Securities are 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. Includes: • Debt Instrument – bonds, debentures, notes, evidence of indebtedness, asset-backed securities. o Bonds - A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental); it includes the terms of the loan, the interest payment (called coupon rate), and the time at which the loaned funds must be paid back (Maturity date). o Debentures - A debenture is a type of debt instrument unsecured by collateral. Since debentures have no collateral backing, debentures must rely on the creditworthiness and reputation of the issuer for support. • Other instruments in the future as may be determined by the SEC. • Derivatives - A derivative is a financial security with a value that is reliant upon, or derived from, an underlying asset or group of assets. The most common underlying assets include stocks, bonds, commodities, currencies , interest rates and market indexes. o Options - are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price called the exercise or strike price, on or before a predetermined date, called the expiry date, which can only be extended in accordance with Exchange rules. Three kinds: ▪ Call option – option to buy; gives the buyer the right to buy an underlying asset at a strike price at anytime up to the expiration date. • Example: There are certain stocks which are rumored to double in amount soon. However, rumors being rumors, a person may instead have a call option, for a price, to stocks for a certain period of time so that if the stocks would continue to have value, then the person can exercise his call option to acquire the stocks and sell it in the future. If he has a call option but may not want to deal with the stocks, he may sell his call option to another person who can exercise it on his behalf. Finally , if he does not want to pursue the venture or it may prove to be unprofitable, he can just let the option expire . ▪ Put option – option to sell; gives the buyer the right to sell at a strike price at anytime up to the expiration date. • If a person thinks that the value of his stocks would decrease in the future, then he may want to place a put option. If for example the value of his stocks is P1,000 a share, if, during the period, the price decreases to 900/share, then he may nevertheless get the 1000/share which is the terms of the put option. If the price of the stock rises, you will lose the premium of the put, but you do not have a loss on the stock. It is a form of insurance to protect oneself from financial loss. ▪ Straddle – combination of both call and put option. • Investment instruments - An investment contract is a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. • Equity instruments - Document that serves as a legally enforceable evidence of the right of ownership in a firm, such as a share certificate ( stock certificate) • Trust Instruments ⮚ The test is: Does it represent a share, participation, or interest in a commercial enterprise or any profit-making venture? If yes, then, it is a security. If it is a security, then, it cannot be sold, or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC. ⮚ They are required to be registered with and approved by the SEC. Registration also includes the disclosure to SEC of all material and relevant information about the issuer of the security. Prior to the sale, the information on the securities, in such form and with such substance as the SEC may prescribe, shall be made available to each prospective purchaser. o To protect the buying public from possible fraud. What needs to be registered: 1. Securities 2. The securities market professional (persons who deal with securities): a. Broker - A person engaged in the business of buying and selling securities for the account of others (Sec.3.3, SRC). b. Dealer - Any person who buys and sells securities for his/her own account in the ordinary course of business (Sec. 3.4, SRC). c. Associated person of a broker or dealer - He is an employee of a broker or dealer 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 (Sec. 3.5, SRC). d. Salesman - He is a natural person, employed as such, or as an agent, by a dealer, issuer or broker to buy and sell securities; but for the purpose 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. i. Example of the exception are rank and file employees of a corporation who are selling stocks. • Security market professionals are required to be registered. No broker shall sell any securities unless he is registered with the SEC. o If you deal with securities as an unregistered market professional, you may not recover compensation for your services as such along with criminal liability. 3. Registration of an Exchange - is an organized market place or facility that brings together buyers and sellers and executes trade of securities and/or commodities. The following need not be registered: 1. Exempt securities 2. Securities exchanged in exempt transactions a. However, as an exception to the above exceptions, SRC provides that the resale of securities previously sold in an exempt transaction must be registered. ⮚ Effect of non-registration: The issuer would be penalized. Issuers of securities not registered shall be subjected to criminal, civil and administrative charges. Exempt Securities: 1. Any security issued or guaranteed by the Government of the Philippines , or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said government. 2. Any security issued or guaranteed by the government of any Country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity. Provided, that the SEC may require compliance with the form and content of disclosures the Commission may prescribe. 3. Certificates issued by a Receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. 4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue. 5. Any security issued by a Bank except its own shares of stock (which serves to promote the sale of securities issued by heavily regulated banks). 6. Other securities as determined by the SEC by rule or regulation, after public hearing.(Sec. 9, SRC) ⮚ Note: Being an issuer of an exempt security does NOT exempt such issuer from the requirement of submission of reports under the regime of full and fair disclosure. Exempt Transactions: 1. Any JUdicial sale, or sale by an executor, administrator, guardian, receiver or trustee in insolvency or bankruptcy 2. Those sold by a pledge holder, mortgagee, or any other similar lien holder, to liquidate a bona fide debt a security pledged in good faith as security for such DEbt 3. Those sold or offered for sale in an Isolated transaction for the owner’s account and the owner not being an underwriter 4. Distribution by the corporation of Securities to its stock holders or other security holders as stock dividends or distribution out of surplus 5. Sale of CApital stock of a corporation to its own stockholders exclusively wherein no commission or remuneration is paid or given directly or indirectly in connection with the sale of such capital stock a. NOTE: Also, this sale must not involve an underwriter or financial advisor 6. Bonds or notes secured by a 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 7. Issue and delivery of any security in exchange for any other security of the same Issuer pursuant to the right of conversion entitling the holder of the security surrendered in exchange to make such conversion. 8. Broker’s transactions executed upon customer’s Orders, on any registered Exchange or other Trading market 9. Share Subscriptions in capital stock prior to incorporation or in pursuance of an increase in its authorized capital stock under the Corporation Code when no expense is incurred, or no commission, compensation or renumeration is paid or given in connection with the sale or disposition of such securities, 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. 10. EXchange of securities by the issuer with its existing security holders exclusively, when no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange 11. Sale by issuer to fewer than 20persons in the Philippines during any 12 month period, otherwise known as private placement transactions 12. Sale of securities to any number of the following Qualified Buyers: a. banks, b. registered investment houses, c. insurance companies, d. pension funds or retirement plans maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions, investment companies, and e. other persons or entities ruled qualified by the SEC on the basis of such factors such as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management (Sec. 10.1, SRC). ⮚ Rationale: Although the securities themselves must still be registered, the sale or issue need not be registered because the investors involved herein are considered as highly sophisticated investors or specialized investors and as such, have a greater risk tolerance or do not need strict protection from the Commission.
Forms of Manipulations in Securities Trading:
o The price of securities should be dictated by market forces. It cannot be pegged or stabilized. The following acts are considered as manipulation of security prices and are therefore prohibited: 1. Transactions intended to create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market: a. Wash Sale – is a transaction in which there is no genuine change in the beneficial (or actual) ownership of a security i. Usually for tax related concerns; to use the incentive of losses for deductions then to repurchase the security at the same or lower price. b. Matched Sale – is a change of ownership in the securities by entering an order for the purchase or sale of a security with the knowledge that a simultaneous order 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. c. Similar transactions where there is no change of beneficial ownership. 2. Effecting a series of transactions that will raise or depress the price of securities to induce the purchase or sale of securities respectively, or creating active trading to induce transactions through manipulative devices: a. Marking the close – or portfolio pumping buying and selling of securities at the close of the market in an effort to alter the closing price of these securities. b. Painting the tape – engaging in a series of transactions effected by brokers in securities that are reported publicly to give the impression or illusion of activity or price movement in a security, which may trick investors into trading in these securities because of the alleged trading volume or indications of interest. c. Squeezing the float – refers to taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way to create artificial prices. This prevents the actual market from determining the price of these securities. i. Shortage + control of demand side = appearance of higher price which is not dictated by the market forces but by certain people. d. Hype and dump – engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices. e. Boiler room operations – refers to activities that involve the use of high pressure sale tactics such as direct mail offers or telephone follow-ups to investors to promote purchase and sale of securities wherein there is misrepresentation in these securities. This is a fraudulent transaction that tricks investors into trading in a fake market. f. Daisy chain – refers to a series of purchase and sales of the same issue at successively higher prices by the same group of people with the purpose of manipulating prices are drawing unsuspecting investors into the market leaving them defrauded of their money and securities. g. Front-Running – is the prohibited practice of a broker-dealer executing its proprietary order before the customer’s order for the same security. This violates the fiduciary responsibility by the broker- dealer to its customer accounts as well as placing the customer’s order first. h. Churning – involves the excessive trading of securities by a broker- dealer in a customer’s discretionary account in order to generate commissions, without regard to the customer’s investment objective. i. The most basic churning comes from excessive trading by a broker to generate commissions. Brokers must justify commissionable trades and how they benefit the client. When there are excessive commissions with no noticeable portfolio gains, churning might have occurred. 3. Disseminating false or misleading statements to raise or depress the amount of a security or to induce sale thereof. • Short sale - it is the selling of shares which the seller does not actually own or possess and therefore he cannot, himself, supply the delivery. It is allowed by the SRC. • Insider trading - a purchase or sale made by an insider, or such insider’s spouse or his relative by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to be effected while in possession of material non-public information if transacted after such information came into existence but prior to the public dissemination of such information, and lapse of reasonable time for the market to absorb such information. o Thus, an insider is a person in possession of a corporate material information not generally available to the public. o Who maybe an insider trader: ▪ The issuer ▪ A director or officer (or person performing similar functions) of, or a person controlling the issuer. ▪ 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 ▪ 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 ▪ Constructive Insider – A person who learns such information by a communication from any of the foregoing insiders. o Generally, what is prohibited is the insider’s use of material non-public information to unduly benefit himself or others. o Material non-public information – Information about the issuer or the security has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public or would affect a person’s disposition or holding of a security. Tender Offer Rule – It is the publicly declared intention by a person alone or in concert with others to buy securities of a public corporation. It is an invitation by the acquirer of shares of a company for other stockholders to tender their shares to the acquirer so that they may sell their shares in the same price and conditions as the previously acquired shares. o Tender offer is in place to protect the interest of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms or a chance to sell their shares at the same price as those of the majority stockholders. o Mandatory Tender Offer: o Any person or group of persons acting in concert who intends to acquire 35% or more of any class of equity shares in a public company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all shareholders of such class. o The mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or “any type of acquisition.” o Example of direct acquisition: ▪ The shares of stock of X company are owned by A (19%), B (16%), C (20%), D (14%), E (31%). If F buys the shares of A (19%), the transaction is not subject to mandatory tender offer. However, if F buys the shares of A (19%) and the shares of B (16%), then tender offer must be made because the total shares bought by F is 35%. o Example of indirect acquisition: ▪ The shares of stock of X company are owned by A (16%), B ( 19%), C (15%), D (18%), and Corporation E (32%) respectively. The shares of Corporation E are owned by X ( 50%), Y (25%) and Z (25%). If W acquires the shares of B ( 19%), the transaction is not subject to mandatory tender offer because it did not reach the 35% threshold limit required by law. However, if W acquires the shares of B (19%) and the shares of X in Corporation E (50% of 32 is 16%), then, tender offer must be made because the total shares bought by W directly and indirectly is 35%. Margin Trading - A kind of trading that allows a broker to advance for the customer/investor part of the purchase price of the security and to keep the same security as collateral for such advance.