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ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW

ATTY. ALEXANDER

C. DY

SECURITIES REGULATION CODE[1]

2 SEMESTER, SY 2011ND

2012
I. GENERAL PROVISIONS
1. Nature of SRC Blue Sky Law to protect public from unscrupulous promoters, who
state business or venture claims which have really no basis, and sell shares or
interests therein to investors, who are then left holding certificates representing
nothing more than a claim to a square of a blue sky.
(a)
(b)
2.

SRC Being Self-Executory Sec. 72.1


Contractual Stipulations Against SRC Sec. 71: Void except against
those in good faith
State Policy Underlying SRC Sec. 2:

(a)

Establish a socially conscious, free market that regulates itself;

(b)

Encourage the widest participation of ownership in enterprises;

(c)

Enhance the democratization of wealth;

(d)

Promote the development of the capital market;

(e)

Protect investors;

(f)

Ensure full and fair disclosure about securities;

(g)

Minimize, if not totally eliminate, insider trading and other fraudulent or


manipulative devices and practices which distorts the free market.
2.1. Compared with RSA (B.P. Blg. 178) To protect the public from unsound,
fraudulent and worthless securities, i.e., truth in securities act [PSE v. CA,
281 SCRA 232 (1997)] in three ways:
(a)

Requiring through the process of registration issuers of securities


to furnish the public with full and accurate disclosure of all material facts
concerning the issuer and the securities so that the public may know what
it is buying;

(b)

Limiting margin and borrowing requirements to prevent undue


speculations; and

(c)

Punishing those who manipulate the market and from


misrepresentations, manipulations and fraudulent practices covering
securities.

2.2. Regulatory Controls Covered:

(a)

Registration process by which a corporation or issue offers and


sells its securities to the public.

(b)

Reporting requirements assuring continuous flow of disclosures


and information about the securities and issuer whose securities are
traded.

(c)

Anti-fraud provisions applicable to price manipulations, insider


trading, misstatements or misrepresentations by corporate management
and others.

(d)

Regulations on market participants like brokers, dealers and


salesmen and securities exchanges.

(e)

Sanctions against those who violate provisions of SRC, as well as


civil liability and/or damages to investors injured by such violations.
(DECASA, pp. 2-3)

(f)

Removal of quasi-judicial functions of the SEC to allow it to


concentrate on its regulatory functions and powers, including the
promulgation of rules and regulations and to exercise investigatory
powers.

II. SECURITIES AND EXCHANGE COMMISSION (SEC)


1.

The Nature and Composition of SEC Sec. 4.1: SEC shall administer
provisions of SRC
(a)
(b)

2.

Composition and qualifications Sec. 4.1, 4.2, 4.3: "Collegial body"


composed of Chairperson and four (4) Commissioners
Meetings Sec. 4.5

(c)

Powers that Can Be Delegated Sec. 4.6: All except its review or
appellate authority and its power to adopt, alter and supplement any rule or
regulation.

(d)

Internal Review Powers Sec. 4.6: SEC may review upon its own
initiative or upon the petition of any interested party any action of any department
or office, individual Commissioner, or staff member.

(e)

Obligation to Indemnify Sec. 6.1

(f)

When Commissioners and Officers Personally Liable Sec. 6.2

Statutory Bases of the Powers and Functions of SEC - Sec. 5.1: SEC
shall act with transparency and shall have the powers and functions provided by:
(a)

The Securities Regulation Code;

(b)

Pres. Decree No. 902-A;

(c)

The Corporation Code;

(d)

The Investment Houses Law;

(e)

The Financing Company Act; and

(f)

Other existing laws.

3.

Powers and Functions of SEC Sec. 5.1


(a)

Jurisdiction and supervision over all corporations, partnerships or


associations which are the grantees of primary franchises and/or a license or
permit issued by the Government;

(b)

Formulate policies and recommendations on issues concerning the


securities market, advise Congress and other government agencies on all
aspects of the securities market and propose legislation and amendments
thereto;

(c)

Approve, reject, suspend, revoke or require amendments to registration


statements, and registration and licensing applications;

(d)

Regulate, investigate or supervise the activities of persons to ensure


compliance;

(e)

Supervise, monitor, suspend or take over the activities of exchanges,


clearing agencies and other SRO;

(f)

Impose sanctions for the violation of laws and the rules, regulations and
orders issued pursuant thereto;

(g)

Prepare, approve, amend or repeal rules, regulations and orders, and


issue opinions and provide guidance on and supervise compliance with such
rules, regulations and orders;

(h)

Enlist the aid and support of and/or deputize any and all enforcement
agencies of the Government, civil or military as well as any private institution,
corporation, firm, association or person in the implementation of its powers and
functions;

(i)

Issue cease and desist orders to prevent fraud or injury to the investing
public;

(j)

Punish for contempt, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court;

(k)

Compel the officers of any registered corporation or association to call


meetings of stockholders or members thereof under its supervision;

(l)

Issue subpoena duces tecum and summon witnesses to appear in any its
proceedings and in appropriate cases, order the examination, search and seizure
of all documents, papers, files and records, tax returns, and books of accounts of
any entity or person under investigation as may be necessary for the proper
disposition of the cases before it, subject to the provisions of existing laws;

(m)

Suspend, or revoke, after proper notice and hearing, the franchise or


certificate of registration of corporations, partnerships or associations, upon any
of the grounds provided by law; and

(n)

Exercise such other powers as may be provided by law as well as those


which may be implied from, or which are necessary or incidental to the carrying
out of, the express powers granted SEC to achieve the objectives and purposes
of these laws.
Note: See: (i) Sec. 55: Settlement Offers; and (ii) Sec. 66: Revelation of
Information Filed with SEC; (iii) Sec. 128, Corporation Code: Substituted
Service Upon SEC.

4.

Removal of Quasi-Judicial Functions of SEC Sec. 5.2: SEC jurisdiction


over all cases enumerated under Section 5 of Pres. Decree 902-A (i.e., fraud
schemes; intra-corporate disputes; election and termination cases of directors,
trustees and officers; and petitions for suspension of payments and/or rehabilitation)
have been transferred to the appropriate Regional Trial Courts.

III. REGISTRATION OF SECURITIES


1.

Definition of Securities Sec. 3.1: Shares, participation or interests in a


corporation or in a commercial enterprise or profit-making venture and evidenced by
a certificate, contract, instrument, whether written or electronic in character, and
include:
(a)

Equity Instruments (represent ownership rights in a corporation, i.e.,


management, surplus profits, assets upon dissolution)) shares of
stock; certificates of interest or participation in a profit sharing agreement;
certificates of deposit for a future subscription; proprietary or nonproprietary
membership certificates in corporations;

(b)

Debt Instruments (issuer required to repay principal amount loaned by


fixed maturity date, at stated rate of interest) bonds, debentures, notes,
evidences of indebtedness[2], asset-backed securities[3];

(c)

Investment Instruments investment contracts[4], fractional undivided


interests in oil, gas or other mineral rights;
Derivatives[5] option[6] and warrants[7];

(d)
(e)

Trust Instruments Certificates of assignments, certificates


participation, trust certificates, voting trust certificates or similar instruments

(f)

of

Catch-all Other instruments as SEC may determine in the future.

Note: Public offering for purposes of registration, means a random or


indiscriminate offering of securities in general to anyone who will buy, whether
solicited or unsolicited.[8]
2. Sale, Offer for Sale Distribution of Securities
2.1. General Rule on Registration of Securities Sec. 8.1:
(a)

Filing and Approval of Registration Statement by SEC Note: Full


Disclosure (SRC) vs. Merit System (RSA) [PSE v. CA, 281 SCRA 232

(1997)] Now, SEC has no power to look into merits of securities to be sold
to the public.
(b)

Giving of Information Prior to Sale


Note: Sec. 8.1 covers only securities sold or offered for sale or
distribution within the Philippines.

2.2. SEC Power on Securities Transactions:


(a)

Sec. 8.2: Grant "conditional approval" of the registration statements;

(b)

Sec. 8.3: Define the terms and conditions under which any written
communication, including any summary prospectus, shall not be deemed to
constitute an offer for sale;

(c)

Sec. 8.4: Keep and open to public inspection at reasonable hours on


business days, the Register of Securities and all documents or information
with respect to the securities registered therein;

(d)

Sec. 8.5: Audit the financial statements, assets and other information
of a firm applying for registration of its securities, when necessary to insure
full disclosure or to protect the interest of the investors and the public in
general;

(e)

Sec. 12.2: Require the registration statement to contain such


information or documents as it may, by rule, prescribe; and may dispense with
any such requirement, or may require additional information or documents,
including written information from an expert, depending on the necessity
thereof or their applicability to the class of securities sought to be registered.
Note: SEC has no power to reverse decision of PSE Board denying listing of
securities [PSE v. CA, 281 SCRA 232 (1997)].

3.

Exempt Securities Sec. 9.1: Registration requirement shall not as a


general rule apply to the following classes of securities:
(a)

Government Issues: Those issued/guaranteed by the Philippine


Government, any political subdivision or agency thereof, or any person controlled
or supervised by, and acting as an instrumentality of said Government;

(b)

Issuances by Foreign Governments: Those issued/guaranteed by any


foreign government with which the Philippines maintains diplomatic relations, or
any state, province or political subdivision thereof on the basis of reciprocity, (but
SEC may require compliance with the specified form and content of disclosures);

(c)

Certificates issued by a bankruptcy receiver/trustee duly approved


by the proper adjudicatory body;

(d)

Those which by law are under the supervision and regulation of the
Office of the Insurance Commission, Housing and Land Use Regulatory
Board, or the Bureau of Internal Revenue;

(e) Bank Issues, except their own shares of stock: Those issued by a bank
except its own shares of stock. Note: If bank is listed in Exchange, not exempted

from complying with reportorial requirements as such [Union Bank v. SEC, 358
SCRA 479 (2001)].
Note: Sec. 9.2: SEC may, by rule or regulation after public hearing, add to the
class of exempt securities if it finds that the enforcement of the Code with respect
to such securities is not necessary in the public interest and for the protection of
investors.
4.

Exempt Transactions Sec. 10.1: Registration requirement shall not apply


to securities sold or offered for sale in the following transactions:
(a)

Judicial sale of securities: At any judicial sale, or sale by an executor,


administrator, guardian, receiver, or trustee in insolvency or bankruptcy;

(b)

Sale of foreclosed securities: By or for the account of a pledge holder,


or mortgagee or any other similar lienholder selling or offering for sale or delivery
in the ordinary course of business, not for the purpose of avoiding the provisions
of the Code, to liquidate a bona fide debt, a security pledged in good faith as
security for such debt;

(c)

Isolated transaction: An isolated transaction in which any security is


sold, offered for sale, subscription or delivery by the owner thereof, or for his
account, not being made in the course of repeated and successive transactions
of a like character, and such owner or representative not being the
underwriter[9] of such security;

(d)

Stock dividends: Stock dividend or other distribution out of surplus by a


corporation, actively engaged in the business authorized by its articles of
incorporation, to its stockholders or other security holders;

(e)

Sale of shares to stockholders not underwritten: Sale of capital stock


of a corporation to its own stockholders exclusively, where no commission or
other remuneration is paid or given directly or indirectly in connection therewith;

(f)

Issuance of bonds to a single purchaser: Issuance of bonds or notes


secured by mortgage upon real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes secured thereby are sold to
a single purchaser at a single sale;

(g)

Transaction pursuant to right of conversion: Issue and delivery of


any security in exchange for any other security of the same issuer pursuant to a
right of conversion, provided that the security surrendered has been registered
under the Code or was, when sold, exempt from the provisions of the Code, and
that the security issued and delivered in exchange, if sold at the conversion price,
would at the time of such conversion fall within the class of securities entitled to
registration under the Code; and that upon such conversion the par value of the
security surrendered in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold;

(h)

Brokers
transactions: Brokers
transactions,
executed
customers orders, on any registered Exchange or other trading market.

upon

(i)

Pre-incorporation subscription or subscription to a capital


increase: Subscriptions of the capital stock of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital
stock, when no expense is incurred, or no commission, compensation or
remuneration is paid or given in connection therewith, and only when the purpose
for soliciting, giving or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly
incorporated, or its authorized capital increased;

(j)

Exchange of securities with existing security holders: The exchange


of securities by the issuer with its existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for
soliciting such exchange;

(k)

Private placements: The sale of securities by an issuer to fewer than


twenty (20) persons in the Philippines during any twelve-month period.

(l)

Sale to qualified buyers: The sale of securities to any number of the


following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Philippine Government or
any political subdivision thereof, or managed by a bank or other persons
authorized by the Bangko Sentral to engage in trust functions;
(v) Investment company; or
(vi) Such other person as SEC may by rule determine as qualified buyers, on the
basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under
management.
Note: Sec. 10.2: Power to Include Other Exempt Transactions SEC may
exempt other transactions, if it finds that the requirements of registration under
the Code is not necessary in the public interest or for the protection of the
investors such as by reason of the small amount involved or the limited character
of the public offering.[10]
Note: Sec. 10.3: Formal Application for Exemption Any person applying for
an exemption, shall file with SEC a notice identifying the exemption relied upon
on such form and at such time as SEC by rule may prescribe and with such
notice shall pay to SEC a fee equivalent to one-tenth (1/10) of one percent (1%)
of the maximum aggregate price or issued value of the securities. Example:
Issuance from authorized but previously unissued capital stock may be granted
exemption [Nestle Philippines v. CA, 203 SCRA 504 (1991)]

5.

Procedure for Registration of Securities - The following provisions apply


to the procedure for registration of securities:
(a) Application Sec. 12.1;
(b)

Prospectus Sec. 12.1;

(c)

Other Information Sec. 12.2 and 12.3;

(d) Signatories to the Registration Statement Sec. 12.4;


(e) Written Consent of Expert Sec. 12.4;
(d) Certification by Selling Stockholders Sec. 12.4;
(e)

Fees Sec. 12.5(a);

(f)

Notice and Publication Sec. 12.5(b);

(g)

SEC Power for Production of Books Sec. 13.2; and

(h) Ruling Sec. 12.6.


6.

Effectivity of Registration Statement Sec. 12.7.

7.

Grounds for Rejection and Revocation Sec. 13.1


7.1. Order Suspending Sale of Securities Sec. 13.4
7.2. Notice to Dealers and Brokers Sec. 13.5
7.3. Withdrawal of Registration Statement Sec. 13.6
7.4. Amendments to the Registration Statement Sec. 14.1 to 14.3
7.5. Action When There is False Statement Sec. 14.4 to 14.5
7.6. Suspension of Registration Sec. 15.1 to 15.3

8.

SEC Power over Pre-need Plans [11] and Commodity Futures


Contract[12] Sec. 74; Sec. 16; Sec. 11: Until otherwise mandated by a
subsequent law, SEC shall continue to regulate and supervise commodity futures
contracts and pre-need plans and the pre-need industry. But See: Pre-Need Code,
which transferred regulation and supervision of pre-need plans to the Insurance
Commission.

IV. REPORTORIAL REQUIREMENTS


1.

Periodic and Other Reports of Issuers Sec. 17.2: Every issuer who:
(i) Has sold a class of its securities pursuant to a registration;
(ii) Has a class of securities listed for trading on an Exchange; and
(iii) With assets of at least P50.0 Million (or such other amount as SEC shall
prescribe), and having 200 or more holders each holding at least 100 shares
of a class of its equity securities (Public company);
(a) Sec. 17.1 Shall file with the SEC (a) Annual Report; and (b) Periodic Reports

(b)

Sec. 17.3 Shall also file with the Exchange where securities are listed
a copy of any report filed with SEC

(c) Sec.
17.5
Shall and
security the annual report.

furnish

each

holder

of

such

equity

B. Reports by 5% Holders of Equity Securities Sec. 18.1: Any person who


acquires directly or indirectly the beneficial ownership of more than 5% of such class
of a Covered Issuer, shall within ten (10) days after such acquisition (or such
reasonable time as fixed by SEC), submit a sworn statement containing the
information in Sec. 18.1(a) to (d) to the:
(a) Issuer of the security;
(b) Exchange where the security is traded; and
(c) SEC.
V. PROTECTION OF SHAREHOLDER INTERESTS
1. Tender Offers
1.1. Obligations for Tender Offers Sec. 19.1(a): Any person, or group of persons
acting in concert, who intends to:
(a)
(b)

Acquire at least fifteen percent (15%) of: or


Acquire at least thirty percent (30%) over a period of twelve (12)
months of:
(i) Any class of equity security of a listed corporation; or
(ii) Any class of equity security of a corporation with assets of at
least P50.0 Million and having 200 or more stockholders with at least
100 shares each;

are obliged to do the following:


(a) Make a tender offer to stockholders by filing with SEC a declaration to that
effect; and furnish the issuer a statement containing such of the information
required of issuers as SEC may prescribe;
(b) Publish all requests or invitations for tender, or materials making a tender
offer or requesting or inviting letters of such a security;
(c) File with SEC and send to the issuer copies of any additional material
soliciting or requesting such tender offers subsequent to the initial solicitation
or request;
(d) Pay at the time of filing of the statement with SEC a filing pay a fee of not
more than one-tenth (1/10) of one percent (1%) of the proposed aggregate
purchase price.

Note: Sec. 19.1(b): Any solicitation or recommendation to the holders of such a


security to accept or reject a tender offer or request or invitation for tenders shall
be made in accordance with such rules and regulations as SEC may prescribe.
1.2. Withdrawal of Securities Deposited Pursuant to a Tender Offer Sec. 19.1(c)
1.3. When Securities Offered Exceed the Offer Made Sec. 19.1(d)
1.4. When Term of Tender Offer Varied Sec. 19.1(e)
1.5. Unlawful and Prohibited Acts Relating to Tender Offers Sec. 19.2: It shall be
unlawful for any person to make any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made, in the light
of the circumstances under which they are made, not misleading, or to engage in
any fraudulent, deceptive, or manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any solicitation of security holders
in opposition to or in favor of any such offer, request, or invitation.
SEC shall, for the purposes of this subsection, define and prescribe means
reasonably designed to prevent, such acts and practices as are fraudulent,
deceptive, or manipulative.
2. Proxy Solicitations
2.1. Rules on Form, Issuance and Solicitation of Proxies Sec. 20.1: Proxies must
be issued and proxy solicitation must be made in accordance with rules and
regulations to be issued by SEC, as follows:

3.

(a)

Sec. 20.2: Proxies must be in writing, signed by the stockholder or his


duly authorized representative and filed before the scheduled meeting with the
corporate secretary;

(b)

Sec. 20.3: Unless otherwise provided in the proxy, it shall be valid only
for the meeting for which it is intended; no proxy shall be valid and effective for a
period longer than five (5) years at one time;

(c)

Sec. 20.4: No broker or dealer shall give any proxy, consent or


authorization, in respect of any security carried for the account of a customer, to
a person other than the customer, without the express written authorization of
such customer;

(d)

Sec. 20.5: A broker or dealer who holds or acquires the proxy for at least
10% (or such percentage as SEC may prescribe) of the outstanding share of the
issuer, shall submit a report identifying the beneficial owner within ten (10) days
after such acquisition, for its own account or customer, to: (i) the issuer; (ii) the
Exchange where traded; and (iii) to SEC.

Internal Record Keeping and Accounting Controls Sec. 22: Every


Covered Issuer shall:
(a)

Sec. 22.1: Make and keep books, records, and accounts which, in
reasonable detail accurately and fairly reflect the transactions and dispositions of
assets of the issuer;

(b)

Sec. 22.2: Devise and maintain a system of internal accounting controls


sufficient to provide reasonable assurances that:
(i)

Transactions and access to assets are pursuant to management


authorization;

(ii)

Financial statements are prepared in conformity with generally


accepted accounting principles that are adopted by the Accounting Standards
Council and the rules promulgated by SEC with regard to the preparation of
financial statements; and

(iii)

Recorded assets are compared with existing assets at reasonable


intervals and differences are reconciled.

4. Transactions of Directors, Officers and Principal Stockholders


4.1 Reportorial Requirements Sec. 23.1: Every person who is:
(i) Directly or indirectly the beneficial owner of more than 10% of any class of
any equity security of a Covered Issuer; or
(ii) A director or an officer of the issuer of such security;
shall file:
(a) At the time either such requirement is first satisfied or within ten (10) days after
he becomes such a beneficial owner, director, or officer, a statement with SEC,
and with the Exchange where it may be listed, of the amount of all equity
securities of such issuer of which he is the beneficial owner; and
(b) Within ten (10) days after the close of each calendar month thereafter, if there
has been a change in such ownership during such month, shall file with SEC,
and also in the Exchange where listed, shall also file with the Exchange, a
statement indicating his ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month.
4.2 Unfair Use of Information Sec. 23.2: For the purpose of preventing the unfair
use of information which may have been obtained by such beneficial owner, director,
or officer by reason of his relationship to the issuer, any profit realized by him from
any purchase and sale, or any sale and purchase, of any equity security of such
issuer within any period of less than six (6) months, unless such security was
acquired in good faith in connection with a debt previously contracted, shall inure to
and be recoverable by the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period exceeding six (6)
months.
This subsection shall not be construed to cover any transaction where such
beneficial owner was not such both at the time of the purchase and sale, or the
sale and purchase, of the security involved, or any transaction or transactions
which SEC by rules and regulations may exempt as not comprehended within the
purpose of this subsection.
Suits to Recover Suit to recover such profit may be instituted before the RTC
by the issuer, or by the owner of any security of the issuer in the name and in

behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty
(60) days after request or shall fail diligently to prosecute the same thereafter, but
no such suit shall be brought more than two (2) years after the date such profit
was realized.
4.3

Unlawful Sale of Securities Sec. 23.3: It shall be unlawful for any such
beneficial owner, director, or officer, directly or indirectly, to sell any equity security of
such issuer if the person selling the security or his principal:
(i) Does not own the security sold; or
(ii) If owning the security, does not deliver it against such sale within twenty (20)
days thereafter, or does not within five (5) days after such sale deposit it in
the mails or other usual channels of transportation;
but no person shall be deemed to have violated this subsection if he proves that
notwithstanding the exercise of good faith he was unable to make such delivery
or deposit within such time, or that to do so would cause undue inconvenience or
expense.
Note: Sec. 23.4: The foregoing prohibition shall not apply to any purchase and
sale, or sale and purchase of an equity security not then or thereafter held by him
in an investment account, by a dealer in the ordinary course of his business and
incident to the establishment or maintenance by him of a primary or secondary
market, otherwise than on an Exchange, for such security.
SEC may, by such rules and regulations as it deems necessary or appropriate in
the public interest, define and prescribe terms and conditions with respect to
securities held in an investment account and transactions made in the ordinary
course of business and incident to the establishment or maintenance of a primary
or secondary market.
5.

Independent Directors Sec. 38 (See discussions under Exchange)

VI. SECURITIES FRAUD, MANIPULATION, INSIDER TRADING


1.

Manipulation of Security Prices and Practices Sec. 24.1: It shall be


unlawful for any person acting for himself or through a dealer or broker, directly or
indirectly:
(a)

To create a false or misleading appearance of active trading in any listed


security traded in an Exchange or any other trading market:
(i) Wash Sale By effecting any transaction in such security which involves no
change in the beneficial ownership thereof;
(ii)

Improper matched order By entering an order or orders for the


purchase or sale of such security with the knowledge that a simultaneous
order or orders of substantially the same size, time and price, for the sale or
purchase of any such security, has or will be entered by or for the same or
different parties; or

(iii)
(b)

By performing similar act where there is no change in beneficial


ownership.
To effect, alone or with others, a series of transactions in securities that:

(i)

Raises their price to induce the purchase of a security, whether of the


same or a different class of the same issuer or of a controlling, controlled, or
commonly controlled company by others;

(ii)

Depresses their price to induce the sale of a security, whether of the


same or a different class, of the same issuer or of a controlling, controlled, or
commonly controlled company by others; or

(iii)

Creates active trading to induce such a purchase or sale through


manipulative devices such as: marking the close;[13] painting the
tape;[14]squeezing the float;[15] hype and dump;[16] boiler room
operations;[17] and such other similar devices.

(c)

Circulating unverified rumor-based market information To


circulate or disseminate information that the price of any security listed in an
Exchange will or is likely to rise or fall because of manipulative market
operations of any one or more persons conducted for the purpose of raising
or depressing the price of the security for the purpose of inducing the
purchase or sale of such security.

(d) To make false or misleading statement with respect to any material fact,
which he knew or had reasonable ground to believe was so false or
misleading, for the purpose of inducing the purchase or sale of any security
listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase
and/or sale of any security traded in an Exchange for the purpose of pegging,
fixing or stabilizing the price of such security, unless otherwise allowed by the
Code or by rules of SEC.
2.

Manipulative Devices Sec. 24.2: It shall be unlawful for any person:


(a) To use or employ, in connection with the purchase or sale of any security any
manipulative or deceptive device or contrivance; or
(b) To effect any short sale[18] or any stop-loss order[19] be executed in
connection with the purchase or sale of any security.
Note: Sec. 24.3: The foregoing provisions notwithstanding, SEC, having due
regard to the public interest and the protection of investors, may, by rules and
regulations, allow certain acts or transactions that may otherwise be prohibited
under this section.

3.

Regulation of Option Trading Sec. 25: No member of an Exchange shall,


directly or indirectly endorse or guarantee the performance of any put, call, straddle,
option or privilege in relation to any security registered on a securities exchange.

The terms put, call, straddle, option, or privilege shall not include any
registered warrant, right or convertible security.
4.

Fraudulent Transactions Sec. 26: It shall be unlawful for any person,


directly or indirectly, in connection with the purchase or sale of any securities to:
(a)

Sec. 26.1: Employ any device, scheme, or artifice to defraud;

(b)

Sec. 26.2: Obtain money or property by means of any untrue statement


of a material fact of any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
were made, not misleading; or

(c)

Sec. 26.3: Engage in any act, transaction, practice or course of business


which operates or would operate as a fraud or deceit upon any person.
Note: Fraud or deceit required, not mere negligence, on the part of offender
[SEC v. CA, 246 SCRA 738 (1995)].
Examples: Churning[20]; Scalping[21]; Single
practice[22]; Front Running[23]

day

trading

5. Insider Trading
5.1 Definition of Insider Sec. 3.8: The term insider means:
(i)

The issuer;

(ii)

A director or officer (or person performing similar functions) of, or a


person controlling the issuer;

(iii)

A person whose relationship or former relationship to the issuer gives


or gave him access to material information about the issuer or the security
that is not generally available to the public;

(iv)

A government employee, or director, or officer of an exchange,


clearing agency and/or self-regulatory organization who has access to
material information about an issuer or a security that is not generally
available to the public; or

(v)

A person who learns such information by a communication from any


of the foregoing insiders.

5.2 Insiders Duty to Disclose When Trading Sec. 27.1: It shall be unlawful for an
insider to sell or buy a security of the issuer, while in possession of material
information with respect to the issuer or the security that is not generally available to
the public, unless:
(a)

The insider proves that the information was not gained from such
relationship; or

(b)

If the other party selling to or buying from the insider (or his agent) is
identified, the insider proves:
(i)

that he disclosed the information to the other party; or

(ii)

that he had reason to believe that the other party otherwise is also in
possession of the information.

Meaning of Material nonpublic Sec. 27.2: For purposes of this Section,


information is material nonpublic if: (a) It has not been generally disclosed to
the public and would likely affect the market price of the security after being
disseminated to the public and the lapse of a reasonable time for the market to
absorb the information; or (b) would be considered by a reasonable person
important under the circumstances in determining his course of action whether to
buy, sell or hold a security.
5.3 Presumption on Insider Trading Sec. 27.1: A purchase or sale of a security of
the issuer made by an insider, or such insiders spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-law, shall be
presumed to have been effected while in possession of material nonpublic
information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time
for the market to absorb such information.
Note: Sec. 27.1: This presumption shall be rebutted upon a showing by the
purchaser or seller that he was not aware of the material nonpublic information at
the time of the purchase or sale.
5.4 Prohibition to Disclose Sec. 27.3: It shall be unlawful for any insider to
communicate material nonpublic information about the issuer or the security to any
person who, by virtue of the communication, becomes an insider, where the insider
communicating the information knows or has reason to believe that such person will
likely buy or sell a security of the issuer while in possession of such information.
5.5 Prohibitions on Tender Offer Situations Sec. 27.4: It shall be unlawful where a
tender offer has commenced or is about to commence for:
(a) Any person (other than the tender offeror) who is in possession of material
nonpublic information relating to such tender offer, to buy or sell the securities of
the issuer that are sought or to be sought by such tender offer if such person
knows or has reason to believe that the information is nonpublic and has been
acquired directly or indirectly from the tender offeror, those acting on its behalf,
the issuer of the securities sought or to be sought by such tender offer, or any
insider of such issuer; and
(b) Any tender offeror, those acting on its behalf, the issuer of the securities sought
or to be sought by such tender offer, and any insider of such issuer to
communicate material nonpublic information relating to the tender offer to any
other person where such communication is likely to result in a such violation.
Note: Sec. 27.4(b): The term securities of the issuer sought or to be sought by
such tender offer shall include any securities convertible or exchangeable into
such securities or any options or rights in any of the foregoing securities.
6.

SEC Power to Issue Rules and Regulation to Prevent Fraudulent,


Deceptive or Manipulative Practices Sec. 72.2 to 72.4

VII. SECURITIES MARKET PROFESSIONALS


1.

Securities Market Professionals SRC classifies brokers, dealers,


salesmen and those associated with them as forming the professionals of the
securities market.
(a)

Sec. 3.3: Broker is a person engaged in the business of buying and


selling securities for the account of others.

(b)

Sec. 3.4: Dealer means any person who buys and sells securities for
his/her own account in the ordinary course of business.

(c)

Sec. 3.5: Associated person of a broker or dealer is an employee


thereof who, directly exercises control of supervisory authority, but does not
include a salesman, or an agent or a person whose functions are solely clerical
or ministerial.

(d)

Sec. 3.13: Salesman is a natural person, employed as such or as an


agent, by a dealer, issuer or broker to buy and sell securities; but Note: Sec.
28.7: Forpurposes of registration, shall not include any employee of an issuer
whose compensation is not determined directly or indirectly on sales of securities
of the issuer.

2.

Mandatory Registration of Security Market Professionals with


SEC Sec. 28.1, 28.2, unless Sec. 28.3: exempted from registration by SEC; Note:
Purpose is to protect public and strengthen securities mechanism. If not registered,
cannot collect fees [Nicolas v. CA, 288 SCRA 307 (1998)]

3.

Qualifications for Registration Sec. 28.4: SEC shall promulgate rules


and regulations, requiring, among other things, as a condition for registration that:
(a)

If natural person pass written examination (proficiency/knowledge);

(b)

If broker or dealer minimum net capital, provide bond/security; and

(c)
4.

If located outside the Philippines written consent to service of process


upon SEC.

Requirements, Prohibitions
Professionals Sec. 28
4.1

and

Obligations

of

Securities

Market

Broker-Director Rule Sec. 30.1: No broker or dealer shall deal in or


otherwise buy or sell, for its own account or for the account of customers,
securities listed on an Exchange issued by any corporation where any
stockholder, director, associated person or salesman, or authorized clerk of said
broker or dealer and all the relatives of the foregoing within the fourth civil degree
of consanguinity or affinity, is at the time holding office in said issuer corporation
as a director, president, vice-president, manager, treasurer, comptroller, secretary
or any office of trust and responsibility, or is a controlling person of the issuer.

4.2 Dealings in Compliance with SEC Rules Sec. 30.2: No broker or dealer shall
effect any transaction in securities or induce or attempt to induce the purchase or

sale of any security except in compliance with such rules and regulations as SEC
shall prescribe to ensure fair and honest dealings in securities and provide
financial safeguards and other standards for the operation of brokers and
dealers, including the establishment of minimum net capital requirements, the
acceptance of custody and use of securities of customers, and the carrying and
use of deposits and credit balances of customers.
5. Revocation, Refusal or Suspension of Registration of Securities Market
Professionals Sec. 29
5.1 Preventive Suspension Sec. 29.2

VIII. EXCHANGES AND OTHER SECURITIES TRADING MARKETS


1.

Prohibition on Use of Unregistered Exchange Sec 32.1

2.

Regulation of Over-the-Counter Markets Sec. 32.2

3. Exchanges
3.1

Definition of Exchange Sec. 3.7: Exchange is an organized


marketplace or facility that brings together buyers and sellers and executes trades of
securities and/or commodities.
Note: The rules and regulations of the stock exchange form part of the contract
covering securities transacted within the facilities of the exchange [Carolina
Industries, Inc. vs. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980)], because
like any other association, an exchange has the power to adopt its own constitution,
by-laws, rules and regulations so far as they are not contrary to law or public policy
and which will secure to the members, exclusive rights and privileges which the
courts have fully recognized. Anyone who becomes a member of the exchange
voluntarily submits himself to the operation of those rules and is expected to be
bound by and to respect them [Lopez, Locsin, Ledesma & Co., Inc. v. CA, 168
SCRA 276 (1988)].

3.2
3.3

Registration of Exchanges Sec. 33.1: File application for registration;


and Sec. 40: Comply with registration requirements of SRO.
Compliance Requirements for Exchanges Sec. 33.2:

2.3 SEC Action on Application Sec. 33.3 and 33.4


2.4 Additional Fees of Exchanges Sec. 35
3. Broker-Dealer Segregation Rule Sec. 34.1: It shall be unlawful for any memberbroker of an Exchange to effect any transaction on such Exchange for its own
account, the account of an associated person, or an account with respect to which it
or an associated person thereof exercises investment discretion;
EXCEPT as follows:
(a) Any transaction by a member-broker acting in the capacity of a market maker;
(b) Any transaction reasonably necessary to carry on an odd-lot transactions;
(c) Any transaction to offset a transaction made in error; and
(d) Other transactions of a similar nature as SEC may define.
3.1 Obligation of Broker When Self-Dealing Sec. 34.2: n all instances where the
member-broker effects an Exchange transaction for its own account or the account
of an associated person or an account with respect to which it exercises investment
discretion, it shall disclose to such customer at or before the completion of the
transaction it is acting for its own account, and this fact shall be reflected in the order
ticket and the confirmation slip.
3.2 Administrative Sanctions Sec. 34.3
4. SEC Powers with Respect to Exchanges and Other Trading Market

4.1 Power over an Exchange Sec. 33.6: Upon appropriate application in accordance
with SEC rules and regulations and upon such terms as SEC may deem necessary
for the protection of investors, an Exchange may withdraw its registration or suspend
its operations or resume the same. But if management prerogative of PSE, i.e.,
denial of listing application, SEC has no power [PSE v. CA, 281 SCRA 232 (1997)].
4.2 Power to Suspend Trading Sec. 36.1: If in SECs opinion such action is
necessary or appropriate for the protection of investors and the public interest so
requires for 30 days, or if more than 30 days but not exceeding 90 days, with
approval of the President of the Philippines.
4.3 Uniform Trading Rules Sec. 36.2
4.4 To Determine Number, Size and Location Sec. 36.3
4.5 Rules for Prompt Clearance and Settlement Sec. 36.4
4.6 Establishment of Trust Fund Sec. 36.5
5. Registration of Innovative and Other Trading Markets Sec. 37
6. Independent Directors Sec. 38: Every Covered Issuer shall have at least two (2)
independent directors or such independent directors shall constitute at least 20% of
the members of such board, whichever is the lesser.
For this purpose, an independent director shall mean a person other
than an officer or employee of the corporation, its parent or subsidiaries, or any
other individual having a relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying out the responsibilities of a
director.

IX. SELF-REGULATORY ORGANIZATIONS


1.

The Nature of Self-Regulatory Organizations Sec. 39.1: Self-regulatory


organizations ("SRO") may be granted much independence by SEC when they are
organized and operated in a manner that they become responsible for the
administration and enforcement of the relevant provisions of the Code, its rules and
regulations, and their own rules and regulations, as necessary and appropriate for
the protection of investors and the public interests, with full powers to deny
membership, barring any person from becoming associated with their members, and
to discipline their members and persons associated with their members under fair
procedures. Under SRC, SEC can register as SRO only "securities-related
organizations.

2. What Are "Securities-Related Organizations"? Sec. 39.1: SRC defines them as


"organizations whose operations are related to or connected with the securities
market such as but not limited to associations of:"
(a) Brokers and dealers;
(b) Transfer agents;
(c) Custodians;
(d) Fiscal and paying agents;
(d) Computer services;
(e) News disseminating services;
(f) Proxy solicitors;
(g) Statistical agencies;
(h) Securities-rating agencies; and
(i) Securities information processors;
which are engaged in the business of:
(a) Collecting, processing, or preparing for distribution, or assisting, participating
in, or coordinating the distribution or publication of, information with respect to
transactions in or quotations for any security; or
(b) Distributing or publishing, whether by means of a ticker tape, a
communications network, a terminal display device, or otherwise, on a current
and continuing basis, information with respect to such transactions or
quotations.
3. Powers of SEC with Respect to Securities-Related Organizations Sec.
39.1: The Code grants SEC the following powers with respect to securities-related
organizations:
(a)

To register them as SRO;

(b)

Otherwise to grant them licenses to operate;

(c)

To regulate, supervise, examine, suspend or otherwise discontinue,


as a condition for their operations; and

(d)

To prescribe rules and regulations necessary or appropriate in the


public interest or for the protection of investors to govern SRO and other
organizations licensed or regulated, including requiring all participants in the
securities market to cooperate within and among themselves and require
electronic integration of their records, to ensure transparency and facilitate
exchange of information.

4. Securities Association
4.1 Registration of Securities Association Sec. 39.2
4.2 Requirements of Securities Association Sec. 39.4
4.3 Membership Procedural Rules Sec. 39.5
5. Periods in Registration of SRO Sec. 40
6. SRO Powers and Obligations Sec. 40
7. Procedure on Adoption or Changes of Rules by SRO Sec. 40
8. SRO Disciplinary Proceedings
8.1 Regular Disciplinary Proceedings Sec. 40.6
8.2 Summary Disciplinary Proceedings Sec. 40.6
8.3 Notice and Appeal to SEC Sec. 40.7
9. SEC Control and Supervision over SRO Sec. 40.5
X.

ACQUISITION AND TRANSFER OF SECURITIES AND SETTLEMENT OF


TRANSACTIONS IN SECURITIES
1. Clearing Agencies
1.1 Definition Sec. 3.6: clearing agency is any person who acts as intermediary in
making deliveries upon payment to effect settlement in securities transactions.
1.2 Prohibition on Use of Unregistered Clearing Agency Sec. 41
1.3 Registration of Clearing Agencies Sec. 42
1.4 Evidentiary Value of Clearing Agency Record Sec. 44
2. Registration and Dealings in Securities
2.1 Recognition of Uncertificated Securities[24] Sec. 43: Notwithstanding Section
63 of the Corporation Code, a corporation whose securities are registered or listed
on a securities Exchange may:
(a) If so resolved by its Board of Directors and agreed by a shareholder, investor
or securities intermediary, issue shares to, or record the transfer of some or
all of its shares into the name of said shareholders, investors or, securities

intermediary in the form of uncertificated securities; without prejudice to the


rights of the securities intermediary subsequently to require the corporation to
issue a certificate in respect of any shares recorded in its name; and
(b) If so provided in its articles of incorporation and by-laws, issue all of the
shares of a particular class in the form of uncertificated securities and subject
to a condition that investors may not require the corporation to issue a
certificate in respect of any shares recorded in their name.
SEC by rule may allow other corporations to provide in their articles of
incorporation and by-laws for the use of uncertificated securities.
2.2 Rules on Transfers of Securities Sec. 43: Transfers of securities, including an
uncertificated securities, may be validly made and consummated by appropriate
book-entries in:
(a) Securities accounts maintained by securities intermediaries;
(b) In the stock and transfer book held by the corporation; or
(c) The stock transfer agent;
with the following legal effects:
(a) Such bookkeeping entries shall be binding on the parties to the transfer;
(b) Such transfer has the effect of the delivery of a security in bearer form or duly
indorsed in blank representing the quantity or amount of security or right
transferred, including the unrestricted negotiability of that security by reason
of such delivery;
(c) However, transfer of uncertificated shares shall only be valid, so far as the
corporation is concerned, when a transfer is recorded in the books of the
corporation so as to show the names of the parties to the transfer and the
number of shares transferred;
(d) The registration of a transfer of a security into the name of and by a
registered clearing agency or its nominee shall be final and conclusive unless
the clearing agency had notice of an adverse claim before the registration
was made; but this is without prejudice to any rights which the claimant may
have against the issuer for wrongful registration; and
(e) Nothing shall preclude compliance by banking institutions and their
stockholders with the applicable ceilings on shareholdings prescribed by law.
2.4 Pledging a Security or Interest Therein Sec. 45: In addition to other methods
recognized by law, a pledge of, or release of a pledge of, a security, including an
uncertificated security, is properly constituted and the instrument proving the right
pledged shall be considered delivered to the creditor under Articles 2093 and 2095
of the Civil Code if a securities intermediary indicates by book-entry that such
security has been credited to a specially designated pledge account in favor of the
pledgee.

Such pledge has the effect of the delivery of a security in bearer form or
duly indorsed in blank representing the quantity or amount of such security or
right pledged.
In case of a registered clearing agency, the procedures and the exact time
at which, such book-entries are created shall be governed by the registered
clearing agencys rules; however, the corporation shall not be bound by the
foregoing transactions unless the corporate secretary is duly notified in such
manner as SEC may provide.
3. SEC Power Over Securities Ownership Sec. 47
XII. MARGIN AND CREDIT
1. Margin
1.1 Purpose Sec. 48: The margin is required for the purpose of preventing the
excessive use of credit for the purchase or carrying of securities.
1.2 SEC Rules on Margin Sec. 48.1
1.3 Margin Allowance Standard Sec. 48.1: SRC mandates that the margin allowance
shall be based upon the following standard:
An amount not greater than whichever is the higher of (a) 65% of the current market price of the security, or
(b) 100% of the lowest market price of the security during the preceding thirtysix (36) calendar months, but not more than 75% of the current market
price.
Note: However, the Monetary Board may increase or decrease the above
percentages, in order to achieve the objectives of the Government with due
regard for promotion of the economy and prevention of the use of excessive
credit.
14. Prohibition on Extension of Margin Sec. 48.2 and 48.3
2. Borrowings by Members, Brokers, and Dealers
2.1 Restrictions on Borrowings Sec. 49
3. Enforcement of Margin Requirements and Borrowing Restrictions
3.1 Indirect Violations of Margin Requirements Sec. 50
3.2 Indirect Violations of Borrowing Restrictions Sec. 50
XIII. LIABILITIES AND PENALTIES
1. Liabilities of Controlling Persons, Aider and Abettor
1.1 Liability of Controlling Persons Sec. 51.1

1.2 Obvious Rule Liability Rule Sec. 51.2


1.3 Hindering or Obstructing Act Sec. 51.3
1.4 Unlawful Aiding and Abetting Sec. 51.4
1.5 Substantial Assistance Sec. 51.5
2. Accounts, Records, Reports, and Examination of Exchanges and Members
2.1 Keeping of Records Sec. 52.1
2.2 Report on Extension of Credit Sec. 52.2
3. Civil Liabilities on Account of False Registration Statement Sec. 56
4. Civil Liabilities Arising in Connection With Prospectus, Communicat-ions and
Reports Sec. 57.1
4.1 Causing False or Misleading Statements to be Filed with SEC Sec. 57.2
5.

Civil
Liability
Transactions - Sec. 58

for

Fraud

in

Connection

with

Securities

6. Civil Liability for Manipulation of Security Prices Sec. 24


7. Civil Liability with Respect to Commodity Futures Contracts and Pre-need
Plans Sec. 60
8. Civil Liability on Account of Insider Trading Sec. 27.1 and 61.2
9. Limitation of Actions Sec. 62
10. Rules on Rights and Damages Claim
10.1 For Actions on False Registration and Manipulative Devices Sec. 63
10.2 Other Remedies Available Sec. 69
11. Penalties for Violation of the Code Sec. 73

[1] This Outline is based primarily on Dean Cesar L. Villanuevas Commercial Law Review, 2007 and
2009 Editions, with references to Atty. Lucila M. Decasas Securities Regulation Code, 2004 Edition, as
indicated.
[2] Evidences of Indebtedness are written representations of debt securities or obligations of
corporations, such as long-term commercial paper (maturity more than 365 days) or short-term
commercial paper (maturity of 365 days or less). [DECASA, p. 7, citing SRC Rule 3-1.S, Amended SRC
IRR]
[3] Asset-backed securities are certificates issued by Special Purpose Entity (SPE), the repayment
of which shall be derived from a cash flow of assets in accordance with the plan. SPE is either Special
Purpose Corporation (SPC) or Special Purpose Trust (SPT). [DECASA, p. 5 citing R.A. No. 9267,
Securitization Act of 2004].
[4] Under the Howey Test, Investment Contracts are contracts, transactions, or schemes
whereby a person: (1) makes an investment of money; (2) in a common enterprise; (3) with expectation of
profits; and (4) primarily from the efforts of others [Power Homes Unlimited Corp. v. SEC, 546 SCRA
567 (2008)]
[5] Derivatives are financial instruments whose value changes in response to the change in a
specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a

credit rating or credit index, or similar variable or underlying factor. It requires no initial or little net
investment relative to other types of contracts that have similar responses to changes in market
conditions. It is settled at a future date. [DECASA, p. 6 citing SRC Rule 3-1.F, Amended SRC IRR]
[6] Options are contracts that give buyer the right, but not the obligation, to buy (call options) or sell
(put options) an underlying security at a predetermined price, called the exercise or stake price, on or
before a predetermined date, called the expiry date, which can only be extended by the SEC upon
stockholders approval. [DECASA, p. 6 citing SRC Rule 3-1.F.1, Amended SRC IRR]
[7] Warrants are rights to subscribe or purchase new shares or existing shares in a company on or
before a predetermined date, called the expiry date, which can only be extended in accordance with SEC
rules and regulations and/or Exchange rules. Warrants generally have a longer exercise period than
options and are evidenced by warrant certificates. [DECASA, p. 6 citing
[8] DECASA, p. 23.

[9]Sec. 3.15: Underwriter is a person who guarantees on a firm commitment and/or declared best
effort basis the distribution and sale of securities of any kind by another company.
[10]Sec. 10.2.
[11] Pre-Need Plans are contracts which provide for the performance of future services or the
payment of future monetary considerations at the time of actual need, for which planholders pay in cash
or installment at stated prices, with or without interest or insurance coverage and includes life, pension,
education, interment, and other plans which SEC may from time to time approve. [Sec. 3.9]
[12] Commodity futures contracts are contracts providing for the making or taking delivery at a
prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof,
which is customarily offset prior to the delivery date, and includes standardized contracts having the
indicia of commodities futures. [DECASA, p. 41 citing SRC Rule 11(1)(2), Amended SRC IRR]
[13] "Marking the close represents the practice of executing the last transaction or series of
transactions at or near the close of the trading day in order to affect its closing price."
[14] Painting the tape represents an illegal practice by traders who manipulate the market by
buying and selling a security to create the illusion of high trading activity and to attract other traders who
may push up the price.
[15] Squeezing the float refers to a wide range of practices from deadpan acceptance of
abnormally high price-to-sales ratios, to crystal ball gazing ten years out in order to find profits, to selfrighteous repetition of "this company is changing the world" mantra.
[16] Hype and dump, is a practice whereby a speculator buys a particular stock, and then goes
into marketing campaign to hype its price, and then sell his lot at huge profit, leaving the late investors
with shares of very deflated price.
[17] Boiler room operations, constitute fraudulent telemarketing operation involving high-pressure
sales of securities. In a typical boiler room, a rented space with desks, telephones, and experienced sales
people who talk to hundreds of people across the country every day skilled but dishonest salespeople,
often with years of experience selling dubious products and services over the phone, sit shoulder to
shoulder at phone banks all day to call potential investors using sophisticated sales scripts and highpressure sales techniques.
[18] Short sale occurs when a speculator sells stocks which he does not own, in anticipation that
the price will decline and that he will be able to cover the sale by purchasing them back at a later date at a
lower price. This is done by borrowing stocks from another party who still receives the dividends paid on
the stocks while the short sale remains in effect. {DECASA, p. 78]
[19] Stop loss order is an order placed to protect a recognized gain in the price of securities
against potential loss. The order reflects the lowest price that a seller is willing to sell at, even though this
is lower than the current market price. The opportunity for manipulation arises because the offer does not
reflect the current market price. The order is a hedge against market decline. [DECASA, pp. 77-78]
[20] Churning is a situation where a broker-dealer is the sole or dominant market-maker in a
particular security and creates a market in that security by repeated purchases from, and resells to, its
individual retain customers at steady increasing prices. Its course of conduct violates anti-fraud

provisions if the broker-dealer does not make a full disclosure to the customers of the nature of the
market with the intent to defraud or with the wilful and reckless disregard for the interest of the customers.
[DECASA, p. 81]
[21] Scalping is a situation in which a broker-dealer or investment adviser recommends the
purchase of securities without disclosing its practice of purchasing such securities before making the
recommendation and then selling them at a profit when the price rises after the recommendation is
disseminated. [DECASA, p. 81]
[22] Single day trading practice is a practice of buying and selling shares in a single trading
session, where the investors settle their accounts at the end of the day. While the transaction is not
prohibited, there is a risk meeting possible deficiencies in the customers account resulting from the
transaction, and may encourage free riding which is an improper extension of credit or purchase of
shares without the intent of paying at all or with the intent of paying only if the price goes up by the
settlement date. [DECASA, p. 81]
[23] Front running is a market malpractice whereby brokers, also acting as dealers, prioritize their
own dealer accounts by executing their own orders on a particular issue ahead of their clients. [DECASA,
p. 81]
[24]Sec. 3.14: Uncertificated security is a security evidenced by electronic or similar records.

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