INVESTMENT HOUSES AND SECURITIES BROKERS/DEALERS

INVESTMENT HOUSES AND SECURITIES BROKERS/DEALERS

Celica May AlvarezMaureen Hermogeno

Marvin Santos

• In whole development scheme, investment in man is the most important of all forms of investments. This refers:– To his education and training – improving his values

and skills.– Another form of investment is also very important

which refers to financial investment which infuses the lifeblood into the economy.

Investment House Law (Section 13 of Presidential Decree No. 129)“An Investment House may engage in the business of a dealer or a broker under the Securities Act without obtaining a separate license for the purpose as required in Section 14 of the Securities Act. (C.A. No. 83, as amended)

Investment Houses• “Any enterprise which engages in the

underwriting of securities of other corporations” (Section 2, P.D. No. 129).

• Underwriting- is the act or process of guaranteeing the distribution and sale of securities of any kind issued by corporation.

• Securities- are written evidences of ownership, interest, or participation, in an enterprise, or written evidences indebtedness of a person or enterprise. 

Form of business organization.• Investment houses are to be organized in the form

of stock corporations.• Before the S.E.C. acts favourably to register the

articles of incorporation of an investment house, or any amendment thereto, the Commission must be satisfied from the evidence submitted to it:

1. That all requirements of Presidential Degree No. 129, as amended, and of existing laws or regulations to

engage in the business have been complied with.2. That the proposed enterprise will not be in conflict with public

interest and economic growth.3. That the amount of capital, the proposed organization,

direction and administration, as well as the integrity, experience and expertise of the organizers and the proposed managerial staff, provide reasonable assurance that the enterprise will be conducted with financial prudence.

Capitalization • The minimum initial paid-in capital of any investment house is

P40 million. However, the majority of the voting stock of any investment house is required to be owned by citizens of the Philippines.

Other activities • Republic Act No. 337, as amended, authorizes the conversion

of an investment house into a Universal Bank or a Multi-Purpose Bank

through the issuance of a license by the Monetary Board of the Bangko Sentral operating under an expanded commercial banking authority. 

Regulatory powers of the Bangko Sentral • Considering the fact that the investment houses are classified

under the Non-Bank Financial Intermediaries, it is only proper and logical that they be subject to the regulatory powers of the Monetary Board of the BS.

• The regulatory powers may be manifested through the insurances of rules and regulations aimed at, but not necessarily limited to, the following:

1. Minimum size of fund acceptance or receipt. 2. Methods of marketing and distribution.3. Terms of placement and maturities.4. Use of funds.

• On the other hand, if an investment house is also engaged in performing quasi-banking activities it may be subject to further regulations, principally aimed at but not limited to the following:

1. Liquidity reserve requirements.2. Capital-to-risk assets ratios.3. Interest rate ceilings.4. Such other consultants as the Board may deem necessary.Securities Brokers/Dealers• Investment houses function “as intermediaries in the marketing

process, as brokers, as dealers, or as underwriters”, the treatment of the topic will be more or less as it is intended to be, that is, Securities Brokers/Dealers as another Non-Bank Financial Intermediaries.

• Thus, the following terms must be clarified: 

Securities Brokers/Dealers• Investment houses function “as intermediaries in the marketing

process, as brokers, as dealers, or as underwriters”, the treatment of the topic will be more or less as it is intended to be, that is, Securities Brokers/Dealers as another Non-Bank Financial Intermediaries.

• Thus, the following terms must be clarified:Broker - any person engaged in the business of effecting

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

Dealer - any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise, but does not include any person insofar as he buys or sells securities for his own account either individually or in some fiduciary capacity, but not as a part of a regular business.

Stockbroker - as defined under N.I.R.C., “includes all persons whose business it is, for themselves as such broker or for other brokers, to

negotiate purchases or sales of stock, bonds, exchange, bullion, coined, money, bank notes, promissory notes or other securities; as defined in the Investment Company Act; dealer in securities includes all persons who for their own account are engaged in the sale of stock, bonds, exchange, bullion, coined money, bank notes, promissory notes, or other securities.”

Dealer in securities - as likewise defined under the N.I.R.C., “means a merchant of stock or securities, whether an individual, partnership, or corporation, with an established place of business regularly engaged in the purchase of securities and their resale to customers; with a view to the gains and profits that may be derived there form.”

Salesman - is to be construed as to “include every natural person, other than a dealer, employed or appointed or authorized by a dealer, issuer or broker to sell securities in any manner.

Exchange - The term “exchange” to “any organization, association, or group of persons, whether incorporated or unincorporated which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange”

Facilities - is to be interpreted in relation to a “exchange” to include its premises, tangible or intangible property, whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of affecting or reporting a transactions on an exchange including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange, and any right of the exchange to the use of any property or service.

Member- is to be understood in relation to an exchange as:1. Any natural person permitted to effect transactions on the floor

of the exchange without the services of another person acting as broker.

2. Any registered broker or dealer with which such a natural person is associated.

3. Any registered broker or dealer permitted to designate as a representative such a natural person’ and

4. Any registered broker or dealer which agrees to be regulated by such exchange and with respect to which the exchange undertakes to enforce compliance with the provisions of the Revised Securities Act, the rules and regulations there under, and its own rules.

Registration of Brokers, Dealers and Salesmen• Pursuant to the provisions of the Revised Securities Act, no

broker, dealer or salesman must engage in business in the Philippines as such

broker, dealer or salesman or sell ant securities, including securities exempted under the said

1. An application for registration in writing is to be filed in the office of the SEC in such form as the Commission may prescribe, duly verified under oath; stating among other things the following:

a. Principal office of the applicant, wherever situated and its principal office and all branch offices in the Philippines, if any.

b. Name or style of doing business.c. Corporate or business names.d. Residences and business addresses of all persons interested in

the business as principals, co-partners, officers and directors, specifying as to each his capacity and title.

e. Character of the business and the length of time the applicant have been engaged in said business.

2. The application for registration must be accompanied by an irrevocable written consent to the service of process upon the Commission in action against such broker or dealer in the manner and form provided by law.

3. Upon compliance with items (1) and (2) the SEC duty bound to register such applicant’ as a broker or dealer conditioned only upon his filing a bond, or other security in lien thereof, in such sum as may be fixed by the Commission which it may deem adequate for the protection of the public, running to the Government of the Philippines, and conditioned upon the faithful compliance with the provisions of the Revised Security Act by said broker or dealer and by all salesman registered by the latter while acting for him.

4. The broker or dealer registered as such by the SEC, my request the commission to also registered as salesman of such dealer or broker such natural person as the latter deems it necessary.

5. The names and addresses of all persons approved for registration as

brokers, dealers or salesman and all orders with respect thereto are recorded in a register of brokers, dealers and salesman kept in the office of the Commission but open public inspection.

6. Changes in registration occasioned by changes in the personal of a partnership or in the principals, co-partners, officers or directors of any broker or dealer may be made from time to time by written application setting forth the facts with respect to such change.

7. Every registered broker or dealer who intends to offer any security for sale is required to notify the Commission in writing of his intention to do so.

 Rules on Registered and Licensing of Stock Brokers, Dealer in Securities and their Salesman

The following guidelines and rules on the registration and licensing of stock brokers, dealers in securities, and their salesmen under Section

19 of the Revised Securities Act, are hereby promulgated by this Commission pursuant to the powers vested in it by existing laws:I. REGISTRATION/LICENSING OF STOCK BROKERS AND DEALERS IN SECURITIES

1. Every application for registration/licensing of stock broker or dealer is securities shall be filed in SEC Form No. 3, which must be verified under oath.

2. The application shall be submitted in two copies accompanied by the following papers or documents:

a. Five testimonial letters attesting to the good repute of all the persons named in the application as managing or administering the affairs of the applicant.

b. Certification of a bank to the effect that the applicant has credit facility in said bank

c. Surety bond in the amount of P200, 000 for a stock broker and P100, 000 in the case of a dealer in securities.

d. If the application is for the registration/licensing of a stock broker and the applicant is a corporation, it should also submit:

d.1. Unlimited and joint liability undertaking executed by at least two stock stockholders (including the member if applicant is a member- firm of a stock exchange), owning not less than 95% of the company’s subscribed capital stock.

d.2.Certification of the Corporate Secretary that the Board of Directors has authorized, in a resolution, the President and Secretary to sign an Irrevocable Consent to Service of Process upon the Securities and Exchange Commission as service to the corporation.

d.3. A copy of the resolution of the stockholders authorizing the corporation to engage in stock brokerage business or in the business of dealer in

securities if said business of dealer in securities, if said business activities are not provided for in the primary purpose clause of the Articles of Incorporation of the company, and

d.4.If the applicant shall operate as a member-firm of a stock exchange, it shall submit a certification by the Secretary of the Exchange that all stockholders thereof are acceptable to the Board of Governors of the Exchange.

3. A minimum paid-up capital in the amount of P 1,000,000.00 is required of every applicant for license as stock broker or dealer in securities.

4. Upon filing of the application the following fees shall be collected:a) Stockbroker -P 1,000.00b) Dealer in Securities -P 1,000.00

5. A Notice or an order shall be issued by the Commission upon filing of the application.

Notice shall be published by the applicant giving notice to any person or party having a valid reason to file an opposition to the issuance of such license as a stockbroker and/or dealer in securities within 10 days from date of publication.II. REGISTRATION/ LICENSING OF SALESMEN

1. Only such natural person2. Application for salesman shall be filed in SEC form No.4 in two

copies verified under oath by such stockbroker or dealer in securities as principal of the salesman

3. Every application shall be accompanied by three (3) testimonial letters vouching to the good moral character of applicant.

4. A filing fee of P100.00 shall be collected by the Commission upon filing of the application.

5. If the applicant is applying for a salesman’s license for the first time, he

should pass a written examination to be given the BED.III. Every registration issued under these rules shall expire on the 31st day of December of the year in which it is issued,

a. the new registration/license for the succeeding year may be issued upon written application and upon payment of the fee without filing of the further statements or furnishing any further information unless specifically required by the Commission.

b. application for the renewals must be made not less than 30 days but not more than 60 days before the first day of the ensuring year, otherwise they shall be treated as original application

IV. All securities issuers, selling their own securities without the intervention of duly licensed brokers or dealers in securities, are deemed dealer pursuant to Sec.19 of the Revised Securities Act and shall be licensed as such dealers in accordance with this rules.

 V. Effectively – these rules shall take effect immediately.

Restriction on borrowings by members, brokers, and dealersSec. 24 of the Revised Securities Act considered it unlawful for any registered brokers or dealer member of securities exchange, or any broker or dealer who transacts a business in securities through the medium of any member of a securities exchange, directly or indirectly:

1. To permit in the ordinary course of business as a broker his aggregate indebtedness to all persons including customers’ credit balances, to exceed such percentage such of the net capital in the business but not exceeding in any case 2,000 %, as the commission may by rules and regulations prescribe as necessary or appropriate in the .public interest or for the protection of investors.

2. To pledge, mortgage or otherwise encumber or arrange for the pledge, mortgage or encumbrance of any security carried for the account of any customers under circumstances:

a. That will permit the comingling of his securities without his written consent, with the securities of any customersb. That will permit such securities of any person other than a bona fide customer. or,c. That will permit such securities to be pledged, mortgaged or encumbered, or subjected to any lien or claim of the pledge, for a sum in excess of the aggregate indebtedness of such customers in respect of such securities

But regards to the protection of the investors may allow certain transactions that may otherwise be prohibited under this paragraph.

3. To lend or arrange for the lending of any security carried for the account of any customers without the written consent of such customers or in contravention of such rules and regulation as the commission may prescribe for the protection of investors.

Exempt securitiesSec.5 of the Revised Securities Act enumerates the different classes of securities to as “exempt securities”.

1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof or by any of its public instrumentalities, or by any person controlled or supervised by, and acting as an instrumentality of said Government or any certificate of deposit for any of the foregoing.

2. Any security issued or guaranteed by the government of any country with which the Philippines is, at the time of the sale or offer of the sale thereof, maintaining diplomatic relations, or by any state, province or political subdivision thereof having the power of taxation or assessment, which security is recognized at the time of the sale or the offer to sell in the Philippines as a valid obligation by such foreign government or by such state, province or political subdivision thereof using the same.

3. Any security issued or guaranteed by any banking institution authorized to do business in the Philippines, the business of which is substantially confined to banking or financial institution licensed to engage in quasi-banking, and supervised by the Bangko Sentral

4. Any security issued by a building and loan association, non-stock savings and loan association, or similar institutions, substantially all the business of which is confined to the making of loans to members but does not include any such security where the issuer takes from the total amount paid o deposited by the purchaser, by way of any fee, cash value or other device whatsoever, either upon termination of the investment at maturity or before maturity an aggregate amount in excess of 3% of the face value of such security; or any security issued by rural credit associations or by cooperative marketing associations which are subject to regulations and supervision by the proper government agency

5. Certificates issued by a receiver or by a trustee in bankruptcy duly

approved by the court 6. Any insurance or endowment policy or annuity contract, or

optional annuity contract, issued by a corporation subject to the supervision of the Insurance Commission.

7. Any security covering any right or interest in real property, including a subdivision lot or a condominium unit, where the sale or transfer of such security is subject to the supervision and regulation of the Housing and Land Use Regulatory Board or any of its authorized constituents or, attached agencies.

8. Pension plans subject to regulation and supervision by the Bureau of Internal Revenue and/or the Insurance Commission.

Exempt Transactions The sales of any security in any of the following

transactions are exempted from registration. To wit (Section 6, RSA):

1. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.

2. By or for the account of a pledge holder, or mortgagee, or any other similar lien holder selling or offering for sale or delivery in ordinary course of business and not for the purpose of avoiding the provision of the Revised Securities Act, to liquidate a bona fide debt, a security pledged in good faith as security for such debt.

3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security.

4. The distribution by a corporation, actively engaged in the business,

authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.

5. The transfer or exchange by one corporation to another of their own securities in connection with a consolidation or merger of such corporations.

6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.

7. The issuance and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion, provided that the security so surrendered has been registered and permitted to be sold under the Revised Securities Act, or

was, when sold, exempt from the provisions of the said Act, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under the said Act.

8. Broker’s transactions, executed upon customer’s orders on any exchange or in the over-the-counter market but not those made upon the solicitation by brokers of such orders.

9. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking, of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a proposed corporation which should be subscribed before it can be registered and duly incorporated.

10. The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

11. Any issuance of any security by a public utility or service corporation which, in compliance with or pursuant to law, regulation or decree, is intended to broaden its equity base as well as to finance a part of the capital investment thereof through the issuance and sale of stocks.

the end

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