of the IRR are categorized as follows:

I. Provides additional protection to investors

SRC Rule 19.1 governs mandatory tender offers;

SRC Rule 38.1 clarifies the definition of independent director;

SRC Rule- 28.1-1 imposes paid up capital requirements on broker dealers;

SRC Rule 30.2-1 promotes international best practice standards of conduct on Broker Dealers;

SRC Rule 30.2-3 imposes standards on the content of an agreement between a broker dealer and a customer;

SRC Rule 302-8 provides for transparency and fairness to investors in block sale transactions, and

SRC Rule 66.3 provides generally for public access to information filed with the Commission and guidance for requests for confidential treatment of information filed therewith.

II. Clarifies prohibited market practices

SRC Rule 24.1(b)-1 clarifies the types of practices which are deemed manipulative and requires Broker Dealers, prior to executing an order to buy or sell securities, to conduct due diligence by reviewing objective factors which may indicate that a proposed transaction is manipulative.

III. Helps eliminate abusive market practices

SRC Rule 30.1 sets forth procedures, including a mandatory disclosure form, for monitoring affiliated Transactions by Broker Dealers;

SRC Rule 34.1-2 requires broker firms acting in dual capacities to implement chinese wall procedures and segregate functions which raise conflict of interest/insider trading concerns;

SRC Rule 34.1-1 clarifies when a Member broker may trade for his own account only pursuant to the exemptions set forth in Section 34.1 of the Code and/or through another brokerage firm and the priority of non-member/customer orders, and

SRC Rule 30.2-5 which requires disclosure of minimum commissions and charges for services performed by a Broker Dealer to ensure that Member Brokers do not indirectly violate Section 34.1 of the Code/Segregation through commission rebates.

III. Imposes additional requirements to support the role of, and promote self regulation by market participants

SRC Rules 28.1-1 and 28.1-4 address the requirement to appoint a registered Associated Person and the duties thereof;

SRC Rule 28.2-3 requires broker dealers to comply with qualification requirements of a self regulatory organization;

SRC Rule 28.1-1 requires all broker dealers to become a member of an SRO, and

SRC Rule 30.2-7 requires broker dealers to implement internal training programs for their staff to ensure that their staff is aware and understands regulatory requirements.

IV. Addresses systemic risk issues

SRC Rule 29 provides for protection of customer accounts where the registration of a broker dealer is suspended or revoked;

SRC Rule 33.2(d)-1 provides for protection of customer accounts in the case of the business failure of an exchange member, and

SRC Rule 36.4(a)-1 provides for trust funds for broker dealer customers in the event that a broker dealer becomes insolvent and the broker dealer’s paid up capital, and liquidation of his trading rights, is insufficient to pay monies owed to clients.

V. Clarifies the role of an Exchange to operate in the public interest

SRC Rule 33.2(c) clarifies limitations on ownership of an exchange to ensure a broad shareholder base and better corporate governance;

SRC Rule 39.1-1 sets forth requirements governing a self regulatory organization which is an organized exchange;

SRC Rule 39.1-2 provides procedures for the registration of associations of brokers and dealers and other self regulatory organizations, and

SRC Rule 39.1-6 provides for the allocation of regulatory responsibilities among self regulatory organizations, the duties as a self regulatory organization and attendant Commission powers.

VI. Provides additional enforcement powers to the Commission

SRC Rule 40.5-1 clarifies SEC powers over Exchanges, Clearing Agencies and Other SROs;

SRC Rule 30.2-9 enables the Commission to obtain the names of stockholders, members, participants, and clients in pursuance of an investigation or market surveillance, and

SRC Rule 55.1 governing SEC power to accept settlement offers where an investigation or disciplinary proceeding has been instituted.

Both the SRC and the IRR are long awaited legislative solutions recommended by the studies much earlier undertaken to address the problems of a weak capital market. The reforms prescribed by the promulgations gained stronger urgency among policy makers and the general public, when the BW stock scandal severely rocked the economy and nearly destroyed the stock market last year. At the very least, the extensive stock market manipulation that characterized the scandal laid bare to the public the extreme weakness of the stock exchange as a market facility and the inadequacies of the existing law in effectively defining and deterring criminal offenses or fraud.

Both the SRC and IRR adopt the best practices developed and observed in mature and credible markets as well as provide standards consistent with those considered as internationally accepted, or those set by the International Organization of Securities Commission (IOSCO).

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