PSE Rules on Exchange Traded Funds: Part A General Provisions and Part B Listing and Disclosure

April 4, 2013 PSE MEMORANDUM NO. CN-0010-13 TO : Investing Public and Market Participants SUBJECT : PSE Rules on Exchange Traded Funds Part A General Provisions and Part B Listing and Disclosure Please be advised that The Philippine Stock Exchange, Inc.'s Rules on Exchange Traded Funds ("PSE ETF Rules") have been approved by the Securities and Exchange Commission ("SEC") on March 18, 2013. For your ready reference, please find attached a copy of the approved PSE ETF Rules, with Part A containing General Provisions and Part B referring to Listing and Disclosure. Please note that Part C (ETF Market Making Rules) and the Implementing Guidelines of ETF Market Making Rules are pending review and discussions with the SEC. Finally, the PSE ETF Rules must be read in conjunction with the SEC ETF Rules issued on October 22, 2012 in its Memorandum Circular No. 10, Series of 2012. For your information and guidance. (SGD.) HANS B. SICAT President and Chief Executive Officer ANNEX 1 SEC Approved PSE ETF Rules March 18, 2013 RULES ON EXCHANGE TRADED FUNDS PART A General Provisions Section 1. Rationale Section 2. Applicability of the Rules of the Exchange Section 3. Scope and Application Section 4. ETF Participants PART B Listing and Disclosure Section 5. General Criteria for Admission to Listing Section 6. Continuing Listing Requirements Section 7. Trading Halts and Suspensions Section 8. Delisting of an ETF Section 9. Penalties and Fines Section 10. Fees Section 11. Compliance with Laws Governing Investments PART A General Provisions SECTION 1. Rationale. The Philippine Stock Exchange, Inc.'s ("Exchange") Rules on Exchange Traded Funds ("Rules") are being made to govern the listing and trading of Exchange Traded Funds ("ETF") to facilitate more investment opportunities for investors. These Rules are consistent with the requirements under Section 8 (1) of the Rules and Regulations on Exchange-Traded Funds of the Securities and Exchange Commission (the "Commission", the rules shall hereinafter be referred to as the "SEC ETF Rules") that the shares of stock of an ETF shall be listed and traded in a registered Exchange. SECTION 2. Applicability of the Rules of the Exchange. These Rules shall be read in conjunction with the SEC ETF Rules, the Securities Regulation Code and its implementing rules and regulations, the Investment Company Act and other relevant laws, rules and regulations and shall form part of all rules of the Exchange. All rules of the Exchange not inconsistent with these Rules shall apply to ETFs. A copy of the SEC ETF Rules is attached herewith as Annex A and is incorporated by reference to these Rules. SECTION 3. Scope and Application. Only companies duly registered with the Commission as ETFs may apply for ETF listing in the Exchange. SECTION 4. ETF Participants. a. ETF An Exchange Traded Fund is an open-end investment company that continuously issues and redeems its shares of stock in Creation Unit in exchange for delivery of a basket of securities representing an index whose performance the ETF endeavors to track; provided that, the terms and conditions relative to the issuance and redemption in Creation Unit shall be prescribed in its Registration Statement. An ETF is established in accordance with the Investment Company Act of the Philippines and duly registered with the Commission. b. Fund Manager In addition to the requirements for the appointment of a Fund Manager under Section 15 of the SEC ETF Rules, the Fund Manager must likewise have been in operation for at least two (2) years and have satisfactory experience in managing funds. An ETF must seek approval of the majority of its outstanding capital stock for any change of the Fund Manager. c. Authorized Participant An ETF shall appoint at least two (2) Authorized Participants, who are registered broker-dealers and active trading participants of the Exchange, who shall meet the following requirements: (i) Those enumerated in Subsections 16.2, 16.3 and 16.4 of the SEC ETF Rules; (ii) A minimum paid-up capital requirement of at least One Hundred Million Pesos (Php100,000,000.00); (iii) Such other qualifications that the Commission and the Exchange may impose or require from time to time. An ETF shall ensure that it has at least two (2) Authorized Participants at all times. d. Market Maker At least one (1) of the designated Authorized Participants of the ETF shall be designated as the ETF Market Maker. The Market Maker shall be subject to the provisions on ETF Market Making Rules found in Part C of these Rules and any applicable rules and regulations that the Commission and/or the Exchange may issue from time to time. e. Custodian An ETF's custodian must comply with the minimum requirements for the appointment of a Custodian under Section 17 of the SEC ETF Rules. f. Transfer Agent In addition to the minimum requirements for the appointment of a Transfer Agent under Section 18 of the SEC ETF Rules, a Transfer Agent must have a paid-in capitalization of at least One Hundred Million Pesos (Php100,000,000.00). g. Auditor The ETF shall engage an independent auditing firm duly accredited by the Commission and acceptable to the Exchange to perform an independent audit of the ETF's financial records. h. Index Provider The ETF must engage an independent Index Provider which is compliant with the requirements set forth in Section 14 of the SEC ETF Rules. PART B Listing and Disclosure An ETF shall be listed on the Exchange's ETF Board, which is a separate board from the Exchange's existing boards. The initial listing requirements under the Listing Rules are applicable to ETFs, unless otherwise provided herein or inconsistent with these Rules. For the avoidance of doubt, the following provisions of the Listing Rules shall not be applicable to listing of ETFs: a. Methods of Initial Listing; 1 b. Requirements for First Board Listing; 2 c. Requirements for Second Board Listing; 3 d. Requirements for Small and Medium Enterprises Board Listing; 4 e. Amended Rules on Listing by Way of Introduction; 5 f. Listing of Debt Securities; 6 g. Rules on Additional Listing of Securities; 7 and h. Fees for initial and additional listing of equity securities, 8 substitutional listing, 9 and listing of debt securities. 10 SECTION 5. General Criteria for Admission to Listing. a. Minimum Authorized Capital Stock and Paid-up capital An ETF applying to list in the Exchange shall have a minimum authorized capital stock and a minimum paid-up capital of at least Two Hundred Fifty Million Pesos (Php250,000,000.00). b. Offering Requirement When the registration of the ETF's securities becomes effective and its listing application is approved by the Exchange, the ETF may, at its option, undertake an offering for its securities. Such offering will not be covered by the IPO Rules on Distribution of Shares under Article III, Part G of the Exchange's Listing Rules, including the provisions pertaining to the twenty percent (20%) mandatory allocation for Trading Participants and the ten percent (10%) mandatory allocation for Local Small Investors. In the event that an ETF undertakes an offering for its securities, Article III, Part A, Sections 4, 5 and 13 of the Listing Rules shall be applicable. c. Shelf listing The ETF may apply for listing the equivalent number of shares subject of the Registration Statement. The Exchange's approval of the listing of the ETF shares shall remain valid provided that the Registration and Licensing Order as well as the Permit to Sell Securities for Sale issued by the Commission covering the subject ETF shares are likewise valid and subsisting. The eligibility for trading of the ETF shares shall take effect only upon the Exchange's receipt of an official notice issued by an authorized officer of the ETF and confirmed in writing by the Custodian and Transfer Agent, that such number of ETF shares has been created and issued to or through the Authorized Participant. Should there be ETF shares which shall remain unissued upon the lapse of the shelf registration period, the said ETF shares shall automatically be removed from the Exchange's registry and may only be re-listed with the Exchange upon the submission by the ETF of the following: 1) Copies of the documents submitted by the ETF to the Commission under Section 7.3 (B) (1) of the SEC ETF Rules; and 2) Payment of the processing fee of Fifty Thousand Pesos (PhP50,000.00) or such amount as the Exchange may prescribe. d. Underlying securities The underlying securities comprising the index which the applicant ETF intends to track must be listed and traded in a registered exchange and have sufficient liquidity. The ETF shall disclose the liquidity criteria and methodology in its Prospectus. e. Procedure for processing of listing applications An application for listing shall only be accepted upon submission of the documentary requirements for listing of an ETF as set forth in Annex B and payment of the applicable processing fee. The general procedures for the listing of equity securities as contained in Article III Part B of the Listing Rules and any subsequent amendment and policies relevant thereto shall be adopted in processing listing applications for ETFs in accordance with the Exchange's initial listing rules. f. Contents of Listing Application In addition to all minimum requirements set forth in the SEC ETF Rules (including, but not limited to, Sections 7, 11, 12, 13 and 19 thereof), the listing application of an ETF must contain the following information: (i) Complete information regarding the Fund Manager, Authorized Participants, Market Maker, Custodian, Auditor, Index Provider and Transfer Agent of the ETF; (ii) The financial track record of the Fund Manager and when applicable, the persons or parties engaged by the Fund Manager to carry out activities necessary for the operation of the ETF pursuant to Subsection 15.5 of the SEC ETF Rules. The required information shall include, among others, their related engagement history and work experience and details of all funds and ETFs managed or advised by them; (iii) Any other information or document that may be required by the Exchange in connection with its evaluation of an ETF's listing application. g. Prospectus, Press Releases and Other Similar Documents In addition to the requirements under Sections 19 and 20 of the SEC ETF Rules, all prospectuses, primers, subscription agreement forms, newspaper prints, advertisements, press releases and similar documents in connection with the issuance shall first be submitted to the Exchange for review and disclosure purposes and may not be printed en masse, distributed or published without the prior written approval of the Exchange. h. Suitability Rule An ETF shall be in compliance with the Suitability Rule as contained in Article 1 Part B Sections 1 b to m of the Listing Rules. SECTION 6. Continuing Listing Requirements. a. Without in any way limiting the applicability of the rules governing the continuing listing of securities already in effect and all the rules and regulations set forth by the Exchange, the following shall be observed at all times: (i) Minimum Public Ownership (MPO) As provided in the MPO rules of the Exchange, the ETF shall maintain a public ownership of at least 10% of the issued and outstanding shares, exclusive of treasury shares, or such other number as the Exchange may from time to time prescribe. To further implement the guidelines in determining public ownership, and for purposes of computing the MPO of an ETF, ETF shares held by Authorized Participants in the course of performing their duties as such or as Market Makers, and shares acquired through the process of creation and redemption shall be considered public shareholdings. (ii) The ETF shall maintain all applicable regulatory licenses and accreditation; (iii) The ETF must ensure that all necessary facilities and information are available to enable holders of its listed shares to exercise their rights. b. The ETF must have an Investor Relations Office which manages the investor relations program of the ETF. The said program must ensure that information affecting the company are communicated effectively to investors. This program shall include, at the minimum, a corporate website that contains, among others, information about the company, such as but not limited to the following: (i) Company information controlling stockholders, board of directors and management team (ii) Company News analyst briefing report, latest news, press releases, newsletter (if any) (iii) Financial report annual and quarterly report for the past 10 years or the period applicable to the ETF (iv) Disclosures recent disclosures to PSE and SEC for the past 10 years or the period applicable to the ETF (v) Investor FAQs commonly asked questions of shareholders (vi) Investor Contacts email for feedback/comments, shareholder assistance and service (vii) Stock Information key figures, dividends, stock information c. Periodic Reporting, Disclosure Policy, and Other Requirements The general structured and unstructured reportorial requirements shall apply to ETFs under the Disclosure Rules of the Exchange, in addition to the reportorial requirements under Section 27 of the SEC ETF Rules. In addition, the ETF must likewise comply with the following: (i) Periodic Reports a) The ETF must disclose the iNAV every one (1) minute or such other frequency as may be prescribed by the Commission from time to time or as proposed by the Exchange in its rules and approved by the Commission. The iNAV, as defined in the SEC ETF Rules, is an approximation of the current value of the basket of securities on a per share basis computed at a one (1) minute interval throughout the trading hours of the Exchange. The iNAV calculation may be provided by the ETF or the ETF Fund Manager or a third party. b) An ETF must announce no later than 4:30 p.m. of every trading day, or on a frequency that the Exchange may from time to time prescribe, via the Online Disclosure System of the Exchange (ODiSy) the following information: (1) Net Asset Value (NAV) and NAV per share; (2) Issued and outstanding shares of the ETF; (3) Underlying index; and (4) Tracking Error as defined under Section 5 (21) of the SEC ETF Rules. (ii) Annual Report In addition to the requirements under the Securities Regulation Code and the SEC ETF Rules, an ETF must submit an annual report which shall disclose the following information within one hundred five (105) days after the end of the fiscal year, or such other time as the Commission, by rule, shall prescribe: a) A list of all investments with a value greater than 5% of the ETF's gross assets, and at least the 10 largest investments stating their: (1) applicable comparative periodic figures, if any; (2) brief description of the business; (3) proportion of share capital owned; (4) cost; (5) valuation of other assets and investments, and in the case of listed investments, market value; (6) dividends received during the year (indicating any interim dividends); (7) dividend payout ratio; (8) extraordinary items, if any; and (9) net assets attributable to investments. b) An analysis of any provision for diminution in the value of investments, stating for each such investment: (1) cost; (2) book value; and (3) provision made. c) Breakdown of the income received: (1) dividends and interest; and (2) other income, if any. d) An analysis of realized and unrealized gain/loss on investment(s); e) The name of the Fund Manager together with an indication of the terms and duration of its appointment and the basis for its remuneration; f) The Securities Lending activities of the ETF; The ETF as a direct lender shall include the latest two (2) bi-annual Summary Reports of their Securities Borrowing and Lending (SBL) transactions submitted to the Commission. g) Amount of related-party transactions for the period under review; The term "related parties" shall refer to "affiliates of the ETF, the Fund Manager, the Custodian, the Transfer Agent, or the Index Provider, accounted for by the equity method of accounting; trusts for the benefit of employees such as pension and profit sharing plans that are managed by or under the trusteeship of the management of the ETF; directors, major shareholders or principal owners of the ETF, the Fund Manager, the Custodian, the Transfer Agent, or the Index Provider; and their management; members of the immediate families of major shareholders, principal owners and management of the ETF and the ETF Fund Manager." h) The performance of the ETF in comparison to its underlying index, in a consistent format, covering the following periods of time: 3-month, 6-month, 1-year, 3-year, 5-year, 10-year and since inception of the ETF; i) Expense ratios for the period under review and for the immediately preceding year. It should be indicated that the expense ratio does not include brokerage and other transaction costs, performance fee, foreign exchange gains/losses, and tax deducted at source or arising out of income received front or back end loads arising from the purchase or sale of other investments; and j) Turnover ratios for the period under review and for the immediately preceding year. (iii) Quarterly Reports In addition to the requirements under the Securities Regulation Code and the SEC ETF Rules, particularly Subsection 27.2, an ETF must submit Quarterly Reports which must disclose the following information within forty-five (45) days from the end of each quarter: a) Top 10 holdings at market value and as a percentage of NAV as at the end of the period under review and for the immediately preceding year; b) Expense ratios for the period under review and for the immediately preceding year. It should be indicated that the expense ratio does not include brokerage and other transaction costs, performance fee, foreign exchange gains/losses, and tax deducted at source or arising out of income received front or back end loads arising from the purchase or sale of other investments; and c) Turnover ratios for the period under review and for the immediately preceding year. (iv) Monthly Issuance and Redemption Report of ETF Creation Units to be submitted not later than 5 trading days from the last day of the preceding month; (v) If the ETF is also listed on another stock exchange, any information released to that stock exchange must also be released to the Exchange at the same time. The disclosure to the Exchange shall be in English. (vi) The ETF must also comply with the following reportorial requirements: a) The ETF must notify the Exchange at the end of each dividend distribution period the following as soon as they are computed by the Fund Manager: (1) The net amount per share; (2) The date of the recording of the list of shareholders; and b) The Fund Manager must state clearly, in all disclosures issued in respect of the sale of shares of the ETF, the terms upon which it undertakes to repurchase ETF shares. If there is no undertaking, it must state that fact; and c) The ETF must notify the Exchange of the following within ten (10) minutes from their occurrence: (1) Any creation and redemption and the resulting issued and outstanding ETF shares; (2) Breach of tracking error threshold; (3) Failure and/or inability to disclose the iNAV at the prescribed frequency; (4) Any changes in the control of the Fund Manager; (5) Any proposed change in the general character, nature or investment objective of the ETF and/or fund management; (6) Any resolution or decision to renew, vary or terminate the management agreement; (7) The fact of inability of the Market Maker to perform its functions or the absence of the Market Maker and the reasons therefor; (8) The name and qualifications of the Authorized Participant which will assume the functions and obligations of the ETF's Market Maker; (9) The decision to terminate the ETF's agreement with any of the following participants and the reasons therefor: (a) Market Maker; (b) Authorized Participant; (c) Fund Manager; (d) Custodian; (e) Index Provider; and (f) Transfer Agent. Provided, however, that within thirty (30) days prior to the effectivity of the termination, the ETF must notify the Exchange in writing of the fact of termination. Further, the ETF must engage a new Market Maker/Authorized Participant/Fund Manager/Custodian/Index Provider or Transfer Agent no later than ten (10) trading days prior to the effectivity date of the termination of services of the previous Market Maker/Authorized Participant/Fund Manager/Custodian/Index Provider or Transfer Agent. Notice to the Exchange that the ETF has engaged a new Market Maker/Authorized Participant/Fund Manager/Custodian/Index Provider or Transfer Agent must be filed within the same period. Upon failure to engage the replacement within the prescribed period, the Exchange shall suspend trading of securities of the ETF which shall be lifted upon receipt of notice of the engagement of a new Market Maker/Authorized Participant/Fund Manager/Custodian/Index Provider or Transfer Agent. (10) Detailed information including the qualifications of the new Authorized Participant(s) which will assume the functions and obligations of the ETF's Authorized Participants; (11) Any trading halt or suspension imposed by another exchange on the ETF Shares and the reasons therefor, if the ETF is simultaneously listed in another stock exchange; (12) Any trading halt or suspension of the underlying securities and subsequent lifting thereof, including the percentage of the said underlying securities in relation to the applicable current index value and, in the case of underlying securities listed in another exchange, the reason for the halt or suspension; (13) Any material facts related to the listed ETF, or the operation, business or assets of the ETF, which may significantly affect the investment decisions of investors. d. Other reports and records as may be required by the Commission from time to time. SECTION 7. Trading Halts and Suspensions. a. Trading of the ETF shares shall be suspended under the following circumstances: (i) If the underlying securities accounting for 20% or more thereof have been suspended; (ii) Absence of a Market Maker for a period of one (1) month; (iii) When the Commission issues an order of suspension or revocation on the registration of the ETF shares; or (iv) Other applicable grounds provided under the Listing and Disclosure Rules and Trading Rules of the Exchange. b. Trading of the ETF shares shall be halted for an hour, or for any appropriate period as may be deemed necessary by the Exchange, on the first day of occurrence of the following circumstances: (i) Breach of tracking error threshold; (ii) Any of the underlying securities has been delisted; (iii) Trading has been halted for one or more underlying securities accounting for 20% or more of the applicable current index value; (iv) If the iNAV is not timely published within the frequency prescribed in these Rules; or (v) Other applicable grounds provided under the Listing and Disclosure Rules and Trading Rules of the Exchange. c. In the case of ETF shares simultaneously listed in another exchange, the Exchange may halt or suspend the trading of the ETF shares if the trading thereof is halted or suspended in the other exchange. SECTION 8. Delisting of an ETF. a. In addition to the grounds for involuntary delisting under the Delisting Rules, the following shall be grounds for the involuntary delisting of an ETF: i. Failure by the ETF to comply with its continuing listing obligations, including the failure to pay the applicable fees; ii. Continued breach of the tracking error threshold set by the ETF for a period of at least one year. Tracking error as defined in the SEC ETF Rules Section 5.21 is the standard deviation of the difference in relative returns between the ETF and its underlying index; iii. Revocation of the registration of the ETF and/or its shares; iv. Such other grounds as may be determined by the Exchange, where delisting of the ETF may be appropriate in the public interest or for the protection of investors. b. Tender Offer/Redemption Requirement In all instances, an ETF that undergoes delisting, must purchase or redeem, either by itself, a stockholder, or through a proponent, more than ninety percent (90%) of the issued and outstanding shares of the ETF. The required redemption may be made: i. By delivering the corresponding basket of securities to the concerned shareholder after the surrender of the ETF shares in accordance with Section 11.1 of the SEC ETF Rules; and/or ii. In exchange for cash in accordance with Section 13 of the SEC ETF Rules. The ETF shall demonstrate that following the redemption of the shares, the ETF, the stockholder or the proponent, has obtained more than ninety percent (90%) of the issued and outstanding shares of the ETF, or such level or percentage as may be prescribed by the Exchange. The purchase or redemption price or valuation shall be duly supported by a fairness opinion prepared by an independent and reputable firm, and in accordance with the Guidelines for Fairness Opinions and Valuation Reports of the Exchange. SECTION 9. Penalties and Fines. a. For non-compliance with the required number of Authorized Participants, a monetary penalty of One Hundred Pesos (Php100.00) for every day of non-compliance shall be imposed upon the ETF. b. For the absence of a Market Maker, a monetary penalty of Five Hundred Pesos (Php500.00) for every day of non-compliance shall be imposed upon the ETF. c. In the absence of a Fund Manager, Custodian, Index Provider, Authorized Participant, Transfer Agent, the Exchange shall suspend the trading of securities of the ETF which shall be lifted upon receipt of notice of the engagement of a new Fund Manager, Custodian, Index Provider, Authorized Participant, or Transfer Agent. d. For any violation of these Rules not stated herein, the penalties under the PSE Disclosure Rules shall apply. SECTION 10. Fees. An ETF shall be required to pay the following fees: a. Processing Fee Upon filing of its application to list, the ETF shall pay a non-refundable processing fee of Fifty Thousand Pesos (Php50,000.00) plus other incidental expenses. b. Listing Fee The ETF shall pay a flat rate of One Hundred Thousand Pesos (Php100,000.00). c. Annual Listing Maintenance Fee The ETF shall pay an Annual Listing Maintenance Fee of 1/200 of 1% of the total market capitalization but in no case shall it be more than Two Hundred Fifty Thousand Pesos (Php250,000.00). SECTION 11. Compliance with Laws Governing Investments. The ETF must ensure compliance with the provisions of existing laws, rules and regulations and issuances including, but not limited to, the Anti-Money Laundering Act of the Philippines, the Investment Company Act, and any other applicable law or regulations. THE PHILIPPINE STOCK EXCHANGE, INC. RULES ON EXCHANGE TRADED FUNDS SECURITIES AND EXCHANGE COMMISSION (SGD.) VICENTE GRACIANO P. FELIZMENIO, JR. Director, Market Regulation Department THE PHILIPPINE STOCK EXCHANGE, INC. (SGD.) ROEL A. REFRAN Chief Operating Officer (SGD.) HANS B. SICAT President and Chief Executive Officer Footnotes 1. Currently, Article III, Part C of the Listing Rules. 2. Currently, Article III, Part D of the Listing Rules. 3. Currently, Article III, Part E of the Listing Rules. 4. Currently, Article III, Part F of the Listing Rules. 5. Currently, Article III, Part H, as amended of the Listing Rules. 6. Currently, Article IV of the Listing Rules. 7. Currently, Article V of the Listing Rules. 8. Currently, Article VI, Parts B and C of the Listing Rules. 9. Currently, Article VI, Part D of the Listing Rules. 10. Currently, Article VI, Part E of the Listing Rules.