Adoption of RSA Rules and RSA Provisions as Rules of PSE and the CSG Sanction Guidelines

July 22, 1998 PSE MEMO FOR BROKERS NO. 325-98 SUBJECT : Adoption of RSA Rules and RSA Provisions as Rules of PSE and the CSG Sanction Guidelines Please be informed that the Exchange's Board of Governors in its regular meeting held last 08 July 1998, approved the following: 1. Adoption of certain RSA Rules & RSA provisions as Rules of the PSE; and 2. Implementation of the CSG Sanction Guidelines. With this adoption of RSA Rules and RSA provisions as PSE Rules, the Exchange now has primary jurisdiction over violations of said rules and legal provisions, and the corresponding authority to determine and impose appropriate sanctions therefor. Additionally, the CSG Sanction Guidelines will enable the Exchange's Business Conduct and Ethics Committee (BCEC) to impose uniform sanctions for confirmed violations of PSE/SEC/RSA rules and RSA provisions. The attached rules take effect immediately. For your information and guidance (SGD.) ATTY. RUBEN L. ALMADRO VP-Compliance & Surveillance Group RSA Rule No. Description/Title/Name 3-2 The Ethical Standards Rule 19-1 The Rule Requiring Registration of Brokers and Dealers and Their Personnel 19-5 The Rule Requiring the Sending of Confirmation Invoices to Customers 19-8 The Rule on Delivery of Customer's Securities 19-11 The Suitability Rule 19-13 The Rule on Charges for Services Performed 19-14 The Supervision Rule 19-17 The Rule Requiring Brokers to Distribute Dividends to Customers Immediately After Receipt 22(a)-6 The Rule Prohibiting Fictitious Transactions 22(a)-7 The Rule Prohibiting Wash Sales 22(a)-10 The Front Running Rule 23(b)-1 The Margin Rule 24(a)-1 The Net Capital Rule 24(a)-2 The Rule on Satisfactory Subordination Agreements 24(b)-1 The Rule on the Lending and Voting of Customer's Securities 24(b)-2 The Customer Protection Rule (on Reserves and Custody of Securities) 25-1 The Rule on Purchases and Sales in Cash Account 26(a)(4)-1 The Rule on Advertisements and Communications with the Public 26(a)(4)-2 The Rule on Publication of Transactions and Quotations 26(a)(4)-3 The Rule Prohibiting Payment to Influence Market Prices 27(a)-1 The Rule on Short-Selling 27(b)-1 The Rule Prohibiting Guarantees Against Loss 29(a)(3)-1 The Rule on the Use of Information Obtained in Fiduciary Capacity 31(a)(3)-1 Conditions Under Which Broker or Dealer Vested With Discretion May Effect Transaction 31 (a)(3)-2 The Discretionary Account Disclosure Rule 34(b)-1 The Rule on Distribution of Proxies by Broker or Dealer 34(b)-2 The Rule Requiring Consent of Customer in the Use of Proxy 35-1 The Rule on Fair Prices, Commissions and Charges 35-2 The Best Execution Rule 37(a)-1 The Books and Records Rule 37(a)-2 The Records Retention Rule 37(a)-6 The Rule on Submission of Annual Audited Financial Reports of Brokers and Dealers 37(a)-7 The Customer Account Information Rule 37(a)-8 The Order Ticket Rule 37(a)-9 The Customer Account Statements Rule 37(a)-10 The Customer Complaint Rule 37(a)-13 The Rule Requiring Quarterly Securities Count by Brokers and Dealers RSA Provision Description/Title/Name Sec. 19, par. 1 Registration of Brokers, Dealers and Salesmen Sec. 26 Manipulation of Security Prices, except Sec. 26(a)(1)(i) on Wash Sales Sec. 27 Manipulative and Deceptive Devices Sec. 29 Fraudulent Transactions Sec. 30 Insider Trading PSE Compliance and Surveillance Group (CSG) Sanction Guidelines The PSE CSG Sanction Guidelines is hereby published so that members may become more familiar with typical violations of securities laws, as well as the imposable disciplinary sanctions pertaining to each type of violation. The PSE CSG Sanction Guidelines is also published for the benefit and guidance of the Business Conduct and Ethics Committee and the Compliance and Surveillance Group to help them determine the appropriate sanctions in PSE disciplinary proceedings involving members. cdlex The sanctions have minimum, medium and maximum terms. The medium term is imposable in cases where there are no attendant mitigating or aggravating circumstances, or when there is an equal number of mitigating and aggravating circumstances. The minimum term is imposable in cases where there is a mitigating and no aggravating circumstance, or where the number of mitigating circumstances is greater than the number of aggravating circumstances. The maximum term is imposable in cases where there is an aggravating circumstance and no mitigating circumstance, or where the number of aggravating circumstances is greater than the number of mitigating circumstances. cdpr Following are examples of mitigating circumstances: The offender has no previous record of having committed a violation of PSE, RSA or SEC Rules. The complaint was settled amicably by the parties. The offense was not characterized by gross negligence or willful disregard of the rights of others. There was no significant risk or exposure to risk on the part of the customer. The amount involved was small or insignificant. There was absence of malice or manipulative intent. The offense was corrected or rectified within a reasonable period of time. Following are examples of aggravating circumstances: There are a number of similar or other offenses committed by respondent; respondent is a repeat offender. There was malicious intent to commit the offense. There was intentional or willful disregard of the rule. There was attempt to conceal the misconduct. There was gross negligence on the part of respondent. There was significant risk or exposure to risk on the part of the customer. There was considerable delay in the performance of the obligation. There has been significant financial damage on the part of the customer (amount involved is huge). The offense was not corrected or rectified within the period set by CSG/BCEC. Despite the foregoing guidelines, however, the BCEC may, in exceptional cases, decide to impose heavier sanctions than the ones recommended below, or reduce the total of the penalties imposed depending on the validity of the explanation given by, or the financial capacity of, the concerned member-brokers. Types of Violations Sanctions RSA Rule 3-2 (The Ethical Standards Rule) Issuance of dishonored ("bouncing") checks to clients P1,000 to P5,000.00 per dishonored check plus order to pay the proceeds of the transaction Unauthorized cancellation of orders of sales proceeds or stock certificate for buy transaction P5,000 to P10,000 plus delivery Misappropriation, non-delivery or delayed payment/settlement of proceeds of transactions P5,000 to P10,000 plus order to deliver proceeds of the transaction Erroneous execution of orders as to price and/or volume P5,000 to P10,000 plus order to rectify mistake Failure to prevent employees from using client's account for their own transactions P5,000 to P10,000 plus order to restore the damage resulting from its employees' use of client's account Failure to observe or follow the directive/instruction of the Business Conduct and Ethics Committee Additional fine, suspension or expulsion depending on the magnitude of the offense. Other offenses constitutive of violation of high standards of commercial honor and just and equitable principles of trade P5,000 to P10,000 plus appropriate order from BCEC Section 19, par. 1, RSA/RSA Rule 19-1 (Registration of Brokers and Dealers and Their Personnel) Employment of unlicensed salesmen/traders P20,000 to P50,000 plus order to secure license or any other appropriate order Failure to renew license as broker/dealer P20,000 to P50,000 plus order to renew license RSA Rule 19-5 (Confirmation to Customer) Non-delivery or delayed delivery of confirmation invoice to customer P5,000 to P10,000 Allowing an employee/salesman to accept confirmation on behalf of customer P5,000 to P10,000 Failure to provide/disclose the minimum information required in the Confirmation Invoice P1,000 to P5,000 RSA Rule 19-8 (Delivery of Customer's Securities) Non-delivery or delayed delivery of client's securities despite repeated demands P5,000 to P20,000 plus order to effect delivery of securities including accrued cash and/or stock dividends, unless delivery was prevented by circumstances beyond the control of broker/dealer, in which case, no penalty shall be imposed Incomplete delivery of client's securities; delivery of client's securities to an unauthorized person P1,000 to P5,000 plus order to effect complete delivery RSA Rule 19-11 (Suitability Rule) Giving unsuitable recommendation to client P5,000 to P20,000 plus order to rectify the mistake RSA Rule 19-13 (Charges for Services Performed) Imposing charges which are unreasonable and unfairly discriminatory between customers P5,000 to P10,000 RSA Rule 19-14 (Supervision Rule) No written supervisory procedures and adopt written supervisory procedures P5,000 to P10,000 plus order to prepare Inadequate written supervisory procedures P1,000 to P5,000 plus order to adopt complete written supervisory procedures Failure to implement written supervisory procedures P5,000 to P10,000 plus order to implement supervisory procedures Failure to designate, compliance officers P5,000 to P10,000 plus order to appoint compliance officer Other violations of Supervision Rule P5,000 to P10,000 RSA Rule 19-17 (Brokers to Distribute Dividends to Customers Immediately After Receipt) Failure to determine cash dividend entitlement of beneficial owners within thirty one (31) trading days after the dividend record date P1,000 to P5,000 plus order to determine and list beneficial owners entitled to cash dividend Failure to deliver dividend checks to beneficial owners within a reasonable period of time P5,000 to P10,000 (except where the customer has an unpaid account with the broker, in which case, a credit to the customer's account with the proper notice to the customer shall constitute prompt delivery of the cash dividend) plus order to effect delivery of dividend checks. RSA Rule 22(a)-6 (Fictitious Transactions) Execution of fictitious sales or making fictitious bids or offers on the floor of the Exchange P50,000 to P100,000 and/or suspension up to expulsion [per RSA Rule 22(a)-6] RSA Rule 22(a)-7 (Wash Sales)) Giving or executing an order for the purchase or sale of securities which would involve no change of ownership (Sec. 26[a][1][i], Revised Securities Act) P50,000 to P100,000 and/or expulsion [per RSA Rule 22(a)-7] RSA Rule 22(a)-10 (Front Running Rule) Effecting a purchase or sale of security for his own account or, if a broker or dealer is a corporation or partnership, effecting a purchase or sale of a security for its own account or for any account in which an officer, director, partner, or employee thereof has a direct or indirect financial interest under the following conditions: P20,000 to P50,000 o the broker or dealer holds an unexecuted market or limit order to buy or sell the same security for a customer; and o the broker or dealer knows that the price at which the transaction will be executed for his or its own account, or for the account of any officer, director, partner or employee is equal to or better than the price obtainable for the customer's order RSA Rule 23(b)-1 (The Margin Rule) Extending credit to a customer in an amount that exceeds 50% of the current market value of the security at the time of the transaction P1,000 to P5,000 Failure to make margin calls for accounts with initial or maintenance margin deficiencies P1,000 to P5,000 Failure to liquidate securities to meet margin calls P1,000 to P5,000 Liquidation of margin accounts without prior issuance of margin call for accounts with initial or maintenance margin deficiencies P5,000 to P20,000 plus restitution of client's securities prior to the liquidation RSA Rule 24(a)-1 (The Net Capital Rule) Impairment of Net Capital requirement (Net Capital should be at least P5,000,000 or 5% of Aggregate Indebtedness, whichever is higher) P20,000 to P50,000 and/or suspension until such time that the required Net Capital is attained Misrepresentation in the computation of Net Capital P20,000 to P50,000 and/or suspension Delayed submission of Net Capital computation P10,000 plus P1,000 for each of delay RSA Rule 24(a)-2 (The Satisfactory Subordination Agreement Rule) Recording of unapproved subordination agreements P5,000 to P10,000 Failure to put up additional collateral for Secured Demand Note despite due notice P5,000 to P10,000 Failure to submit subordination agreements on time (thirty days before execution date) Disapproval of subordination agreements RSA Rule 24(b))-1 (Lending and Voting Customers' Securities) Lending of securities owned by a customer to whom credit was extended by a broker or dealer without the written consent of the customer P5,000 to P20,000 RSA Rule 24(b)-2 (Customer Protection Rule) Failure to obtain and maintain physical possession or control of all fully-paid securities or excess margin securities earned by a broker or dealer for the account of customers (except in case of temporary lags resulting from normal business operation, and provided that the broker or dealer takes timely steps in good faith to establish prompt physical possession or control) P5,000 to P20,000 Use of fully-paid or excess margin securities as collateral for loan without written consent from clients P5,000 to P20,000 Having secured written consent from clients, failure to provide cash collateral to clients P5,000 to P10,000 Use, without the necessary written consent, of a client's fully-paid or excess margin securities to effect delivery of a short sale transaction for another client P5,000 to P20,000 Failure to effect the mandatory buy-out procedure within ten days after settlement date P5,000 to P20,000 Not being exempt from the reserve requirement, failure to compute for the required reserve on a regular weekly or monthly basis and/or to deposit the required reserve in a Special Reserve Bank Account P5,000 to P20,000 RSA Rule 25-1 (Purchases and Sales in Cash Accounts) Allowing customers to incur continuous debit balance on cash accounts, in effect authorizing customers to have de facto margin accounts P1,000 to P5,000 Failure to implement the mandatory close-out of overdue or unsettled sell/buy transactions which have been outstanding for more than ten trading days P1,000 to P5,000 Failure to implement the sanction on accounts which have a closed transaction as a result of non-payment or non-delivery of securities P1,000 to P5,000 Section 26, Revised Securities Act [Manipulation of Security Prices; except Sec. 26(a)(1)(i) on Wash Sales] P50,000 to P100,000 and/or suspension to expulsion Section 27, Revised Securities Act (Manipulative and Deceptive, Devices P50,000 to P100,000 and/or suspension to expulsion Section 28, Revised Securities Act (Artificial Measures of Price Control) P50,000 to P100,000 and/or suspension to expulsion Section 30, Revised Securities Act (Insider Trading) P50,000 to P100,000 and/or suspension to expulsion RSA Rule 26 (a)(4)-1 (Advertisements and Communications with the Public) Releasing exaggerated, unwarranted or misleading statements in public communications P5,000 to P10,000 Communications with the public containing promises of specific results or opinions without reasonable basis P5,000 to P10,000 RSA Rule 26(a))(4)-2 (Publication of Transactions and Quotations) Publication or circulation of inaccurate trading transactions and quotations P5,000 to P10,000 (unless the person involved believes that such transaction was a bona fide purchase or sale of security or such quotation represents a bona fide bid for, or offer of, such security, in which case, no penalty shall be imposed) RSA Rule 26(a)(4)-3 (Payment to Influence Market Prices) Influencing or rewarding a person to publish any information which will have a favorable effect on the market price of any security P5,000 to P10,000 (not applicable to any paid advertisement) RSA Rule 27(a)-1 (Short Sales)) Failure to determine good delivery P5,000 to P10,000 Failure to observe the rule that no short sales shall be executed unless (a) at a price higher than the last sale or (2) at the price of the last sale if and only if that price is above the next preceding different sale price on such day P20,000 to P50,000 (up to suspension for the second violation [as fixed under RSA Rule 27(a)-1]) Failure to implement the mandatory close-out procedure within ten business days after settlement date P5,000 to P10,000 Execution of short sales involving a director, officer or principal stockholder in securities of a corporation in which he is a director, officer or principal stockholder P20,000 to P50,000 (up to suspension for the second violation [as fixed under RSA Rule 27(a)-1]) Failure to indicate the term short in the selling order and throughout all the records pertinent to the sale. P1,000 to P5,000 Failure to make and finalize arrangements for the borrowing of securities to effect delivery by settlement date P5,000 to P10,000 RSA Rule 27(b)-1 (Prohibition on Guarantees Against Loss) Guaranteeing a customer against loss in any securities account or in any securities transaction P5,000 to P20,000 RSA Rule 29(a)(3)-1 (Use of Information Obtained in Fiduciary Capacity) Use of fiduciary information to solicit orders, to make purchases, sales or exchanges of securities, or to provide such information to any person who does not need such information P5,000 to P10,000 RSA Rule 31(a)(3)-1 (Conditions Under Which a Broker or Dealer with Discretion May Effect Transactions) Effecting a transaction for or with a customer in any security in which in the course of his business as a broker, dealer, or salesman, he has a long or short position, or in the distribution or accumulation of which he has any direct financial interest, or in which he holds, or has granted or has knowledge that any principal for whom he is acting holds or has granted option, without disclosing to the customer the fact of such position, interest, or option and without obtaining the written, telegraphic or facsimile consent of such customer to each such transaction P5,000 to P20,000 plus restitution of customer's equity To buy from or sell to such customer any security for any account in which he or any principal for whom he is acting, is interested, without obtaining the written, telegraphic or facsimile consent of such customer to each such purchase or sale. P5,000 to P20,000 RSA Rule 31(a)(3)-2 (Discretionary Account Disclosure Rule) Exercising discretionary power without prior written authorization from the customer as to stated individual(s) and without evidence of acceptance of such discretionary power from the broker. P5,000 to P20,000 Failure to secure the designated officer's approval in each discretionary order entered P5,000 to P10,000 Failure to review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size and frequency in view of the financial resources and character of the account P5,000 to P20,000 Effecting discretionary transactions which are excessive in size and frequency in view of the financial resources and character of such account P10,000 to P50,000 and/or suspension RSA Rule 34(b)-1 (Distribution of Proxies by Broker or Dealer) Failure to respond to inquiry by first class mail or other equally prompt means within seven (7) business days after the date of receipt of inquiry P1,000 to P5,000 Failure to forward the proxy, other proxy soliciting material information statement and or annual reports to security holders received from the registrant to its customers who are beneficial owners of the registrant's securities within five (5) business days from receipt of such material P1,000 to P5,000 RSA Rule 34(b)-2 (Consent of Customer for Use of Proxy) Giving of proxy, consent or authorization, in respect of any security earned for the account of a customer without the express written authorization of such customer P1,000 to P5,000 RSA Rule 35-1 (Fair Prices, Commission and Charges) In transactions where broker/dealer buys for his own account from his customer, or sells for his own account to his customer, failure to buy or sell at a price which is fair, taking consideration all relevant circumstances P5,000 to P20,000 In such transactions mentioned above, charging the customer more than a fair commission, or other charge or fee, taking into consideration all relevant circumstances P5,000 to P20,000 RSA Rule 35-2 (Best Execution Rule) Failure to exercise reasonable diligence in ascertaining the best available price for a security and failure to buy or sell at that price so that the resultant price to the customer is as favorable as possible under the prevailing market conditions P5,000 to P20,000 RSA Rule 37(a)-1 (Books and Records Rule) Failure to maintain any of the following books and records: P5,000 to 10,000 for each book not property maintained a Purchase and Sales Blotters b Cash Receipts and Disbursement Books c Securities Received and Delivered Blotters d General Ledger e Customer Ledger f Other Sources of Debits and Credits g Securities in Transfer Ledger h Monies Borrowed and Loaned Ledger i Dividends and Interest Ledger j Securities Borrowed and Loaned Ledger k Fails to Deliver and Fails to Received Ledger l Securities Difference Ledger m Securities Position Record n Order Ticket o Confirmation Invoices p Trial Balance q Net Capital Computation r Employment Application s Customer Account Information Form Failure to keep the books and records current and updated P5,000 to 10,000 for each book not made current and updated RSA Rule 37(a)-2 (The Records Retention Rule) Failure to preserve the books and records within the required three (3) or six (6) year-periods P5,000 to P10,000 for each book, file or record not properly preserved RSA Rule 37(a)-6 (Annual Audited Financial Reports of Brokers and Dealers) Delayed submission or non-submission of audited financial reports (deadline is 105 days after the close of the fiscal year) P50,000 basic penalty plus P1,000 per each day of delay (per PSE Circular No. 83, S'95) Failure to make use of the required format outlined in SEC Form 37-AR P5,000 to P10,000 RSA Rule 37(a)-7 (The Customer Account Information Rule) Not exerting reasonable effort to obtain the minimum required information about customers P1,000 to P5,000 RSA Rule 37(a)-8 (The Order Ticket Rule) Failure to prepare order tickets for all orders P1,000 to P5,000 Failure to properly time-stamp order tickets P1,000 to P5,000 Failure to indicate the required information about customers' orders P1,000 to P5,000 RSA Rule 37(a)-9 (Customer Account Statements) Failure to send quarterly statement of accounts to customers whose accounts have activity during the period P5,000 to P10,000 Failure to provide the minimum information required for statements of account P1,000 to P5,000 RSA Rule 37(a)-10 (The Customer Complaint Rule) Failure to maintain records of customer complaint P1,000 to P5,000 Failure to act on Customer complaints P1,000 to P5,000 RSA Rule 37(a)-13 (Quarterly Securities Counts by Brokers and Dealers) For brokers and dealers not exempt from the Rule, delay in, or failure to conduct, the quarterly count of securities P1,000 to P5,000 Failure to effect reconciliation of securities count differences P1,000 to P5,000 Violation of Code of Conduct and Professional Ethics for Traders and both Salesmen P5,000 to 20,000 and/or suspension (for traders/salesmen and brokers/dealers)