Guidelines on the Management of the Trust Fund of Pre-Need Corporations

September 27, 2007 SEC MEMORANDUM CIRCULAR NO. 04-07 TO : (1) Pre-Need Corporations (2) Entities Authorized to Engage in Trust Operations and Act as Trustee for Pre-Need Corporations SUBJECT : Guidelines on the Management of the Trust Fund of Pre-Need Corporations SECTION 1. Mandate and Objectives. Pursuant to Sections 16 and 74 of Republic Act No. 8799, otherwise known as the Securities Regulation Code (SRC), the Securities and Exchange Commission (Commission) issues these Guidelines to Pre-Need Corporations and entities authorized to engage in trust operations and act as Trustee for Pre-Need Corporations: a) to govern the management and administration of Trust Funds established for the payment of Pre-Need Benefits under plan contracts, and b) to provide an updated and more flexible choice of investments for the Trust Fund subject to rules and regulations that would ensure prudent investment management and protection of the interests of the Planholders. SECTION 2. Scope. These Guidelines shall cover the following subjects: a) Trust Fund b) Trust Agreement c) Responsibilities of the Trustee d) Investments of the Trust Fund e) Recognition and Measurement of Trust Fund Assets and Liabilities f) Liquidity Reserve Fund g) Reportorial Requirements h) Time of Making Deposits to the Trust Fund i) Transitory Provisions j) Sanctions SECTION 3. Definition of Terms. Whenever used in these Guidelines, the following terms shall have the respective meanings hereafter set forth or indicated, unless the context requires otherwise: HEAcDC a) Best execution refers to the obligation of the Trustee to use reasonable diligence in ascertaining the best available price for the investment and, to buy or sell at a price so that the resultant price is as favorable as possible to the Trust Fund under prevailing market conditions. b) Collective Investment Schemes (CIS) refer to any arrangement whereby funds are pooled together for the purpose of investing in a portfolio of securities or other financial assets. c) Delinquent Plan refers to a Pre-Need Plan where any due installment has been unpaid. d) Exchange refers to an organized marketplace or facility that brings together buyers and sellers and executes trades of securities and/or commodities. e) In Force Plan refers to a Pre-Need Plan for which the Pre-Need Corporation has an outstanding obligation, either for the (i) delivery of Pre-Need Benefits or (ii) payment of Termination Value. f) Investment Strategy refers to a method of portfolio management and asset allocation that a Trustee employs. g) Lapsed Plan refers to a Delinquent Plan which has remained unpaid beyond the grace period of two (2) months from date of delinquency. h) Liquidity Reserve Fund refers to a portion of the Trust Fund set aside by the Trustee to cover the Pre-Need Benefits. i) Pre-Need Benefits refer to the payment of monetary consideration and/or performance of future services which the Pre-Need Corporation undertakes to deliver either to the Planholder or his beneficiary at the time of actual need or agreed maturity date, as specified in the Pre-Need Plan. j) Pre-Need Reserves refer to the measure of liabilities of the Pre-Need Corporation for its In Force Plans or Lapsed Plans as of valuation date. It is set up for the Pre-Need Benefits payable by the Pre-Need Corporation as stated in the plan contract. k) Termination Value refers to the amount the Planholder should be paid upon surrender of the Pre-Need Plan prior to maturity or availment of full Pre-Need Benefits. l) Trust Agreement refers to an instrument in writing covering the terms and conditions of the Trust. m) Trust Fund refers to the fund set up from the Planholders' payments, separate and distinct from the paid-up capital of a registered Pre-Need Corporation, established with a Trustee under a Trust Agreement approved by the Commission, to pay for the Pre-Need Benefits as provided in the plan contract. n) Trust Fund Equity refers to the total assets less total liabilities of the Trust Fund. cCESTA o) Trust Investment Committee refers to a body of the Trustee which reviews and approves transactions between trusts and/or fiduciary accounts. p) Trustee refers to a trust company, trust department of a bank or an investment house that is authorized to perform trust and other fiduciary functions by the Bangko Sentral ng Pilipinas (BSP) and act as Trustee for Pre-Need Corporations. q) Trustor refers to the Pre-Need Corporation. SECTION 4. Trust Fund. A Trust Fund shall be separately established for each type of plan with a trust company, trust department of a bank or an investment house authorized to perform trust and other fiduciary functions by the BSP. SECTION 5. Trust Agreement. The proposed Trust Agreement, for each type of plan, shall be submitted by the concerned Pre-Need Corporation to the Commission for approval before execution and shall contain and/or state, among other things, the following provisions: a) The Trust Fund shall be under the management and control of the Trustee; b) Investment powers of the Trustee with respect to the Trust Fund; c) The required monthly regular contributions to the Trust Fund shall be deposited and credited to the Trust Fund account in accordance with Section 11 of these Guidelines; d) Investments, loans or credit accommodations to directors, officers, stockholders and related interests (DOSRI) of the Pre-Need Corporation and the Trustee are prohibited unless otherwise allowed by these Guidelines or the Commission; e) Withdrawals and payments from the Trust Fund; f) Recognition and measurement of Trust Fund assets and liabilities; g) Continuing authorization for the Commission's duly authorized representative/s to examine and verify the Trust Fund; h) Undertaking to abide by the rules and regulations and investment guidelines of the Commission relating to the Trust Fund; i) Disclosure and submission within forty eight (48) hours from the date of execution of any material agreement between the Trustor and the Trustee other than the Trust Agreement; j) Prior notice by the Trustee to, and, approval by, the Commission of amendments to or termination of the Trust Agreement; k) Contractual liability of the Trustee to the Trustor in case of substantial losses to the Trust Fund as a result of fraud, gross negligence or evident bad faith; and l) Undertaking by the Trustee to submit to the Commission such other data or information as may be required by the latter. HAEDCT SECTION 6. Responsibilities of the Trustee. The Trust Fund, inclusive of earnings, shall be administered and managed by the Trustee for the protection of the Planholders. The Trustee shall exercise the skill, care and diligence that a prudent man acting in the same capacity would give under the circumstances, guided by sound investment principles, and taking into consideration, among other things, the following: a) preservation of capital b) risk diversification c) growth of investment portfolio. SECTION 7. Investments of the Trust Fund. 7.1 To ensure the liquidity of the Trust Fund and to meet the Pre-Need Reserves essential to the delivery of the Pre-Need Benefits under the plan contract, Trustees are allowed to invest the Trust Fund in the following: a) Securities i) Evidence of indebtedness of the Republic of the Philippines and any other evidence of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines (ROP), such as, but not limited to, treasury bills, fixed rate treasury notes, retail treasury bonds, denominated either in Philippine or in foreign currency, and foreign currency linked notes. ii) Loans, bonds or other evidence of indebtedness issued by government agencies/entities and government owned and controlled corporations, and guaranteed by the Republic of the Philippines as to the payment of the principal and the interest. iii) Bonds and other evidence of indebtedness issued by: iii.1) the government of any foreign country with which the Philippines maintains diplomatic relations, with a credit rating obtained from a reputable international credit rating agency or a credit rating agency acceptable to the Commission that is at least two (2) notches higher than that of ROP bonds, and iii.2) supranationals (or international organizations whose membership transcends national boundaries or interests, e.g. International Bank for Reconstruction and Development, Asian Development Bank). iv) Corporate bonds of privately-owned domestic corporations duly registered with the Commission with a current credit rating 1 of at least "A" by an accredited Philippine rating agency. AaCTID v) Corporate bonds registered in another country with a credit rating obtained from a reputable international credit rating agency that is at least two (2) notches higher than that of ROP bonds. vi) Commercial papers duly registered with the Commission with an investment grade credit rating based on the rating scale of an accredited Philippine rating agency at the time of investment. vii) Equities listed on a local Stock Exchange. These shall include stocks issued by companies that are financially stable, actively traded, possess good track record of growth and have declared dividends for the past three (3)-years. The Trustee shall in no case be allowed to fully invest the Trust Fund in a single issue. viii) Savings and/or time deposits (peso or foreign currency denominated) maintained with a universal, commercial or thrift bank that passed the Trustee's investment review process. ix) Loans to private corporations that passed the Trustee's investment review process subject to the following guidelines: ix.1) If classified as held-to-maturity, the remaining term to maturity shall not exceed ten (10) years unless matched to a liability for a batch of maturing benefits; ix.2) If collateralized, the borrower shall have a credit rating of at least "BAA" or "Average" by an accredited Philippine rating agency; ix.2.1) The loan shall be fully secured by any of the following: ix.2.1.1) Assignment of deposits maintained with universal, commercial or thrift banks other than the Trustee's own bank proper provided the financial institution passed the Trustee's investment review process; ix.2.1.2) Standby letters of credit for the term of the loan issued by a universal or commercial bank subject to the requirements under Sections 7.1 (a) (viii) and 7.2 (b); ix.2.1.3) Real estate mortgage up to the extent of seventy five percent (75%) of the appraised value of the respective real estate security plus sixty percent (60%) of the appraised value of the insured improvements at the time the loan was granted. CSAcTa The property shall be covered by an Original/Transfer Certificate of Title (OCT/TCT) registered in the name of the mortgagor and free from liens and encumbrances; ix.2..1.4) Mortgage Trust Indenture (MTI) and Mortgage Participation Certificates (MPCs); ix.2.2) For loans guaranteed by a parent company, the latter shall have had net profitable operations for the past three (3) consecutive years or have a credit rating of at least "BAA" or its equivalent by an accredited Philippine rating agency. If an updated independent third party rating is not available, the parent company must have an equivalent credit rating based on the Trustee's internal rating system. ix.3) If not collateralized but covered by a negative pledge of the borrower not to permit its properties to be mortgaged to creditors, the borrower corporation shall have obtained a current credit rating of at least "A" or an equivalent rating of "Above Average". Furthermore, it must show profitable operations for the past three (3) consecutive years preceding the grant of the loan and shall have no accumulated capital deficit immediately preceding the grant of the loan. x) Senior, subordinated or hybrid debt securities issued by banks other than the Trustee's own bank proper, classified under Tier 1 or Tier 2 in its capital structure provided that the issuer has an investment grade credit rating based on the rating scale of an accredited Philippine rating agency or a rating of at least satisfactory from the BSP at the time of investment. If an independent third party rating is not available or is not updated, the investment must have an equivalent credit rating based on the Trustee's internal rating system. b) Collective Investment Schemes (CIS) i) CIS duly registered with the Commission Allowable CIS must have a track record of performance at par with or above the median performance of pooled funds in the same category. New CIS may be allowed provided that its fund manager has at least a three (3)-year track record in managing pooled funds. AIHECa ii) Offshore Mutual Funds with positive fund performance as against their benchmark index for the past three (3) consecutive years. The maximum exposure to CIS shall not exceed ten percent (10%) of the total Trust Fund equity. c) Real Estate Income generating commercial and residential real estate properties, unless otherwise disallowed by the Commission. These shall include real estate properties located in strategic areas of cities and first class municipalities. The OCT/TCT shall be in the name of the owner, free from liens and encumbrances and shall be transferred in the name of the Trustee in trust for the planholders or the Trust Agreement shall be annotated on the OCT/TCT within ninety (90) days from the date of investment or the execution of the Trust Agreement. The original copy of the OCT/TCT shall be placed in the possession of the trustee. The real estate properties shall be appraised every three (3)-years by a licensed real estate appraiser duly accredited by the Commission to reflect the increase or decrease in their value. The appraisal increment or decrement shall be disclosed in the books of the Trust Fund. The said increment shall not be used either to cover up the required monthly contribution to the Trust Fund or any deficiency in the Trust Fund as of the end of actuarial valuation date. The total recorded value of the real estate investment shall not exceed fifteen percent (15%) of the total Trust Fund equity. d) Planholder Loans This investment shall be subject to the following conditions: i.) The amount to be invested shall not exceed five percent (5%) of the total Trust Fund equity; ii.) The loan amortizations collected by Pre-Need Corporations shall not be used directly to fund the payment of benefits for maturing obligations but shall be deposited to the Trust Fund not later than two (2) working days from receipt; iii.) The terms and conditions of the loan agreement shall be made known to the planholders; and iv.) The loan agreement shall comply with the provisions of the Truth in Lending Act. 7.2 Notwithstanding the prohibition against transactions with directors, officers, stockholders and related interests (DOSRI) of the Trustor or the Trustee, the Trustee may invest in the following outlets: a) Equities of companies related to the Trustee that are listed on a local Stock Exchange. TCaAHI These shall include stocks issued by companies that are financially stable, actively traded, possess good track record of growth and have declared dividends for the past three (3)-years. The Trustee shall in no case be allowed to fully invest the Trust Fund in a single issue. The foregoing investment may subsequently be disallowed by the Commission, and, where proper, subject the Trustee to sanctions for gross violation of prudential standards. b) Savings and/or time deposits with the trustee's own bank proper, whether it be universal, commercial or thrift bank, provided it has a rating of at least satisfactory as of the last examination by the BSP and prior approval of the Commission is secured. 7.3 Except for investments under Section 7.1 (a) (i) hereof, records of analyses supporting the investments and records of the Trust Investment Committee's approval pertaining to the said investments shall be maintained and made available to the Commission upon request. The said records, when ordered submitted by the Commission, shall be certified by a responsible officer of the Trustee. To show proof of best execution, the Trustee shall maintain records or quotes from two (2) alternative providers, whenever applicable, or data from any reputable source that can best provide a basis for the asset's fair value. Such records shall be made available to the Commission upon request. SECTION 8. Recognition and Measurement of Trust Fund Assets and Liabilities. The Trust Fund Assets and Liabilities shall be recognized in accordance with the provisions of the effective Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS) and their interpretations, which include the following: a) PAS 39 for Financial Instruments b) PAS 40 for Investment Property SECTION 9. Liquidity Reserve Fund. No less than twenty percent (20%) of the net value of the Trust Fund assets per type of plan shall be set aside as a liquidity reserve to cover the Pre-Need Benefits due to Planholders. For this purpose, the Pre-Need Corporation shall submit to the Trustee and to the Commission a list of fully paid plans maturing during the year on or before the fifteenth (15th) day of the first month of the fiscal year of the Pre-Need Corporation. Furthermore, the Pre-Need Corporation shall submit to the Commission a three-year cash flow projection on how to fund these benefit obligations from its liquid Trust Fund assets on an annual basis on or before the end of the second month of the fiscal year of the Pre-Need Corporation. The Liquidity Reserve Fund shall consist of cash or assets in the Trust Fund that are easily convertible to cash. The following shall qualify as investments for the Liquidity Reserve Fund: a) Evidence of indebtedness of the Republic of the Philippines and other evidence of indebtedness or obligations, the servicing and repayment of which are fully guaranteed by the Republic of the Philippines such as, but not limited to, treasury bills, reverse repurchase agreements (RRP) and special deposit accounts (SDA); b) Savings and/or time deposits (peso or foreign currency denominated) in accordance with Sections 7.1 (a) (viii) and 7.2 (b); c) Equities listed on a local Stock Exchange. These shall include stocks issued by companies that are financially stable, actively traded, possess good track record of growth and have declared dividends for the past three (3)-years. The Trustee shall in no case be allowed to fully invest the Trust Fund in a single issue. SECTION 10. Reportorial Requirements. 10.1 The Pre-Need Corporation shall publish its audited balance sheet together with the consolidated Trust Fund Balance Sheet once a year within one hundred and twenty (120) days from the end of the fiscal year in a newspaper of general circulation in the city/province where the Pre-Need Corporation has its head office. cADEIa The details of the changes in equity, such as income or loss for the period, retained earnings, beginning and ending, shall be provided in the Equity Section of the Balance Sheet of the Pre-Need Corporation. Earnings from corporate assets shall be segregated from the Accumulated Income of the Trust Fund. A copy of such statement as published, together with the publisher's certificate, shall be submitted to the Commission within two (2) working days after said publication. 10.2 An Annual Investment Strategy shall be submitted by the Trustee to the Commission on or before the end of the second month of the fiscal year of the Pre-Need Corporation, showing the allocation of the proposed investment for the next three (3)-years. 10.3 A monthly report of the Trust Fund shall be submitted by the Trustee to the Trustor and the Commission within ten (10) days after the end of each month for reconciliation purposes of the Trustor and the Commission and shall include the following: a) Balance Sheet The equity portion of the Trust Fund Balance Sheet shall state the following: i) Contributions and withdrawals for the reporting period shall be segregated from the prior year's accumulated figures. ii) Retained earnings for the reporting period shall be segregated from the prior year's accumulated surplus. b) An Income Statement, three (3) column report to include: i) Month to Date income with equivalent ROI ii) Year to Date income with equivalent ROI c) Return of Investment (ROI) Computation Schedule i) For the Month ii) Year to Date The total portfolio shall be computed net of taxes and fees and inclusive of mark-to-market gains and losses. The following shall be the standard formula for computing return on investment: WHERE: EndingMV = Ending Market Value BegMV = Beginning Market Value Cont = Contributions for the period With = Withdrawals for the period n = Number of days for the period where ROI is computed WtdCont = Sum of contributions which are weighted based on the number of days these were held in the fund. WtdWithd = Sum of withdrawals which are given weights based on the number of days these were held in the fund for the period involved d) Schedule of Earning Assets including Mark-to-Market (M-T-M) Gains and Losses as of each ROI reporting date in Item (c) above e) Special Transactions Report which lists transactions, outstanding balances and pertinent investment details on DOSRI Investments f) Investment Activity Report/Summary of Transactions Schedule g) Portfolio analysis schedule h) Trustee's Certificate on Trust Fund Balance i) Summary of accounting policies on each significant trust fund assets and liabilities. If there would be no change in the policies for the succeeding months, a mere statement of consistent application would suffice. j) Explanatory or disclosure notes on significant items as required under PAS 32, 39, 40 and PFRS 7 k) Such other statements and schedules as may be reasonably requested by the trustor. 10.4 Monthly report on remittance to the Trustee of loan amortizations collected, pursuant to Section 7.1 (d), from the planholders by the Pre-Need Corporation together with the Certified True Copies of Official Receipts, as proof of deposit to the Trust Fund, to be submitted not later than ten (10) days after the end of each reference month. SECTION 11. Time of Making Deposits to the Trust Fund. Trust Fund deposits which shall be sourced from collections of payments from plans sold either in cash or installment for the first half of the month, shall be made not later than three (3) working days after the end of the first half of the current month, and for collections made on the second half, not later than three (3) working days following the end of the reference month. If the Commission discovers a deficiency in the Trust Fund, it shall give notice of its finding to the Pre-Need Corporation and require it to make additional deposits to the Trust Fund. The Pre-Need Corporation shall have thirty (30) days from receipt of notice, or, submission of the actuarial valuation report, whichever is earlier, to make the necessary deposit to correct the deficiency. Any excess in the Trust Fund of each plan shall not be credited to future deposit requirements, or transferred from one type of plan to another. TADCSE SECTION 12. Transitory Provisions. 12.1 Within one (1) year from the effectivity of these Guidelines, the following investments of the Trust Fund must be divested, unless otherwise allowed by the Commission: a) Unlisted shares of stock, b) Excess from the prescribed limit of the investment portfolio allocation, c) Non-income generating real estate properties, and d) Other investments not allowed by these Guidelines. Within thirty (30) days from the effectivity of these Guidelines, the Trustee shall submit an inventory of the Trust Fund Investments in the foregoing enumeration and a time-bound divestment program for the approval of the Commission. 12.2 The Trustee shall comply with the new reportorial requirements within one hundred twenty (120) days from the effectivity of these Guidelines. SECTION 13. Sanctions. Failure to comply with these Guidelines shall subject the Pre-Need Corporation and/or the Trustee, after due notice and hearing, to sanctions set forth in the Schedule of Penalties 2 attached herewith for reference and incorporated as an integral part of these Guidelines. The payment of the assessed fines and penalties shall in no case be sourced from the Trust Fund. SECTION 14. Repealing Clause. All circulars, rules and regulations or parts thereof that are inconsistent with the provisions of these Guidelines are deemed repealed, superseded or modified accordingly. SECTION 15. Effectivity. These Guidelines shall be published twice in two (2) newspapers of general circulation in the Philippines and shall take effect on November 1, 2007. Issued on 27 September 2007 at EDSA, Greenhills, Mandaluyong City, Philippines. (SGD.) FE B. BARIN Chairperson (SGD.) MA. JUANITA E. CUETO Commissioner (SGD.) JESUS ENRIQUE G. MARTINEZ Commissioner (SGD.) RAUL J. PALABRICA Commissioner (SGD.) THADDEUS E. VENTURANZA Commissioner APPENDIX A DESCRIPTION OF CREDIT RATINGS For purposes of these Guidelines, the credit rating equivalent shall be as follows: Rating INVESTMENT GRADE Highest Quality Aaa or AAA High Quality (Very Strong) Aa or AA Upper Medium Grade (Strong) A Medium Grade Baa or BBB NON-INVESTMENT GRADE Lower Medium Grade (somewhat speculative) Ba or BB Low Grade (speculative) B Poor Quality (may default) Caa or CCC Most Speculative Ca or CC No interest bearing paid or bankruptcy petition C filed In default C or D Definition of Symbols Aaa or AAA : Smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal secured. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa or AA : Margins of protection may not be as large as in Aaa issues. Fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than for Aaa-rated securities. STaCcA A : With favorable investment attributes and are considered upper-medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa or BBB : Neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such issues lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba or BB : Judged to have speculative elements. The issuer's capability to pay for such issues cannot be considered as well assured. Often, the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. B : Generally lacks the characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of contract over any long period of time may be small. Caa or CCC : Poor standing. High possibility of default and there may be present elements of danger with respect to principal or interest. EAcTDH Ca or CC : Very poor standing. Has other marked shortcomings. The issue may be in default. C or D : In default. APPENDIX B SCHEDULE OF PENALTIES SEC MEMORANDUM CIRCULAR NO. _____, VIOLATIONS SANCTIONS series of 2007. FIRST SECOND THIRD OFFENSE OFFENSE OFFENSE Section 5 Failure to secure the approval P10,000 P20,000 P30,000 of the Commission on matters relating to Trust Agreements prior to its implementation/ execution THIS IS IMPOSABLE UPON BOTH THE TRUSTOR AND TRUSTEE Section 5 Failure to disclose within the P10,000 P20,000 P30,000 (i) prescribed period any material agreement between the Trustor and Trustee, other than the Trust Agreement THIS IS IMPOSABLE UPON BOTH THE TRUSTOR AND TRUSTEE Section 5 Failure to secure prior approval P10,000 P20,000 P30,000 (j) of the Commission on the amendment or termination of the Trust Agreement THIS IS IMPOSABLE UPON BOTH THE TRUSTOR AND TRUSTEE Section 7 Failure to maintain the prescribed P20,000 P30,000 P40,000 investment limits THIS IS IMPOSABLE UPON THE TRUSTEE Failure to comply with any of the P20,000 P30,000 P40,000 requirements for the investment of the Trust Fund THIS IS IMPOSABLE UPON THE TRUSTEE Section 7.1 Failure to transfer in the name P20,000 P30,000 P40,000 (c) of the Trustee or annotate the Trust Agreement in the OCT/ TCT THIS IS IMPOSABLE UPON BOTH THE TRUSTOR AND TRUSTEE Section 7.1 Failure to remit to the Trust P50,000 P100,000 P150,000 (d) Fund the loan amortization collected from Planholders THIS IS IMPOSABLE UPON THE TRUSTOR Section 7.3 Refusal/Failure to furnish Reprimand P10,000 P20,000 proof of best execution, records of analyses or other information required by the Commission THIS IS IMPOSABLE UPON THE TRUSTEE Section 8 Failure to comply with the Reprimand P10,000 P20,000 provisions of PAS 39 and 40 in the recognition and measurement of Trust Fund Assets and Liabilities THIS IS IMPOSABLE UPON THE TRUSTEE Section 9 Failure to comply with the P20,000 P30,000 P40,000 Liquidity Reserve Fund THIS IS IMPOSABLE UPON THE TRUSTEE Non-filing/Late Filing of the P10,000 P20,000 P30,000 list of fully paid plans maturing during the year THIS IS IMPOSABLE UPON THE TRUSTOR Non-filing/Late Filing of cash Reprimand P10,000 P20,000 flow projection THIS IS IMPOSABLE UPON THE TRUSTOR Section Failure to publish the Audited P20,000 P30,000 P40,000 10.1 Financial Statement within 120 days after the end of fiscal year THIS IS IMPOSABLE UPON THE TRUSTOR Non-filing/Late Filing of the Reprimand P10,000 P20,000 publisher's certificate THIS IS IMPOSABLE UPON THE TRUSTOR Material Misstatement in the P50,000 P100,000 P150,000 Report submitted to or required by the Commission THIS IS IMPOSABLE UPON THE TRUSTOR Misrepresentation or misleading P50,000 P100,000 P150,000 statements in any report submitted to or required by the Commission THIS IS IMPOSABLE UPON THE TRUSTOR Section Non-filing/Late filing of an annual Reprimand P10,000 P20,000 10.2 Investment Strategy THIS IS IMPOSABLE UPON THE TRUSTEE Section Non-filing/Late filing of monthly Reprimand P10,000 P20,000 10.3 report THIS IS IMPOSABLE UPON THE TRUSTEE Material Misstatement in the P50,000 P100,000 P150,000 Report submitted to or required by the Commission THIS IS IMPOSABLE UPON THE TRUSTEE Misrepresentation or misleading P50,000 P100,000 P150,000 statements in any report submitted to or required by the Commission THIS IS IMPOSABLE UPON THE TRUSTEE Section Non-filing/Late Filing of monthly Reprimand P10,000 P20,000 10.4 reports on remittance to the Trustee of loan amortizations collected pursuant to Section 7.1 (d) THIS IS IMPOSABLE UPON THE TRUSTOR Section 11 Failure to deposit the required P50,000 + P100,000 + P150,000 + regular monthly contributions P300/day of P300/day of P300/day of to the Trust Fund continuing continuing continuing violation violation violation THIS IS IMPOSABLE UPON THE TRUSTOR Failure to deposit the required P50,000 P100,000 P150,000 regular monthly contributions to the Trust Fund within the prescribed period THIS IS IMPOSABLE UPON THE TRUSTOR Failure to make additional P50,000 + P100,000 + P150,000 + deposits to the Trust Fund P300/day of P300/day of P300/day of cover deficiencies continuing continuing continuing violation violation violation THIS IS IMPOSABLE UPON THE TRUSTOR Failure to make additional P50,000 P100,000 P150,000 deposits to the Trust Fund cover deficiencies within the prescribed period THIS IS IMPOSABLE UPON THE TRUSTOR Crediting of excess in the P50,000 P100,000 P150,000 Trust Fund for future deposit requirements/Transfer of Trust Fund from one plan to another THIS IS IMPOSABLE UPON THE TRUSTOR Section Failure to divest the ineligible P20,000 P30,000 P40,000 12.1 investments/ failure to divest within the prescribed period THIS IS IMPOSABLE UPON THE TRUSTEE Non-Filing/Late Filing of an Reprimand P10,000 P20,000 inventory of investments of the Trust Fund and a time- bound divestment program THIS IS IMPOSABLE UPON THE TRUSTEE Section 13 Withdrawal from the Trust P50,000 P100,000 P150,000 Fund for the purpose of payment of assessed fines and penalties THIS IS IMPOSABLE UPON THE BOTH THE TRUSTOR AND TRUSTEE Published in The Philippine Daily Inquirer and The Business Mirror on October 18, 2007 . PRE-NEED RULE 31, AS AMENDED: ACCOUNTING STANDARDS FOR PRE-NEED PLANS AND PRE-NEED UNIFORM CHART OF ACCOUNTS (PNUCA) I. The following adopted accounting standards and chart of accounts shall be considered the Generally Accepted Accounting Principles (GAAP) for pre-need companies in the Philippines: A. BALANCE SHEET (1) Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and are subject to an insignificant risk of change in value. This account should not be restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date. (PAS 1 par 57d). (2) Financial Assets The disclosure, recognition and measurements of financial assets of pre-need companies shall be in accordance with PAS 32 and 39. (3) Other Receivables This account shall be limited to the following: (a) Insurance Claims Receivables claims from the insurer for the unpaid balance of installments arising from the demise or disability of an insured planholder; (b) Receivables from Trustee these are advances made by the pre-need company to settle obligations to availing planholders, which are reimbursable by the trustee. This transaction shall be allowed only upon execution of a sworn affidavit signed by the President and another authorized officer of the company attesting to the validity of the benefit payments covered by the transaction and vesting upon the trustee the right to audit the records of the concerned planholders anytime. (c) Advances to Directors, Officers, Stockholders and related interests such as employees, agencies and agents. Each of the foregoing items shall be separately disclosed to the notes financial statements of the company . (4) Prepayments and Accrued Income This shall represent prepaid expenses, deposits and interest receivable pertaining to interest accrued arising from cash and cash equivalents, available for sale financial assets, and loans and receivables. (5) Inventories When applicable for life plans, inventories which consist of caskets, urns and memorial lots shall be carried at the lower of cost or net realizable value. All other requirements of PAS 2 shall be complied with respect to this account. (6) Trust Funds (a) The net asset value in the trust fund shall be at least equal to the required Pre-need Reserves as determined by a qualified actuary using the method prescribed in this Rule. (b) All requirements under the rules and regulations as may be promulgated by the Commission on trust fund shall be complied with. (c) The recognition and measurement of the assets in the trust fund shall be in accordance with PAS 39 (Financial Instruments) and 40 (Investment Property) and other applicable standards, depending on the composition of the fund. (d) The component assets and liabilities of the trust fund shall be presented separately in the notes to financial statements. (e) Impairment of Financial Assets The carrying value of all financial assets shall be reviewed for impairment whenever or circumstances indicate that the carrying amount may not be recoverable. The identification of impairment and the termination of recoverable amount is a process of involving various assumptions and factors, including the financial condition of the counterparty, expect future cash flows, observable market prices and expected net selling prices. In order to determine whether negative revaluations on investment securities correctly represent impairment, all investment securities for which the market has been significantly below cost price for a considerable period of time, shall be individually reviewed. A distinction shall be made between negative revaluations due to general market fluctuations and due to issuer specific developments. The impairment review shall focus on issuer specific developments regarding financial condition and future prospects, taking into account the intent and ability to hold the securities under the company's long-term investment strategy. Assets Carried at Amortized Cost For loans and receivables carried at amortized cost, the amount of the loss shall be measured as the difference between the financial asset's carrying amount and the present value of the estimated future cash flows discounted at the financial asset's original effective interest rate. If a variable interest rate was used, the discounted rate for measuring the impairment loss is the current effective interest rate. Impairment loss is recorded in the statement of income. The company shall assess whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset shall be included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized shall not be included in a collective assessment of impairment. If in a subsequent period, the amount of impairment loss decreases can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss shall be reversed. Any subsequent reversal of an impairment loss shall be recognized in the statement of income, to the extent that the carrying value of the assets does not exceed its amortized cost at the reversal date. Available-for-Sale (AFS) Financial Assets For AFS financial assets, a significant prolonged decline in the fair value shall indicate impairment. For AFS financial assets, the impairment loss shall be the difference between its current fair value and its original cost. Impairment loss shall be transferred from equity to the statement of income. Reversals of impairment losses shall be reversed through the statement of income, to the extent that the initial impairment loss was transferred from equity to the statement of income. The reversal must be objectively supported by an increase in the fair value of the instrument after the impairment loss was recognized. (7) Property and Equipment These are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one, period. The recognition, measurement, disclosure and other requirements for this account shall be in accordance with PAS 16. (8) Investment Properties These are corporate assets of the company that are held to earn rentals or for capital appreciation or both. The recognition, measurement, disclosure and other requirements for this account shall be in accordance with PAS 40. (9) Intangible Assets (a) These are identifiable non-monetary asset without physical substance which have future economic benefits. (b) The recognition, measurement, disclosure and other requirements for this account shall be in accordance with PAS 38. (c) Impairment of Non-Monetary Assets The carrying values of assets (investment in real estate, property and equipment) shall be reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash generating units shall be written down to their recoverable amounts. The recoverable amount of an asset is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows shall be discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Impairment losses shall be recognized in the statements of income. (10) Insurance Premium Fund This represents corporate assets that are restricted to cover the payment of insurance premiums after the paying period of the pre-need plan. This shall be equal to the amount computed for the Insurance Premium Reserves under paragraph (13) of this Rule. (11) Accrued expenses and other liabilities This account may include the following items which are due to be settled within twelve months after the balance sheet date: (a) Accrued insurance expense; (b) Accrued expense on salaries and others; (c) Withholding taxes payable. (12) Pre-need Reserves (a) Pre-need Reserves (PNR) shall be set up for all pre-need benefits guaranteed and payable by the pre-need company as defined in the pre-need plan contracts; (b) In recognizing PNR for educational and pension plans, the general requirements of PAS 37 on provisioning and the specific methodology provided below shall be complied with by the company. For life plans, the requirements of PFRS 4 (Insurance Contracts) shall be complied with by the company; (c) The amount recognized as a provision to cover the PNR shall be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision; (d) Since the effect of the time value of money for pre-need plans is material, the amount of provision shall be the present value of the funding expected to be required to settle the obligation with due consideration of the different probabilities, as follows: (i) On Currently-Being-Paid Plans (1) Provision for termination values applying the surrender rate experience of the company. The trend of surrender rate experience shall be disclosed in the company's notes to financial statements; (2) Liability shall be set-up for the portion of currently-being-paid plans that will reach full payment, applying the full payment experience of the company. It shall be equivalent to the present value of future maturity benefits reduced by the present value of future trust fund contributions required per Product Model discounted at the approved hurdle rate per Product Model of the company. Currently-Being-Paid Plans pertain to accounts that are up-to-date in payment and include in force plans as defined in the contract provision, i.e., plans within the 60-day grace period . (ii) On Lapsed Plans within the Allowable Reinstatement Period Provision for termination values applying the reinstatement experience of the company. The trend of reinstatement experience shall be disclosed in the company's notes to financial statements; (iii) Fully Paid Plans (1) For those due for payment within the next five (5) years, the reserve shall be the present value of future maturity benefits discounted at the attainable rate, as determined and certified by the company's trustee using industry best practices and principles which shall indicated in such certification; (2) For those not yet due for payment within the next five (5) years, the reserve shall be the present value of future ' maturity benefits discounted at the approved hurdle rate per Product Model of the company. (e) Future events that may affect the foregoing amounts shall be reflected in the amount of the provision for PNR where there is sufficient objective evidence that they will occur; (f) The rates of surrender, cancellation, reinstatement, utilization, and inflation, when applied, must consider the actual experience of the company in the last three (3)-years, or the industry, in the absence of a reliable company experience; (g) The computation of the foregoing assumptions shall be validated by a qualified actuary of the pre-need company. His or her validation report shall be provided to its external auditors for purposes of statutory audit of the financial statements of the company, and shall be submitted to the Commission as a separate report; (h) The probability of pre-termination on surrender of fully paid plans, shall be considered in determining the Pre-need Reserves of fully paid plans. A pre-termination experience on fully paid plans of 5% and below shall be considered insignificant. In such cases, derecognition of liability shall be recorded at pre-termination date; (k) The disclosure requirements under PAS 1 relative to methods and assumptions used to estimate the PNR including the sensitivity of the PNR amount, shall be complied with; (l) Any excess in the amount of the trust fund as a result of the initial adoption of the revised reserving method shall neither be released from the fund nor be credited/off-set to future required contributions; (j) Individual subsidiary accounts for education plans and for pension plans must be maintained (e.g. [1] "Pre-Need Reserves-Education Plans"; [2] "Pre-Need Reserves-Pension Plans"). (13) Other Reserves The company shall set-up other provisions in accordance with PAS 37 to cover its obligations such as Insurance Premium Reserve . Unless the Commission shall so specifically require, a company may at its option set up other provisions as a prudent measure. (14) Pension Liability This represents the obligation of the company pertaining to its employee benefits, which shall be accounted for under PAS 19. (15) Income Tax Payable The presentation and recognition of this account shall be in accordance with PAS 12. The foregoing items of assets and liabilities shall be presented in the Balance Sheet in the order of liquidity and shall be classified between current and non-current, in accordance with PAS 1 . (16) Stockholders' Equity This section includes the following items: (a) Outstanding capital stock; (b) Additional Paid-In capital; (c) Deposit for Future Subscription (if any); (d) Revaluation reserve for available-for-sale financial assets; (e) Retained earnings. See restrictions under paragraph (D) (2) & (3) of this Rule . The foregoing breakdown may instead be presented on the face of the Statement of Changes in Equity. B. STATEMENT OF INCOME (17) Revenues (a) Premium Revenue Premiums from sale of pre-need plans shall be recognized as earned when collected. When premiums are recognized as income, the related cost of contracts shall be computed, with the result that benefits and expenses are matched with such revenue. (b) Trust Fund Income Income generated by the trust fund shall be included in the Investment in Trust Fund account under the assets section of the Balance Sheet. The amount of the trust fund income shall be disclosed in the notes to financial statements. The portion of the retained earnings representing the trust fund income shall be automatically restricted to payments of benefits of plan holders and such other related payments as allowed under the Pre-Need Rules. (c) Investment Income Interest income shall be recognized in the statement of income as it accrues, taking into account the effective yield of the asset or liability or an applicable floating rate. Interest income and expense includes the amortization of any discount or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. Investment income shall likewise include dividends, which are included on the date the shares become quoted ex dividend. (d) Realized Gains or Losses Recorded in the Statement of Income Realized gains or losses on the sale of available for sale financial assets are calculated as the difference between the net sales proceeds and the carrying value. This is recognized in the Statements of Income when the sales transaction occurred. (e) Other Income this may include service fee and loading income, surcharge and amendment fees and miscellaneous income. (18) Cost of Contracts Issued This account pertains to: (a) The increase in PNR as at the current year as compared to the provision for the same period of the previous year. If there is a decrease in the PNR as a result from new information or new developments, the amount shall be deducted from the Cost of Contracts Issued of the current period. In case of material prior period errors, the requirements of PAS 8 shall be complied with by the pre-need company. b) Amount of trust fund contribution for the year; c) Documentary stamp tax and SEC registration fees. The foregoing items shall be presented separately on the face of the Income Statement. (19) Other Direct costs and expenses This account includes the following which shall be presented separately in the notes to financial statements: (a) Basic commissions; (b) Other commission such as overrides, bonuses; (c) Insurance; (d) Other expenses that constitute direct cost of contracts issued. Individual subsidiary accounts for education plans and for pension plans must be maintained (e.g. [1] "Cost of Contracts issued-Education Plans"; [2] "Cost of Contracts issued-Pension Plans") (20) General and administrative expenses This represents the following expenses: (a) Salaries, wages and employee benefits; (b) Rent, light and water; (c) Taxes and licenses; (d) Advertising and promotions; (e) Electronic data processing; (f) Professional fee; (g) Training; (h) Repairs and maintenance; (i) Postage, telephone and telegraph; (j) Depreciation and amortization; (k) Transportation and travel; (l) Office Supplies; (m) Miscellaneous. The company shall disclose in the notes of its financial statements any effort or cost-saving measures to control its expenses in order to ensure delivery of promised services/benefits to plan holders . (21) Provision for Income Tax C. CASH FLOW STATEMENT The requirements of PAS 17 on Cash Flow Statements shall be complied with. D. STATEMENT OF CHANGES IN EQUITY (22) The presentation requirements of PAS 1 (paragraphs 96 to 101) on Statement of Changes in Equity shall be complied with. (23) The amount of restricted/appropriated and unrestricted/unappropriated retained earnings shall be separately presented in this Statement. However, no appropriation of the retained earnings shall be made by the company unless the same is approved by the Commission or allowed in the Pre-Need Rules. (24) The portion of the retained earnings representing the trust fund income shall be automatically restricted to payments of benefits of plan holders and such related payments as allowed under the Pre-Need Rules. E. NOTES TO THE FINANCIAL STATEMENTS The presentation and disclosure requirements of the PAS mentioned in items above and the following accounting standards shall be complied with by pre-need companies (if applicable): (25) PFRS 2 on Share Based Payment; (26) PFRS 3 on Business Combination; (27) PFRS 4 on Insurance Contracts; (28) PFRS 5 on Non-Current Assets Held for Sale and Discontinued Operation; (29) PAS 8 on Accounting Policies, Changes in Accounting Estimates and Errors; (30) PAS 10 on Events after the Balance Sheet Date; (31) PAS 17 on Leases; (32) PAS 21 on The Effects of Changes in Foreign Exchange Rates; (33) PAS 24 on Related Party Disclosures; (34) PAS 27 on Consolidated Financial Statements; (35) PAS 28 on Investment in Associates; (36) PAS 31 on Interest in Joint Ventures; (37) PAS 23 on Borrowing Cost. The notes to financial statements shall likewise disclose the impact of the transition from the old reserving method to the revised requirements provided in this Rule . F. INTERIM FINANCIAL REPORTING (38) The Balance Sheet, Income Statement, Cash Flow Statement and Statement of Changes in Equity shall contain the complete accounts as in annual financial report. They shall not be presented in condensed form. All the applicable accounts in this revised PNUCA shall be reflected in the interim financial reports; (39) All other requirements of PAS 34 on Interim Financial Reporting shall be complied with by the company, e.g., inclusion of selected explanatory notes, same accounting policies as annual. II. SANCTION Failure to comply with any of the requirement of this Rule shall subject the company with the penalties provided in the Consolidated Scale of Fines (SEC Memorandum Circular No. 6, Series of 2005) or any amendment thereto. III. REPEALING CLAUSE All other rules and regulations, circulars, or memoranda or any part thereof, in conflict with or contrary to these Rules or any portion hereof, are hereby repealed or modified accordingly. IV. EFFECTIVITY Except on the revised reserving method and the accounting for liability arising from education and pension plans which the Commission earlier resolved for optional adoption by pre-need companies in their audited financial statements as of December 31, 2006, this amended Rule shall become effective for interim financial statements covering periods ended June 30, 2007 and onwards, and for audited financial statements for the period ended December 31, 2007, and thereafter. May 10, 2007, Mandaluyong City, Philippines. (SGD.) FE B. BARIN Chairperson (SGD.) MA. JUANITA E. CUETO (SGD.) JESUS E.G. MARTINEZ Commissioner Commissioner (SGD.) RAUL J. PALABRICA (SGD.) THADDEUS E. VENTURANZA Commissioner Commissioner ( Continuation ) ANNEX I CHECKLIST OF REQUIREMENTS FOR PETITION FOR THE RELIEFS CONCERNING THE TRUST FUND OF PRE-NEED CORPORATIONS Note: 1. All requirements should be submitted in four (4) copies together with the required SEC Standard Cover Sheet. 2. All documents should be arranged in the order appearing below. 3. Accomplished checklist should be left with the SEC processor. C. Transfer of Trust Fund from One Trustee to Another ___1 Petition setting forth the relief/s sought and the reasons/s for the allowance of the relief/s requested ___2. Board Resolution certified by the corporate secretary authorizing the request ___3. Filing Fee Filing fee: P2,500 plus legal research of 1% of filing fee ______________________ _____________ Signature over printed name Date of SEC processor Footnotes 1. For a discussion on Credit Ratings, please refer to Appendix "A". 2. For the Schedule of Penalties, please refer to Appendix "B".