CHAPTER III

Operation of Investment Companies

Sec. 8. Distribution and Redemption of Mutual Fund Securities. –

 (a)    A registered mutual fund shall not sell any redeemable security issued by it except through a principal distributor for distribution at the public offering price determined as described in the prospectus.  A principal distributor or dealer shall not sell any such security except at the public offering price determined as described in the prospectus.  However, these restrictions do not apply to a sale made (1) under Subsection 23(b); (2) under an offer made solely to all registered holders of the securities issued by the mutual fund proportionate to their holdings or proportionate to any cash distribution made to them by the mutual fund, subject to appropriate qualifications designed solely to avoid issuance of fractional securities; or (3) as otherwise provided in a rule or order made under Subsection 19.

(b)    Within seven banking days after the surrender of a security to a registered mutual fund or its agent designated for that purpose, or such other period as the Commission may prescribe by rule, the mutual fund shall redeem and make payment for the security in accordance with its terms as stated in the prospectus.  A registered mutual fund shall not suspend the right of redemption or postpone the date of payment upon redemption, except:

1.       For any period (A) during which the Philippine Stock Exchange is closed other than the customary weekend and holiday closing, or (B) during which trading on the Philippine Stock Exchange is restricted;

2.       For any period during which an emergency exists as a result of which (A) disposal by the mutual fund of securities owned by it is not reasonably practicable, or (B) when it is not reasonably practicable for the mutual fund to determine fairly its net asset value; or

3.       For such other periods as the Commission may permit by order or regulation for the protection of security holders of the mutual fund.

The Commission shall determine by rule or regulation the conditions under which (i) trading is restricted or (ii) an emergency exists for purposes of this subsection.  A registered mutual fund shall not sell any redeemable securities issued by it during any period for which there is a suspension or postponement under this subsection.

(c)    A registered mutual fund shall not restrict the transferability or negotiability of any security issued by it, except in conformity with the statements contained in its prospectus, and in compliance with any rules and regulations the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(d)    A registered mutual fund shall not issue any of its securities (1) for services, or (2) for property other than cash or securities (including securities issued by it), except as a dividend or distribution to its security holders or in connection with a reorganization.

(e)    Sales of securities of a registered investment company shall be on a cash basis only.  Securities of a registered investment company shall not be issuable on an installment basis.  Unless the Commission specifically prescribes otherwise by rule or regulation, credit shall not be, directly or indirectly, extended, maintained or arranged based upon the market price of a security issued by a mutual fund as contemplated by Section 48 of the SRC.

(f)    Any provision of The Corporation Code of the Philippines in conflict with this section shall not apply to a registered mutual fund.

(g)    The Commission may issue rules concerning the procedures used for the purchase and redemption of securities of registered mutual funds and the purchase and redemption price for those securities.  These rules may prescribe the manner in which fees and commissions are included in the price at which those securities are sold and redeemed and determine a maximum sales load that may be charged.

Sec. 9. Distribution and Repurchase of Closed-End Fund Securities. –

 (a)    A registered closed-end fund shall not issue any of its securities (1) for services, or (2) for property other than cash or securities (including securities issued by it), except as a dividend or distribution to its security holders or in connection with a reorganization.

(b)    A registered closed-end fund shall not sell any common stock issued by it at a price below its current net asset value (determined as of a time within 48 hours, excluding Sundays and holidays, before the price is determined), exclusive of any distributing commission or discount, except (1) in connection with an offering to all the holders of its common stock; (2) with the consent of the holders of a majority of its common stock; or (3) upon conversion of a convertible security in accordance with its terms.

(c)    A registered closed-end fund shall not purchase any shares of stock issued by it except:

1.       On a securities exchange or such other open market as the Commission may designate by rule, regulation or order if the fund has, within the preceding six months, informed its stockholders of its intention to purchase the stock by letter or report addressed to all its stockholders;

2.       Pursuant to tenders, after reasonable opportunity to submit tenders has been given to all its stockholders; or

3.       Under such other circumstances as the Commission may permit by rule, regulation or order for the protection of investors in order to insure that the purchases are made in a manner and on a basis that does not unfairly discriminate against any of its stockholders.

Sec. 10. Advertising. –

A registered investment company shall not circulate or distribute any advertisement unless it has been filed.  The Commission is authorized to adopt rules governing the content, format and use of advertising material, and may limit, restrict or require revision of advertising material if it finds the advertising material to be false or misleading, or not in accordance with this Act or any rules or regulations under it.  If the Commission initiates proceedings to determine whether to limit, restrict or revise advertising material, it may not be used while the proceedings are pending.  The terms "advertisement" and "advertising material" include any form of notice, circular, letter or other written or email communication addressed to more than two persons, any fax transmission available on demand, any poster in a public place, or any notice or announcement in any publication or by radio, television or the Internet intended to promote or induce the sale of securities of an investment company.

Sec. 11. Limit on Fees and Expenses. –

(a)    The operating expenses of a registered investment company during a fiscal year, including salaries, fees and emoluments received by its directors from the investment company, shall not exceed five percent of its average daily net asset value for that fiscal year, or such other amount as the Commission may prescribe by rule.  The investment advisers and administrative managers to a registered investment company shall reimburse the investment company to the extent the prescribed amount is exceeded in proportion to their fees paid by the investment company during that year.

(b)    If a registered investment company invests in the securities of another investment company, any fee or sales load payable in respect of the investment in the other investment company shall be deducted from the fee payable to the investment advisers of the registered investment company.

Sec. 12. Structure and Capitalization of Investment Companies. –

(a)    Unless the Commission prescribes otherwise by rule or regulation, a registered investment company shall:

1.       Be organized in the form of a stock corporation;

2.       Issue shares of stock consisting solely of one class of voting common stock;

3.       If a mutual fund, provide in its articles of incorporation that shareholders are not entitled to pre-emptive rights, despite any provision of The Corporation Code of the Philippines to the contrary;

4.       Have, at the time of registration, an initial subscribed and paid-up capital from its promoter of at least P50,000,000;

5.       Require that initial paid-up capital not be withdrawn for a period of one year following registration; and

6.       If a mutual fund, maintain at all times a reserve in liquid or semi-liquid assets, as prescribed by the Commission by rule, equal to 10 percent of the fund’s total net asset value.

(b)    A registered investment company is not required to have paid-up capital for the issuance of shares of common stock in excess of the amount specified under this section.

(c)    The securities of a registered investment company initially subscribed by the promoter shall not be sold, transferred or otherwise disposed of within 12 months of the date of registration.

(d)    The Commission may prescribe by rule or order such other or additional requirements concerning the form, share structure, restricted period for withdrawals, and level of and restrictions on capitalization and liquidity as are necessary or appropriate in the public interest or for the protection of investors.  The Commission shall consider whether a smaller amount of paid-up capital is appropriate if an investment company is one of a group of investment companies under common management.

(e)    The Commission is authorized to conduct examinations of the financial condition of investment companies as often as may be necessary or appropriate in the public interest or for the protection of investors.

(f)    A registered investment company, its principal distributors and its principal underwriters shall not make a public offering of the investment company's securities unless the investment company is in compliance with the provisions of this section.

Sec. 13. Board of Directors. –

(a)    Starting from the date that is 90 days after the effective date of this Act, a majority of the directors of a registered investment company shall be disinterested persons.

(b)    A registered investment company shall not have as a majority of its directors persons who are officers or directors of any one bank, investment house or broker or its affiliated persons.

(c)    A majority of the directors of a registered investment company shall be residents of the Philippines, unless the Commission prescribes otherwise by rule.

 (d)   No person shall serve as a director of a registered investment company unless elected to that office by the company’s stockholders at a meeting of the stockholders duly called for that purpose at least annually, except that vacancies occurring between meetings may be filled in any otherwise legal manner if immediately after filling any such vacancy at least two-thirds of the directors then holding office shall have been elected as directors by the company’s stockholders.

Sec. 14. Reporting Requirements for Investment Companies. –

(a)    Within 105 days after the end of its fiscal year, a registered investment company shall transmit to its stockholders and file  an annual report containing the following:

1.       A balance sheet, income statement, statement of cash flows, and statement of changes in net assets for the period covered by the report, including a statement of the aggregate value of investments as of the balance sheet date.  The income statement shall be itemized with respect to each category of income and expense representing more than five percent of total income or expense.  The statement of surplus shall be itemized with respect to each charge or credit to the surplus account representing more than five percent of the total charges or credits for the period.  The financial statements shall be (A) prepared in accordance with generally accepted accounting principles and practices established by the Accounting Standards Council of the Philippines uniformly applied and pursuant to any rules the Commission prescribes respecting financial statement presentation and disclosure, and (B) audited and certified by independent certified public accountants whose opinion shall state that they have verified the securities owned, either by actual examination or by receipt of a certificate from the custodian, as the Commission by rule may prescribe by rule.

2.       A list showing the amount and value of securities owned on the date of the balance sheet.

3.       A statement of the aggregate remuneration paid by the investment company during the period covered by the report to each of its affiliated persons.

4.       A statement of the aggregate peso amounts of purchases and sales of portfolio securities, other than government securities, made during the period covered by the report.

5.       A description of any transactions between the investment company and any of its affiliated persons during the period covered by the report.

6.       A summary of financial information on a per share basis, a statement showing the calculation of net asset value per share with comparisons to the same period in the three preceding fiscal years, and the total investment return per share.

7.      Such other information as the Commission may prescribe by rule.

If, in the Commission’s judgment, any item required under this subsection is inapplicable or inappropriate to a specified type of investment company, the Commission may by rule instead permit the inclusion of an item of a comparable character as it deems applicable to that type of investment company.

(b)    A registered investment company shall file such other information and documents as the Commission may prescribe by rule to keep reasonably current its registration statement filed under Section 7 or its annual report filed under Subsection (a).

(c)    Reports, including financial statements, filed by a registered investment company under Subsections (a) and (b) shall be instead of any periodical or current reports or financial statements otherwise required to be filed under Section 17 of the SRC or under The Corporation Code of the Philippines.

Sec. 15. Purchases on Margin, Short Selling and Limits on Indebtedness. –

(a)    Unless the Commission prescribes otherwise by rule or order as necessary or appropriate in the public interest or for the protection of investors, a registered investment company shall not purchase any security on margin, except short-term credits necessary for the clearance of transactions.

(b)    A registered mutual fund shall not issue any debt securities, but is permitted to borrow from a bank.  If asset coverage for its borrowings at any time falls below 300 percent, the fund shall, within three banking days, reduce its borrowings until the asset coverage is at least 300 percent.

(c)    A registered closed-end fund shall not:

1.       Incur any indebtedness, through the issue of a debt security or otherwise, unless, immediately after incurring the indebtedness, it has an asset coverage of at least 300 percent for all of its indebtedness; or

2.       Declare a dividend or distribution on its common stock unless, at the time of declaration, it has asset coverage of at least 300 percent for all its indebtedness, after deducting the amount of the dividend.

SEC. 16. Investment Restrictions. –

(a)    Unless the Commission prescribes otherwise by rule or order as necessary or appropriate in the public interest or for the protection of investors, a registered investment company shall not, directly or indirectly:

1.       Purchase securities of an investment company if, immediately after the purchase, it will have more than 10 percent of its net asset value invested in aggregate in securities of investment companies;

2.       Purchase securities of an issuer if, immediately after the purchase, it will have more than 10 percent of its net asset value invested in shares of that issuer;

3.       Purchase securities of an issuer if, immediately after the purchase, it will hold securities carrying more than 10 percent of (A) the votes of that issuer, or (B) the aggregate market value of the equity securities of that issuer;

4.       Purchase assets if, immediately after the purchase, it will have more than 10 percent of its net asset value invested in illiquid assets, as prescribed by the Commission by rule;

5.       Purchase commodity futures contracts;

6.       Purchase precious metals; or

7.       Purchase investments that could result in the investment company having unlimited liability.

(b)    The Commission shall issue rules restricting or prohibiting any investment policy of a registered investment company as it finds necessary or appropriate in the public interest or for the protection of investors.

Sec. 17. Misleading Names.–

A registered investment company shall not adopt as part of its name or title, or that of any securities issued by it, any word or words which the Commission finds, and by rule or order declares to be, deceptive or misleading.  The Commission is authorized to deny the registration of an investment company using a deceptive or misleading name or title.

Sec. 18. Prohibition on Loans and Guarantees. –

A registered investment company shall not lend money or property to any person or guarantee an obligation of any kind.  Issuance of a variable annuity shall be deemed not to violate this prohibition.

Sec. 19. Other Prohibited Activities of Investment Companies. –

Unless the Commission by rule or order prescribes otherwise as necessary or appropriate in the public interest or for the protection of investors, a registered investment company shall not:

 1.      Act as a distributor of its securities, except through a principal distributor or a principal underwriter;

 2.      Generate funds for promoting the private business of any employee, officer, director, promoter or stockholder; or

3.       Knowingly acquire, during the existence of any underwriting or selling syndicate, a security (except a security issued by it) the underwriter of which is an officer, director, investment adviser or employee of the investment company, or is a person of which any such officer, director, investment adviser or employee is an affiliated person, unless in acquiring the security the investment company is itself acting as an underwriter.

Sec. 20. Changes in Investment Policy.–

(a)    Without the prior approval of the Commission and its board of directors, a registered investment company shall not:

1.       Borrow money, issue senior securities, or purchase or sell real estate or commodities, except in accordance with the policies contained in its registration statement;

2.       Deviate from the policies contained in its registration statement concerning concentration of investments in any particular industry or group of industries; or

3.       Deviate from any other investment policy contained in its registration statement, including any statement of investment objectives.

(b)    The Commission may impose such conditions in granting its approval as it finds necessary or appropriate in the public interest or for the protection of investors, including without limitation a favorable vote of the outstanding shares carrying a majority of the votes of the investment company or of the shares carrying a majority of the votes whose holders are present or represented by proxy at a general meeting of the stockholders.

Sec. 21. Reorganizations. –

(a)    A person who solicits or permits the use of his name to solicit any proxy, consent, authorization, power of attorney, ratification, deposit or dissent in respect to a plan of reorganization of a registered investment company shall, within 24 hours after the solicitation begins, transmit to the Commission a copy of the plan and any deposit agreement relating to it, to the extent they have not already been filed.

(b)    A plan for the reorganization of a registered investment company shall be carried out only with the prior approval of the Commission and subject to such conditions as the Commission finds necessary or appropriate in the public interest or for the protection of investors.

Sec. 22. Dividends. –

 If a registered investment company pays a dividend, or makes a distribution in the nature of a dividend payment, from a source other than:

1.       Its accumulated undistributed net income, determined in accordance with good accounting practice, but not including profits or losses realized upon the sale of securities or other property; or

2.       Its earned surplus so determined for the current or preceding fiscal year, the payment shall be accompanied by a written statement that adequately discloses the sources of the payment.  The Commission may prescribe the form of the statement by rule, regulation or order in the public interest and for the protection of investors.

Sec. 23. Offers to Exchange Securities. –

(a)    Neither a registered mutual fund nor any of its principal distributors shall make or cause to be made an offer to the holder of a security of the mutual fund or any other mutual fund to exchange his security for a security in the same or another mutual fund on any basis other than the relative net asset values of the securities to be exchanged, unless the terms of the offer have first been approved by the Commission or are in accordance with rules or regulations issued by the Commission.  For purposes of this section:

1.       An offer by a principal distributor means an offer communicated to the holder of a security, but does not include an offer made by the principal distributor to an individual investor in the course of its retail business.

2.       Net asset value means the net asset value in effect for determining the price at which the securities involved are offered for sale to the public at the time of the receipt of the acceptance of the offer or at such later time as is specified in the offer.

(b)    Subsection (a) does not apply to an offer made under (1) a plan of reorganization approved by the holders of a majority of the outstanding shares of the class or series to which the security being offered belongs; or (2) a right of conversion, at the option of the holder, upon the terms specified in the applicable charter, certificate or articles of incorporation or by-laws.

Sec. 24. Proxies and Voting Trusts. –

(a)    A solicitation of a proxy, consent or authorization with respect to a security of a registered investment company shall comply with any rules and regulations prescribed by the Commission under this Act or the SRC.  A proxy, consent or authorization that is solicited with respect to a security of a registered investment company shall be valid for a matter requiring stockholder approval under this Act or a conditional order or approval granted by the Commission under this Act only if it has been solicited expressly for the meeting at which that matter is to be acted upon or for action on that matter without a meeting.  A proxy, consent or authorization relating to an approval by stockholders may not be valid and effective for a period longer than two years.  A solicitation of a proxy, consent or authorization shall not be made by means of a proxy statement, form of proxy, consent or authorization, notice of meeting or other communication, written or oral, that is materially false or misleading, or which fails to disclose material facts necessary to correct any statement made in an earlier communication with respect to a solicitation for the same meeting or subject matter if the earlier communication has become false or misleading.

(b)    A registered investment company, any of its affiliated persons, any issuer of a voting trust certificate relating to a security of a registered investment company, or any underwriter of such a certificate shall not offer for sale, sell or deliver after sale any such voting trust certificate in connection with a public offering.

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