Republic of the Philippines

Polytechnic University of the Philippines

Sta. Mesa, Manila

Graduate School

A Report

in

BA 733
Money, Capital
Markets, and Financial Institutions
Investment Houses and
Finance Companies
Submitted to:

Dr. Mario Perilla

Reporter:

Socrates F. Calachan
 •Part One
Investment Houses and
Securities Brokers/Dealers

•What is an investment House?

•The powers of an investment house in

addition to the powers granter to
corporations in general.

•What form of business organization an

investment house is to be organized?

•Other activities of an investment house.

•Can an investment house engage in foreign

exchange transactions?

•What is the effect of a merger between an

investment house and a Commercial Banking
Corporation?
 Part Two
Financing Companies and Other Non-Bank
Financial Institutions
* Laws Governing Financial Companies
* Forms of Business Organizations
* Paid-up Capital

Other Non-bank Financial Institutions

* Authorized and Prohibited Investment
* Lending Investors
* Venture Capital Corporations
* Conditions for Investments
 Investment House and
Securities Brokers/Dealers

 Investment is the beginning of

progress and the very
important form of investment is
the Financial Investment which
infuses the lifeblood into the
economy.
 Investment houses and
securitiesbrokers/dealers:
# Investment houses supply the funds
for production or business.

# Invesment Houses build up capital

formation by selling securities like bonds
and stocks.

# These financial institutions become

tools of economic development.
 # Investment house acts as middlemen.

# Investment house may engage in the

business of a broker without obtaining a
separate license. Bancom is an example of
an Investment house.

# Manila Stock Exchange is an example of

securities brokers and or
dealers.
Investment Houses:
 Investment houses’ principal function is
underwriting, which means that it
serves an agent, and its compensation
is in the form of a commission.

 It brings together the suppliers and

users of long-term capital funds.

 The suppliers are individuals, insurance

companies, and other financial
institutions while the users are the
government, public utilities, and industrial
companies.
Investment Houses:
 An investment house provides long-term
or fixed capital funds for business and
government enterprises.

 This is done by mobilizing the savings

of people through the sale of stocks,
bonds, notes, and other instruments in
behalf of issuing corporations and
governments.

 However, because of the small market

for long-term funds, investment
houses entered the money market
business. (A money market is a place
is a place where the demand for and
supply of short-term funds meet.)
 Section 13 of Presidential Decree
No. 129, as amended, otherwise
known as Investment House Law,
states that . . . . . . . . .
An Investment House may engage in the
business of a dealer or a broker under the
Securities Act without obtaining a separate
license for the purpose as required in Section 14
of the Securities Act (C.A. No. 83, as amended)

Reference to Section 14 of the Securities Act

should now be treated as Section 19 under The
Revised Securities Act, otherwise know as
Batas Pambansa 178, effective February 23,
1982.
 Investment house is . . . . . .

defined as “any enterprise which

engages in the underwriting of securities
of other corporations (Section 2, P.D. No.
129)
Underwriting is the act or process of
guaranteeing the distribution and
sale of securities of any kind issued
by another corporation.

Securities are written evidences of ownership,

interest, or participation, in an enterprise, or

written evidences of indebtedness of a person
or enterprise. It includes, but is not limited
to the instruments enumerated in Section 2 of
the Securities Act (Commonwealth Act No.
83, as amended)
 Section 2 of The Revised Securities Act defines the term
“securities” as

Bonds, debentures, notes, evidences of indebtedness, shares in a

company, preorganization certificates or subscriptions, investment
contracts, certificates of interest or participation in a profit sharing
agreement, collateral trust certificates, equipment trust certificates
(including conditional sale contracts or similar interests or instruments
serving the same purpose), voting trust certificates, certificates of deposit
for a security, or fractional undivided interest in oil, gas, or other mineral
rights, or, in general interests or instruments commonly considered to be
securities, or certificates of interests or participation in, temporary or
interim certificates for, receipts for, guarantees of, or warrants or rights,
to subscribe to or buy or sell any of the foregoing; or commercial papers
evidencing indebtedness of any person, financial or non-financial or non-
financial entity, irrespective of maturity, issued, endorsed, sold,
transferred or in any manner conveyed to another, with or without
recourse, such as promissory notes, repurchase agreements, certificates
of assignments, certificates of participation, trust certificates or similar
instruments; or proprietary or non-proprietary membership certificates,
commodity futures contracts, transferable stock options, pre-need plans,
pension plans, life plans, joint venture contracts, and similar contracts
and investments where there is no tangible return in investments plus
profits but an appreciation of capital as well as enjoyment of particular
privileges and services.
 * Under the National Internal
Revenue Code, the term
“securities” means shares of
stock in a corporation and rights
to subscribe for or to
receive such shares.

* The term includes bonds,

debentures, notes, or certificates,
or other evidence issued by a
government or political subdivision
thereof.
The term “underwriter” must likewise ,
be looked into, thus . . . . . .
Underwriter means any person who has
purchased from an issuer with a view to, or offers or
sells for an issuer in connection with, the distributions
of any security, or participates or has direct or indirect
participation in any such undertaking, or participates
or has participation in the direct or indirect
underwriting of any such undertaking; but such term
shall commission from an underwriter or dealer not in
excess of the usual and customary distributors’ or
sellers’ commission. As used in this paragraph, the
term “issuer” shall include, in addition to an issuer, any
person under direct or indirect common control with
the issuer.
 Form of Business
Organization:

* Investment houses are to be

organized in the form of stock
corporation.
Capitalization: The minimum initial paid-in capital of any
investment house is P40M.

* The majority of the voting stock of any

investment house is required to be owned by
citizens of the Philippines.

* To determine the percentage of foreign-owned

voting stocks in investment houses, the basis for
the computation is the citizenship of each
stockholder, and with respect to corporate
owners of voting stock, the citizenship of the
individual owners of voting stock in the
corporation holding shares in that investment
house.

* The majority of the members of the Board of

Directors must be citizens of the Philippines.
Investment House Business: the
powers of an Investment house

1. Arrange to distribute on a guaranteed basis securities of

other corporations and of the government or its
instrumentalities.

2. Participate in a syndicated undertaking to purchase and

sell, distribute or arrange to distribute on a
guaranteed basis securities of other
corporations and of the government or its instrumentalities.

3. Arrange to distribute or participate in a syndicate

undertaking to purchase and sell on a best- efforts
basis securities of other corporations and of the
government or its instrumentalities.

4. Participate as soliciting dealer or selling group member

in tender offers, block sales, or exchange
offering or securities; deal in options, rights
or warrants relating to securities.
5. Promote, sponsor, or otherwise assist and
implement ventures, projects and programs that
contribute to the economy’s development.

6. Act as financial consultant, investment adviser, or

broker.

7. Act as portfolio manager and/or financial agent.

8. Encourage companies to go public, and initiate

and/or promote, whenever warranted, the formation,
merger, consolidation, reorganization, expansion or
recapitalization of productive enterprises

9. Undertake or contract for researches, studies and

surveys on such matters as business and economic
conditions of various countries, the structure of
financial markets, the institutional arrangements for
mobilizing investments.
10. Acquire, own, hold, lease or obtain and interest in
real and or personal property.
11. Design pension, profit-sharing and other employee
benefit plans
12. Such other activities or business ventures as are
directly or indirectly related to the dealing in
securities and other commercial papers, unless
otherwise governed or prohibited by special laws, in
which case the special law in made applicable.
13. Subject to prior approval by the Monetary Board, the
provisions of Charter IV of the New Central Bank
Act, and such rules and regulations as may be
issued by the Monetary Board, engage in foreign
exchange operations which the Monetary Board
identifies as directly related to and supportive of the
activities specified under number 8.
14. Act as trustee of a trust fund or trust property,
subject to the provisions of Chapter VII of the
General Banking Act.
 Other Activities:

Republic Act 337, as

amended, authorizes the
conversion of an investment
house into a Universal Bank
or a Multi-Purpose Bank
through the issuance of a
license by the Monetary
Board of the Bangko Sentral
operating under an expanded
commercial banking
authority.
 Quasi-banking Activities:
 The monetary board may, at its discretion, determine
whether an investment house may be given the go-
signal to perform or conduct quasi-banking activities.

 The term “quasi-banking activities” or “quasi-banking

functions” means:
borrowing funds from twenty or more personal or
corporate lenders at any one time, through the issuance,
endorsement or acceptance of debt, instruments of any
kind other than deposits for the borrowers own accounts,
or through the issuance of certificates of assignment or
similar instruments, with recourse, or or repurchase
agreements for purposes of relending or purchasing
receivables and other similar obligations: Provided,
however, That commercial, industrial, and other non-
financial companies, which borrow funds through any of
these means for the limited purpose of financing their
own needs or needs of their agents or dealers, shall not
be considered as performing quasi-banking functions.
 Quasi-Banking Activities:

If an investment house is also engaged in

performing quasi-banking activities it may
be subject to further regulations,
principally aimed at but not limited to the
following:

1. Liquidity reserve
requirements.
2. Capital-to-risk assets ratios.
3. Interest rate ceilings.
4. Such other consultants as the
Board may deem necessary.
 If an Investment House is
converted to a commercial
bank which is authorized to
operate under an expanded
commercial banking authority,
it will be subject to the
restrictions imposed by the
Republic Act No. 337 as
amended, as well as, other
applicable banking laws in
general.
Securities brokers/dealers
* Investment houses function “as intermediaries
in the marketing process, as brokers, as
dealers, or as underwriters”.

* Broker is defined as any person engaged in the

business of effecting transactions in
securities for the account of others but does not
include a bank.

* Dealer is also defined under the securities act as

any person engaged in the business of
buying and selling securities for his own
account, through a broker or otherwise, but does
not include any person insofar as he buys or sells
securities for his own account, either individually or
in some fiduciary capacity, but not as part of a
regular business.
 Non-Compliance with the Provisions of Presidential
Decree 129, as amended, of other pertinent laws, of the terms or conditions
of its certificate of registration or charter, or of orders, decisions, rulings or
regulations issued by the Securities and Exchange Commission or by the
Bangko Sentral ng Pilipinas:

 The SEC may impose and collect a fine of not exceeding P200
per day for every day during which such violation of non-
compliance continues, and/or suspend its certificate of
registration.
 Any person, or any director or officer of an investment house
who violates or does not comply with the provisions of PD No.
129 (as amended), be punished by a fine of not more than
P20,000, or an imprisonment of not more than five years or
both, at the discretion of the court.
* Dealer in securities is defined as “a merchant
of stocks or securities, whether an individual,
partnership, or corporation, with an established
place of business regularly engaged in the
purchase of securities and their resale to
customers; with a view to the gains and profits that
may be derived there from.”

• Stockbroker is also defined as “includes all

persons whose business it is, for themselves as
such brokers or for other brokers, to negotiate
purchases or sales of stock, bonds, exchange,
bullion, coined money, bank notes, promissory
notes or other securities; but does not include
underwriter for one or more investment
companies as defined in the Investment Company
Act; dealer in securities includes all persons who
for their own account are engaged in the sale of
stock, bonds, exchange, bullion, coined money,
bank notes, promissory notes, or other securities.”
 Part Two: FINANCING
COMPANIES AND OTHER NON-
BANK FINANCIAL
INSTITUTIONS
 Principal Law governing finance companies

 Meaning of Finance Companies

 Difference between “credit” and “purchase

discounts”

 Basic activities or functions of finance

companies

 The paid-up capital of finance companies

inside and outside MetroManila

 What is a lending investor and their functions?

 What is a VCC and its functions?

Regulation/Supervision

 Financing company is a financial

institution which is subject to
regulation, if not supervision, under
two government agencies namely:

 1. Central Bank of the Philippines

 2. Security and Exchange

Commission
 Republic Act No. 5980, as amended,
otherwise known as the Financing Act
which took effect on August 4, 1969, is the
principal law governing the operations of
finance companies.

 Section 3a, R.A. 5980, as amended, defines financing

companies are corporations or partnerships – except those
regulated by the Bangko Sentral, the Insurance
Commissioner, and the Cooperatives Development Authority
– which are primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial, or
agricultural enterprises, either by discounting or factoring
commercial papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other
evidences of indebtedness, or by leasing motor vehicles,
heavy equipment and industrial machinery, business and
office machines and equipment, appliances, and other
movable property.
Section 187, paragraph (ee) of the National
Internal Revenue Code defines the term
“finance companies as . . . . .

 “Corporations or partnership other than a

bank, or insurance company, primarily
organized for the purpose of extending
credit facilities to consumers and to
industrial, commercial or agricultural
enterprises whether by granting direct loan
or by discounting or factoring commercial
papers or accounts receivable for profit,
buying and selling contracts, leases,
chattel mortgages and other evidences of
indebtedness arising out of one or more of
the steps in the distribution and sale of
commodities.”
Basically, finance companies are engaged
in the business of extending credit in any
of the following ways:

 A) By discounting or factoring commercial

papers or accounts receivable.

 B) By buying and selling contracts, leases,

chattel mortgages, or other evidences of
indebtedness.

 C) By leasing motor vehicles, heavy

equipment and industrial machinery, business
and office machines and equipment, appliances
and other movable property.
Forms of Business Organizations
Financing Companies are organized in the form of stock
corporations or general partnerships, and at least 6O
% of the capital of which is owned by citizens of the
Philippines.

 The minimum paid-up capital must be made in cash

of at least:

 1) P10,000,000 - MetroManila Area

 2) 5,000,000 - First Class Cities outside

MetroManila

 3) 2,500,000 - Second Class Cities and First

Class Municipalities

 4) 1,000,000 - Third Class Cities and Second

Class Municipalities

 5) 500,000 - Fourth Class Cities, Third Class

Municipalities and Below
 Other Non-bank Financial
Institutions
 1. Fund Managers or Financial Manager
refers to a bank or a non-bank financial
institution performing quasi-banking
functions engages in the business of
administering and managing the property
or money or its equivalent as agent or
representative of the owner or of a third
person.

 2. A Fund Manager must be a

corporation, and as such, it is organized
by at least five but not more than fifteen
incorporators.
 The operations of a fund manager are under the
regulation of the Securities and Exchange
Commission and the Bangko Sentral, the latter
being empowered by law to regulate also the
financial affairs of certain specific non-bank financial
institutions.

 The funds being managed by a fund manager

include, but need not be limited to, pension,
retirement or provident funds which are set up
either by operation of law or as a matter of company
policy or in accordance with the agreement between
the corporate management and the personnel who
are, in most cases, bound by a union recognized by
the government and the company where the
member-personnel are working.

 The other types of funds being managed by the

fund manager comes from outsiders, which
partake of the nature of trust funds entrusted under
the care of the bank’s trust department.
 Authorized and Prohibited
Investments:
 Investment are made in accordance with the terms of the
agreement, either in the name of the property owner or in
the name of the fund manager in the latter’s capacity as
agent which shall be clearly indicated in the covering
documents of investments.

 When the agreement does not specify the character or class

of investments, the investment shall be limited to debt
and equity securities contained in the list approved by
the board of directors or its duly designated committee.

 Funds for investment in securities are invested in

high-grade securities acceptable as collateral under
existing Central Bank rules and regulations .
Investment in other securities are made with the consent or
instructions of the fund owners.

 A fund manager must not commingle the funds of

two or more accounts for the purpose of investing in
money market.
 Lending Investors:
 A lending investor is a person, partnership, or a corporation
licensed and/or registered with the SEC and the BS as a non-bank
financial institution performing any or all of the following
functions on a regular and recurring basis:

1. Receive funds from one group of persons, regardless of

number, through traditional deposits (demand, time, and savings),
or issuance of debt and equity securities; and make available or
lend these funds to another person or entity, and in the process
acquired debt and equity securities.

2. Use principally the funds received for acquiring various types

of debt or equity securities.

3. Borrow against, or lend on, or buy or sell debt or equity

securities.

4. Hold assets consisting principally of debt or equity securities ,

such as promissory notes, bills of exchange, mortgages, stocks,
bonds, and commercial papers.

5. Realize income on a regular basis in the nature of , but need not

be limited to, interest, discounts, capital gains, underwriting fees,
guarantees, fees, commissions, and service fees, principally from
transactions in debt or equity securities or by being a go-between
of suppliers and users of funds.
 Venture Capital Corporations:
 A venture capital corporation is organized by virtue of
Presidential Decree No. 1688 dated April 3, 1980 to assist
small- medium-scale industries.

 It is an entity jointly organized by private banks, the

National Development Corporation and the Technology
Resource Center and/or such other government
agencies as may be authorized.

 A small- and medium-scale industry is one with total

assets not exceeding P4M.

 The initial paid-in capital of a venture capital

corporation shall not exceed P5m.

 A venture capital corporation shall be known by any

name not otherwise legally used by any other
corporation, provided the words Venture Capital are
made part of the said name.

 A bank with a minimum paid-in capital of P100M, singly

or with other eligible banks, may own up to 60% of the
total voting stock of a venture capital corporation.
 Conditions for investments:

Investments of a venture capital corporation in the shares

of stock or small- and medium-scale enterprises
are subject to the following conditions:

1. Investments are limited to the shares of stock of

those enterprises engaged in an industry certified as
desirable by the Secretary of Trade and Industry.

2. The total assets of the enterprise, including the

investments of the venture capital corporation, do not
exceed P4M.

Subject to prior approval of the Monetary

Board of the Bangko Sentral, a person may
concurrently hold the position of director or officer in
a bank and in a venture capital corporation.

A venture capital corporation in which a

bank owns shares of stock shall be subject to the Bangko
Sentral reportorial requirements prescribed for non-bank
financial institutions. It may also be subject to
examination by the Bangko Sentral.
The End of Report.

Thank you very much!