SEC overhauls securities law’s implementing rules

THE SECURITIES and Exchange Commission has overhauled the implementing framework for domestic securities regulation to give corporations more leeway in raising funds, plug regulatory loopholes and incorporate global best practices.

The SEC en banc recently approved the 2015 Securities Regulation Code (SRC) which expands the shelf registration program and streamlines certain requirements on the public offering of debt or equity securities. The new implementing rules and regulations (IRR) also refine the tender offer requirements, oftentimes a contentious issue during corporate take-overs.

The 2015 SEC rules also addresses regulatory gaps and boosted market and regulatory structures. The adoption of global best practices was also meant to ensure that the players would be able to meet the challenges posed by increasing market sophistication and regional integration.

“I am pleased that the SEC has completed this very challenging project,” SEC chair Teresita Herbosa said in a press statement. “We received significant inputs on this rule-making, and in response we incorporated many changes from the proposals that are designed to address varying concerns. I believe the final version faithfully implements the statutory requirements as mandated by SRC.”

The salient features of the revised implementing rules are as follows:

-The mandatory tender offer rules have been revised to provide for two levels of action, depending on the threshold triggered: a disclosure action; and mandatory tender offer action. The rules also provide for a set of guidelines in the conduct of valuation and issuance of fairness opinion.

– Shelf registration is expanded. Under a shelf registration program, securities to be issued in tranches may be registered for an offering to be made on a continuous or delayed basis for a period not exceeding three years.

– Commercial paper is now simply defined as evidence of indebtedness of any person with a maturity of 365 days or less. The new rules ceased using the terms of long term commercial paper and short term commercial paper. Selling commercial papers is also made easier with the requirement of an issuer rating instead of a separate rating for each issuance.

– A new category of exempt security is introduced. This involves securities issued or guaranteed by multilateral financial entities (MFEs) established through a treaty or binding agreement to which the Philippines is a party.

– Public offerings which have a limited character are also exempt from registration. Such offerings will be exempt as long as the covered securities are available only to the parties or persons named in the application for exemption for a specified period. An example of this are the employee stock option plans (ESOPs) issued by a corporation to its eligible employees.

– Underwriters are no longer required to underwrite securities solely on a firm commitment basis. They can agree on a different plan of distribution with the issuing company subject to the approval by the SEC. However, as a general rule, issuers of registered securities, except issuers of proprietary/non-proprietary membership certificates or shares, are still required to enter into an underwriting agreement with an investment bank or investment house.

– The period to sell securities is expanded. The period to sell securities which are subject of registration statement is extended from two days to 10 business days from the date of the effectivity of the registration statement.

Requirements for “qualified” buyers or those allowed to participate in private and typically more sophisticatedly structured offering of securities are relaxed. The financial capacity of individuals to qualify had been reduced to P10 million in annual gross income from P25 million previously. Any verifiable document may now be submitted to prove financial capacity. Income tax return is optional.

The SEC also adopted a new policy to extend the effectivity of financial statements to 180 days from 135 days to align with the ASEAN (Association of Southeast Asian Nation) standard as part of ASEAN market integration. This policy will be formalized as part of the amended SRC Rule 68 (Special Accounting Rules) which the SEC will release separately at a later date. In the meantime, issuers can avail of this extension by filing a request for exemptive relief with the SEC.

A copy of the 2015 SRC Rules may be downloaded from the SEC website at www.sec.gov.ph.

The initial draft of the proposed amendments was exposed for public comment in 2011. Subsequently, the SEC conducted a series of consultations with market participants and various stakeholders. The final draft of the rules was adopted after SEC carefully reviewed and considered the relevant comments from stakeholders.