Basic Rules and Regulations to Implement the Provisions of Presidential Decree No. 129 Otherwise Known as "The Investment Houses Law"

July 9, 1973 BASIC RULES AND REGULATIONS TO IMPLEMENT THE PROVISIONS OF PRESIDENTIAL DE CR EE NO. 129 OTHERWISE KNOWN AS "THE INVESTMENT HO US ES LAW" To effectively carry out the provisions of Presidential Decree No. 129, otherwise known as "THE INVESTMENT HOUSES LAW", the Commission, pursuant to the powers vested in it by said Decree and by Republic Act Nos. 1143 and 5050, hereby promulgates the following rules and regulations for the information and guidance of the public. prcd SECTION 1. Scope of Applicability . These rules and regulations shall apply to any enterprise which engages or purports to engage in the underwriting of securities. SECTION 2. Definitions . The following terms as used in Presidential Decree No. 129 and these rules shall be understood to mean as follows: a. Investment House is an enterprise which engages or purports to engage, whether regularly or on an isolated basis, in the underwriting of securities of another person or enterprise, including securities of the Government and its instrumentalities. b. Underwriting of securities is the act or process of guaranteeing the distribution and sale within the Philippines of securities issued by another person or enterprise, including securities of the Government or its instrumentalities. The distribution and sale may be on a public or private placement basis. c. Securities are written evidences of ownership, interest or participation, in any 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. d. Guarantee is any commitment and/or undertaking made by a person, firm or entity to an issuer or holder, by the distribution of such securities for sale, resale, or subscription, either through an outright purchase or through a corresponding commitment to purchase the balance not subscribed or sold. e. Private Placement refers to the underwritten sale of securities to less than 20 persons or enterprises. f. Public distribution refers to the underwritten sale of securities to at least 20 persons or enterprises. g. Voting Stock is that portion of the authorized capital stock of an Investment House, as are subscribed and entitled to vote. h. Paid-In Capital are all payments on subscriptions to the authorized capital of an Investment House, including premiums paid in excess of par. i. Officer shall be understood to mean a senior officer of an Investment House or bank, which includes the President, Executive Vice-President, General Manager, Vice-President, Assistant Vice-President, Corporate Secretary, Head of an Operating Department, and Branch Manager and such other officers as the Commission, in consultation with the Central Bank, shall determine. j. Organizers are persons who undertake to form an Investment House, among themselves and others, and who are indicated in the Articles of Incorporation as the incorporators and the incorporating directors. k. Managerial Staff are the officers of an Investment House. Where an Investment House is under a management contract, the term shall be understood to include the officers of the management firm. l. Unimpaired Capital and Surplus means the total of the unimpaired paid-in capital, surplus, and undivided profits, net of such valuation reserves as may be required by the Commission, provided that the Commission may include such other items as it may deem appropriate. cdll m. Quasi-Banking Functions shall refer to the functions defined as such by law and appropriate implementing rules and regulations. n. Commission shall mean the Securities and Exchange Commission. SECTION 3. Organization and Registration . A. Investment Houses shall be organized in the form of stock corporations in accordance with the provisions of the Corporation Law, subject to the following requirements: 1. At least a majority of the voting stock of the Corporation shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned voting stocks, in an Investment House, the basis of the computation shall be 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 the Investment House: 2. The majority of the members of the Board shall be citizens of the Philippines; 3. Foreign equity participation shall be registered or reported with the Board of Investment in accordance with the rules and regulations of that Office, prior to or simultaneous with the registration with the Commission; 4. The corporation shall have the minimum initial paid-in capital of P20,000,000.00 at the time of incorporation. 5. Resident foreign directors or technicians of an Investment House, if any, shall register with the Bureau of Immigration and Deportation; 6. In no event shall an officer of an Investment House shall at the same time an officer of a bank, as defined in Section 2 of R. A. 337, as amended; 7. No director or officer of an Investment House shall at the same time be a director of a bank, and no director of an Investment House shall at the same time be an officer of a bank, except as may be authorized as an exception by the Monetary Board of the Central Bank. B. Procedure . The organizers shall file with the Commission, a sworn application for registration in accordance with the prescribed form, together with the following documents: 1. All documents required for registration as a stock corporation; 2. An information sheet of the registrant corporation (SEC Form 129-2); 3. A statement under oath by the organizers and the proposed managerial staff, of their educational background and work experience as well as information on any position currently held by them in banking and other financial institutions, if any (SEC Form 129-3); 4. A one-year projected statements of assets and liabilities of the proposed Investment House; 5. A tentative program of operation for one year, including its investment direction and volume, its expected sources and intended uses of funds and its quasi-banking functions, if any. C. Hearing on Application . The Securities and Exchange Commission shall conduct a hearing to determine whether the establishment of the proposed Investment House will promote public interest and economic growth. The Central bank shall be officially notified. The SEC Commissioner shall not register any articles of incorporation unless his Office shall have consulted the Central Bank and is satisfied on the basis of the evidence submitted that: cdll 1. All the requirements of Presidential Decree No. 129 and of existing laws relative to the organization of an Investment House have been complied with; 2. Public interest and economic growth are promoted; 3. The amount of capital, the proposed organization, direction and administration, as well as the integrity, experience, expertise of the organizers and the proposed managerial staff, provide reasonable assurance that the enterprise will be conducted with financial prudence. D. Issuance of Certificate of Incorporation . Upon compliance with all the requirements of law and implementing rules, and the Commission is satisfied that the formation of the Investment House will promote public interest and economic growth, a Certificate of Incorporation will be issued to it. A license to operate shall also be granted after it shall have adopted its by-laws, elected its Directors and appointed its officers. E. Annual Fees . On or before the fifteenth day of January of each year, and for as long as its license to operate remains in effects, each Investment House shall pay a fee of P200.00. At the time of payment, the Commission may require the licensee to appear and inform the Commission of the results of its operations. F. Branch Operations . No Investment House shall open, maintain or operate a branch or agency without first securing from the Commission a license to Operate a Branch in a particular locality. All applications for a license to operate a branch shall be acted upon by the Commission within ninety (90) days after submission of such documents as may be required by the Commission in support of such application. G. Use of the Term "Investment House " No person, association, partnership or corporation other than those duly licensed as an Investment House in accordance with these rules and regulations, shall advertise or hold itself out as being engaged in the business of an Investment House. SECTION 4. Underwriting Requirements . Underwriting agreements entered into by an Investment House, with respect to public distribution of securities, including the fees to be charged in connection therewith, shall be subject to the approval of the Commission, it being understood that no public distribution of securities shall be made without such approval. The Commission may impose such terms and conditions as may be necessary in the public interest and for the protection of investors; and it may require the submission of such documents as may be necessary to ascertain compliance with such standards of operation as it establish. Transactions which constitute quasi-banking functions shall be subject to Central Bank regulations. As a gesture of faith in the issue, an Investment House may take for its own account a portion of the securities it underwrites but shall sell all such securities to the public. SECTION 5. Management of Funds . The Commission, by circular, shall provide limitations on investments of discretionary accounts under the management of an Investment House. Should the Investment House engage in the management of funds, it must at all times adhere to the prudent man's rule. The Investment House shall ensure that the interest of the funds managed is promoted and that the operation of the funds is undertaken on an arms' length basis. The Commission may require such documents and reports as may be necessary, in order to determine if prudence and safety of the principal have been paramount in the decision of the Investment House. SECTION 6. Underwriting Fees . Except in highly-meritorious cases, as approved by the Commission, an Investment House shall not collect underwriting fees in excess of five per centum (5%) of the amount generated by the underwriter for the issuer. SECTION 7. Contingency Reserve . An Investment House shall provide annually a reserve for contingencies at such reasonable amount as may be required by the Commission. SECTION 8. Prohibitions . 1. No investment House shall undertake underwriting., commitments for its own account in an aggregate outstanding amount exceeding twenty (20) times its unimpaired capital and surplus. 2. An Investment House should not at any time allow its unimpaired capital and surplus to fall below twenty million (P20,000,000.00) pesos; otherwise, it shall be prohibited from undertaking securities for so long as such deficiency remains. 3. Whenever an Investment House is engaged in the management of funds, its officers and other personnel directly involved in the management of funds are prohibited from simultaneously or concurrently buying or selling the shares of stock of the same firm that the funds are buying or selling. 4. No advance to directors, officers and stockholders owning at least 10% of the outstanding capital of an Investment House shall be allowed, unless sufficiently collateralized. SECTION 9. Reporting Requirements . Every registered Investment House shall file with the Commission the following periodic reports in triplicate: A. Progress Reports . a quarterly report of the results of its under-writing operations and activities of funds managed on all commitments entered into in such form as may be provided for the purpose, within fifteen (15) days from the end of each quarter. B. Semi-Annual Financial Statement signed under oath by its chief accountant and verified by the president, within a period of sixty (60) days after the end of each semester containing such data, and in such form as the Commission shall require. A copy shall be filed with the Central Bank. C. Annual Report concerning its operational activities for the year just ended, signed by its president (SEC Form 129-1) within the month of March of each year. A copy shall be filed with the Central Bank. D. A Report on the composition of the board of directors or any resignation, dismissal, suspension, or filing of vacancies therein, or of any officers or managerial staff, signed under oath by the secretary, within fifteen days after occurrence of the event. Every registered Investment House shall maintain and preserve such records and documents as the Commission may prescribe by way of circulars. Such circulars shall provide for a reasonable degree of uniformity in accounting policies and principles to be followed by Investment Houses in maintaining their accounting records and in preparing financial statements as required by these rules. SECTION 10. Transitory Provisions . A. All existing enterprises which have been operating as Investment House, prior to February 15, 1973, shall: 1. Within six (6) months from February 15, 1973, file an information sheet with the Commission in such form and containing such data as may be required, pay the required fee under Sec. 3-E of these rules, and the Commission in consultation with the Monetary Board, after determining compliance with the requirements of Presidential Decree No. 129 of these Rules, shall issue a License to Operate an Investment House. 2. Within one (1) year from February 15, 1973, comply with the requirement of a minimum paid-in capital of Twenty Million (P20,000,000.00) Pesos, citizenship requirements, and the prohibition on interlocking directorate or officership. SECTION 11. Stockbrokerage or Dealership Functions . If an Investment House engages in the business of a stockbroker or dealer pursuant to Presidential Decree No. 129, it shall comply with the provisions of C.A. No. 83, otherwise known as the Securities Act. and the rules and regulations of the Commission promulgated pursuant thereto: Provided, however, that an Investment House need not obtain a separate license under Section 14 of the Securities Act. SECTION 12. Central Bank Rules . Investment Houses shall also be subject to the rules and regulations for non-bank financial intermediaries as provided by law.; SECTION 13. Visitorial Power . The Commission may at its discretion, make such investigations as it deems necessary to determine whether or not an Investment House is complying with any of the provisions of Presidential Decree No. 129 or of any applicable laws rules and regulations. It shall determine all the facts and circumstances concerning the matter to be investigated for the imposition of sanctions/penalties or remedial or preventive measures. SECTION 14. General Exemption Power . The Commission may upon proper petition and payment of a fee of P100.00, grant an exemption from compliance with any requirements of these rules as may be consistent with public interest and the protection of investors. SECTION 15. Penalties . Any violation of Presidential Decree No. 129, or of these rules and regulations, shall be penalized by suspension or revocation of the License to Operate, after proper notice and hearing. In appropriate cases, a fine not exceeding P200.00 per day for every day during which such violation continues, shall be imposed upon the Investment House and the officer or director who ordered or authorized the violation without prejudice to the criminal liabilities provided in the second paragraph of Section 16 of Presidential Decree No. 129, In the exercise of its regulatory powers under Section 12 of Presidential Decree No. 129, the Monetary Board may issue a cease-and-desist order upon an Investment House which is not complying with Central Bank rules and regulations pertaining to non-bank financial intermediaries or in appropriate cases, rules governing quasi-banking functions of Investment Houses. Failure to comply with the cease-and-desist order shall subject an Investment House to a fine to be imposed by the Monetary Board. SECTION 16. Effectivity . These rules shall take effect immediately. They shall be published in a newspaper of general circulation in the Philippines and in the Official Gazette. cdll (SGD.) ARCADIO E. YABYABIN Securities and Exchange Commissioner Approved: (SGD.) TROADIO T. QUIAZON, JR. Acting Secretary of Trade ATTACHMENT PRESIDENTIAL DECREE NO. 129 GOVERNING THE ESTABLISHMENT, OPERATION AND REGULATIONS OF INVESTMENT HOUSES WHEREAS, there were pending before Congress, prior to the promulgation of Proclamation No. 1081, dated September 21, 1972, urgent measures proposing the regulation of the so-called investment banks; cdll WHEREAS, an extensive survey and study of the Philippine financial system had been undertaken in order to determine its adequacy in Philippine economic development, and an integrated set of recommendations were submitted; WHEREAS, the recommendations, as endorsed with modifications by the monetary authorities and made the basis of this Decree, advocated in the enactment of the statutory framework within which the underwriting of securities may be governed and, to the extent that these entities perform quasi-banking functions, to harmonize their operations with national monetary goals. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers in me vested by the Constitution as Commander-in-Chief of the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, and in order to effect the desired changes and reforms in the social, economic and political structure of our society, do hereby order and decree and make part of the law of the land the following: SECTION 1. Title . This Decree shall be known as "The Investment Houses Law." SECTION 2. Scope . Any enterprise which engages in the underwriting of securities of other corporations shall be considered an "Investment House" and shall be subject to the provisions of this Decree and of other pertinent laws. Nothing in this Decree shall be understood to preclude other enterprises from engaging in the mere buying and selling of short-term securities of other persons or enterprises. SECTION 3. Definitions . For the purpose of this Decree, unless the context otherwise indicates, the following definitions of terms are hereby adopted: a) "Underwriting" is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. b) "Securities" are written evidences of ownership, interests, 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 4. Organization and Registration . Investment Houses shall be organized in the form of stock corporation. The Securities and Exchange Commission shall not register the articles of incorporation of any Investment House, or any amendment thereto, unless it is satisfied from the evidence submitted to it: cdlex a) That all the requirements of this Decree and of existing laws or regulations to engage in the business have been complied with; b) That the proposed enterprise will not be in conflict with public interest and economic growth; c) That the amount of capital, the proposed organization, direction and administration, as well as the integrity, experience and expertise of the organizers and the proposed managerial staff, provide reasonable assurance that the enterprise will be conducted with financial prudence. In determining compliance with the provisions of subsections (b) and (c) above, the Securities and Exchange Commission shall consult the Monetary Board of the Central Bank of the Philippines. All applications for registration of the articles of incorporation of Investment Houses shall be accompanied by: 1. A least three copies of the proposed articles of incorporation; 2. At statement under oath of the educational background and experience of the organizers, directors and the proposed managerial staff, as well as information on any position concurrently held by them in other financial or banking institutions, if any; 3. A projected statement of assets and liabilities of the proposed Investment House; 4. A tentative program of operation for one year, including its investment direction and volume; and 5. Such other information as the Securities and Exchange Commission may require in support of the application and to enable the Commission to determine the justifiability of establishing the proposed enterprise. Any enterprise already in operation and exercising the powers of an Investment House prior to the effectivity of this Decree shall, within six months therefrom, file an information sheet with the Securities and Exchange Commission in such form and containing such data as the Securities and Exchange Commission may, at its discretion, require, to enable the Commission, to determine in consultation with the Monetary Board whether the enterprise meets the requirements of this Decree. SECTION 5. Citizenship requirements . The majority of the voting stock of any Investment House shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned voting stocks in Investment Houses, the basis for the computation shall be 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 shall be citizens of the Philippines. SECTION 6. Prohibitions . Except as may be authorized by the Monetary Board, no director or officer of an Investment House shall concurrently be a director or officer of a bank, as defined in Section 2 of Republic Act No. 337 as amended: Provided, however, That in no event, can a person be authorized to be concurrently an officer of an Investment House and of a bank. No Investment House shall engage in banking operations as defined in Section 2 of Republic Act No. 337, as amended. SECTION 7. Powers . In addition to the powers granted to corporations in general, an Investment House is authorized to do the following: 1. Arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities; 2. Participate in a syndicate 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 to 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; deals in options, rights or warrants relating to securities and such other powers which a dealer may exercise under the Securities Act (Act No. 83, as amended); 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, but not as trustee of a trust fund or trust property as provided for in Chapter VII of Republic Act No. 337, as amended; 8. Encourage companies to go public, and initiate and/or promote, whenever warranted, the formation, merger, consolidation, reorganization, or recapitalization of productive enterprises, by providing assistance or participation in the form of debt or equity financing or through the extension of financial or technical advice or service; 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 an interest in real and/or personal property as may be necessary or appropriate to carry on its objectives and purposes; 11. Design pension, profit-sharing and other employee benefits plans; and 12. Such other activities or business ventures as are directly or indirectly to the dealing in securities and other commercial papers, unless otherwise governed or prohibited by special laws, in which case the special law shall apply. Nothing in this Section shall preclude other enterprises not covered by this Decree from engaging in the activities listed under subsections (3) to (11) of this section, except as may otherwise be governed by special laws. SECTION 8. Capital . The minimum initial paid-up capital of any Investment House shall be twenty million (P20,000,000.00) Pesos. SECTION 9. Credit Policies . Investment Houses shall coordinate their credit policies with the general credit policies of the Monetary Board of the Central Bank. SECTION 10. Reports . Investment Houses shall submit to the Securities and Exchange Commission and to the Central Bank a semi-annual report of operations and financial condition, signed under oath by its chief accountant and verified by its president. The Securities and Exchange Commission, may at its discretion require Investment Houses to include their underwriting commitments as contingent accounts in their financial statements. SECTION 11. Regulations . Within six months after the approval of this Decree, the Securities and Exchange Commission, in coordination with the Central Bank, shall promulgate the necessary rules and regulations implementing the provisions of this Decree. SECTION 12. Central Bank Regulatory Powers . Investment Houses shall be subject to such regulations of the Central Bank on non-bank financial intermediaries as may be promulgated pursuant to Section 2-B of Republic Act No. 337, as amended. The regulations which may include, but need not be limited to (a) minimum size of fund acceptance or receipt, (b) methods of marketing and distribution, (c) terms of placement and maturities, and (d) uses of funds, may be modified by the Monetary Board insofar as they apply to Investment Houses. llcd The Monetary Board may, at its discretion, determine whether Investment Houses may be permitted to perform quasi-banking functions as defined in Section 2-D, subsection (b) of Republic Act No. 337, as amended. The Monetary Board is hereby authorized, at its discretion, to require any enterprise which is engaged or proposes to engage in quasi-banking functions to incorporate as an Investment House. If the Monetary Board decides to permit Investment Houses to engage in quasi-banking functions, the Board may require as a condition precedent the obtaining of a certificate of authority for the purpose from the Monetary Board. Whenever the Monetary Board authorizes an Investment House to engage in quasi-banking functions, in accordance with the provisions of this section, the Board may subject Investment Houses to further regulations, pursuant to Republic Act 337, as amended, which may include but need not necessarily be limited to (a) liquidity reserve requirements; (b) capital-to-risk assets ratios; (c) interest rate ceilings; and (d) such other constraints as the Board may deem necessary. In the exercise of its authority in this section, the Monetary Board may, whenever it determines that the circumstances so warrant, subject an Investment House to special examination. Whenever on the basis of the reports submitted by, or upon examination of the books and records of an Investment House, the Central Bank finds that the Investment House is not complying with the provisions of this section, with the pertinent provisions of this Decree, or other laws, or of orders, instructions, rules or regulations issued by the Monetary Board pertaining to non-bank financial intermediaries and quasi-banking activities, said Board shall forthwith issue a cease-and-desist order upon the Investment House to comply with the cease-and-desist order shall subject said Investment House to a fine not exceeding two hundred (P200.00) pesos for every day the order is violated, to be imposed by the Monetary Board, without prejudice to the penalties provided in Section 16 of this Decree. SECTION 13. Applicability of Securities Act . 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). SECTION 14. Applicability of Corporation Law . The provisions of the Corporation Law (Act No. 1459, as amended) insofar as they are not in conflict or inconsistent with the provisions of this Decree shall apply to Investment Houses. SECTION 15. Transitory Provisions . Existing enterprises which are operating as Investment Houses, shall, within one year following the approval of this Decree, comply with the requirements hereof, except with respect to the filing of an information sheet which shall be complied within six months as provided in the last paragraph of Section 4 of this Decree. SECTION 16. Penalties for Violation . Upon proof that an Investment House is violating or not complying with the provisions of this Decree, 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 Central Bank of the Philippines, the Securities and Exchange Commission shall impose upon the Investment House and collect a fine of not exceeding two hundred (P200.00) pesos per day for every day during which such violation or non-compliance continues, and/or suspend its certificate of registration. The officer or director of the Investment House who ordered or authorized the violation or non-compliance shall be solidarily liable. The fine so imposed shall be paid to the Government of the Philippines through the Securities and Exchange Commission. Without prejudice to the provisions of the preceding paragraph, any person, or any director or officer of an Investment House who violates or does not comply with the provisions of this Decree, 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 Central Bank of the Philippines, shall be punished by a fine of not more than twenty thousand (P20,000.00) pesos, or an imprisonment of not more than five days or both, at the discretion of the court. SECTION 17. Separability Clause . The provisions of this Decree are hereby declared separable, and if any clause, sentence, provisions or section thereof, or its application to any person or circumstance should be declared invalid such invalidity shall not affect the other provisions of this Decree which can be given force and effect without the provisions which have been declared invalid. SECTION 18. Repeal . All acts and existing laws inconsistent with this Decree are hereby repealed. cdlex SECTION 19. Effectivity . This Decree shall take effect immediately. Done in the City of Manila, this 15th day of February in the year of Our Lord, Nineteen Hundred and Seventy-three. (SGD.) FERDINAND E. MARCOS President Republic of the Philippines By the President: (SGD.) ALEJANDRO MELCHOR Executive Secretary