1995 corp disclosure requirements

Copyright 1994-2010 CD Technologies Asia, Inc. Securities and Exchange Commission 2009 1

1995

CORPORATE DISCLOSURE REQUIREMENTS

A Primer

PHILIPPINE STOCK EXCHANGE

Volume 1

1995

Table of Contents

Corporate Disclosure Requirements: A Primer

Insider Trading

"Short-Swing" Liability

Quick Guide on Corporate Disclosures

Continuing Listing Requirements

Corporate Disclosure Requirements: A Primer

PSE Principle

Q: What is the PSE's principle on corporate disclosure?


A: The basic principle of the Philippine Stock Exchange, Inc., ("PSE" or the

"Exchange") is to ensure full, fair, timely and accurate disclosure for all

listed companies. This principle is founded in Article 1 of its By-laws

which states:

"Sec. 1. The Principles and foundation of the Philippine Stock

Exchange hereinafter referred to as the Exchange are as follows:

xxx xxx xxx

(c) It shall uncompromisingly adhere to the highest ethical standards,

to ensure full, fair, timely and accurate disclosure at all times of material

information that may affect the value and trading of listed securities.

xxx xxx xxx."

Q: What is the purpose behind this principle?

A: It is the position of the Exchange that a fair and orderly market demands

that all listed companies make available to the public information

necessary to enable holders of the listed securities and the public to

appraise the position of the listed company; and to take reasonable steps

to ensure that all who invest in its securities enjoy equal access to such

information. cd

Q: What are the kinds of disclosure?

A: There are two kinds of disclosure: the structured and the unstructured

continuing disclosures.

Ensuring Full & Timely Disclosures Structured Continuing Disclosure

Q: What are structured Continuing Disclosures?

A: Structured Continuing Disclosures are the periodic reportorial

requirements required by the Securities and Exchange Commission ("SEC or the

Commission") and the PSE. The purpose of these structured disclosures is to

assure the public availability of continuing adequate information on publicly

listed companies. The following are the reportorial requirements required by the

Exchange as found in Chapter 9 of the PSE Listing Manual:


(1) Audited Annual Financial Report — to be furnished the Exchange not

later than 105 days after the end of its fiscal year. 200 copies must be

provided the Exchange for distribution. (SEC Cir. 7 Series of 1988).

(2) Annual Report — to be furnished the Exchange 15 days from Annual

Meeting. 200 copies must be provided the Exchange for distribution.

(SEC Cir. 7 Series of 1988).

(3) Semi-Annual Report — to be furnished the Exchange within 60 days from

the end of the first semester of fiscal year. 200 copies must be provided

the Exchange for distribution.

(4) Quarterly Report — to be furnished the Exchange within 30 days from the

end of the Quarter. 200 copies must be provided the Exchange for

distribution. (SEC.-BED Cir. No. 1 Series of 1987)

(5) Report on Beneficial Ownership as required by Section 36 of the Revised

Securities Act, which shall be filed within 10 days after the close of each

calendar month.

(6) List of stockholders entitled to vote in an annual or special stockholders

meeting as may be required by the Exchange.

(7) Annual Verification of the Bureau of Mines for mining companies.

(8) Duplicate original of every other information, documents, and reports

submitted to the SEC pursuant to Sec. 11 of the Revised Securities Act

(RSA).

UNSTRUCTURED CONTINUING DISCLOSURE

Q: What is unstructured continuing disclosure?

A: Unstructured disclosure is the communication of corporate developments

to the investing public as they occur. aisadc


Q: Is there a SEC rule on unstructured corporate disclosure?

A: Yes. The SEC rule on unstructured corporate disclosure can be found in

Sec. 11 (A-3) of the Revised Securities Act which requires every issuer

of a security registered pursuant to this Act to file with the Commission

such annual reports and such periodicals and other reports as may be

necessary to update information on the operation of the business of the

issuer or registrant.

Q: Is there a PSE rule on unstructured corporate disclosure?

A: In addition to the various SEC rules, the PSE has disclosure regulation to

which companies must adhere. Recently, the PSE added Chapter 10 to

its listing rules to clarify a listed company's disclosure obligations to the

public and to the PSE Compliance and Surveillance Department

regarding material news, unusual market activity and rumors and to

further clarify the function of temporary trading halts.

Q: What is the PSE rule on unstructured corporate disclosure?

A: A listed company is required to keep the PSE and the Commission

promptly informed by phone or fax immediately, i.e. at least 10 minutes

after, and confirmed in writing within 2 hours of any material

information or corporate act, development or event. During trading

hours, a listed company should inform the Compliance and Surveillance

Department by phone at least 10 minutes after and to be immediately

confirmed by fax.

All unstructured corporate disclosures should be addressed to the attention of

the Compliance and Surveillance Department of the Exchange.

Q: What standards and tests should be employed to determine whether

disclosure should be made?


A: Immediate disclosure should be made of information about company's

affairs or about events or conditions in the market for the company's

securities which meets either of the following standards:

(1) where the information is necessary to enable the company and the public

to appraise their position or standing; or

(2) where such information is necessary to avoid the creation of a false market

for its securities; or

(3) where such information may reasonably be expected to materially affect

market activity and the price of its securities.

Thus, the test in determining if immediate disclosure should be made: A

material fact does not have to be a decision-changing fact. [The practical test is: Is it a

market-moving event? Is it likely to move the stock price if disclosure is made?]

Whether or not the investor would have changed his or her decision is not a test in

determining if immediate disclosure should be address made. cda

Q. What kind of information helps the public to appraise their position?

A: Material information with a significant impact in the listed company's

operations such as those relating to the issuer's financial condition,

prospects, development projects, contracts entered into in the ordinary

course of the business or otherwise, mergers and acquisitions, dealings

with employees, suppliers, customers and others, as well as information

concerning a significant change in ownership of the company's securities

owned by insiders or representing control of the company.

Q: What are some specific examples of a company's affairs or market

conditions typically requiring disclosure?

A: The following events, while not comprising a list of all the situations

which may require disclosure, are particularly likely to require prompt

disclosure.

(a) Any declaration of a cash dividend, stock dividend and pre-emptive

rights by the Board of Directors;

(b) The holding of any stockholders' meeting;

(c) A tender offer, take-over or reverse take-over and a merger for another

corporation's securities.

(d) Capitalization issues, options, directors/officers/employee stock option

plans, warrants, stock splits and reverse splits;


e) All material resolutions taken up in a stockholders' meeting of the issuer;

(f) All call to be made on unpaid subscriptions to the capital stock of the

issuer;

(g) Any change of address of the registered office of the issuer or of its

transfer agents;

(h) Any change in the directors, officers, auditors or transfer agent of the

issuer;

(i) Any proposed amendment to the Articles of Incorporation and By-Laws;

(j) Any change in shareholdings of directors, officers and stockholders

owning more than 10% of any class of any security, as provided for

under Sec. 36, Chapter IV of the Revised Securities Act;

(k) Any action filed in court, or any application filed with the SEC, to

dissolve or wind-up the issuer or any of its subsidiaries, or any

amendment to the Articles of Incorporation shortening its corporate

term; or any significant litigation that will affect the corporation;

(l) The appointment of a receiver or liquidator for the issuer or any of its

subsidiaries;

(m) Any acquisition of shares of another corporation or any transaction

resulting in such corporation becoming a subsidiary of the issuer;

(n) Any acquisition by the issuer of shares resulting in its holding 10% or

more of the paid-up capital of another listed corporation or where the

total value of its holdings exceeds 5% of net assets of an unlisted

corporation;

(o) Joint ventures, mergers, consolidation, take-overs, reverse take-overs

and acquisitions; cdasia

(p) Any sale made by the issuer of its shareholdings in another listed or

unlisted corporation,

i. resulting in such corporation ceasing to be its subsidiary;

ii. resulting in its shareholding falling below 10% of the issued

capital stock;

(q) Firm evidence of significant improvement or deterioration in near-term

earnings prospects;

(r) The purchase or sale of significant assets;

(s) A new product or discovery;


(t) The public or private sale of a significant amount of additional

securities;

(u) A call for redemption of securities;

(v) The borrowing of a significant amount of funds;

(w) Default of financing or sale agreements;

(x) A significant change in capital investment plans;

(y) A significant dispute or disputes with subcontractors, customers or

suppliers, or with any other parties.

Disclosing Cash Dividends

Q: How should a corporation disclose a declaration of cash dividend?

A: Disclosure of cash dividend declarations should be made as follows:

(1) The corporation is required to notify the Exchange by phone, after 10

minutes, and immediately confirmed in writing by fax after the

declaration of cash dividends by the Board of Directors.

(2) The record date set by the corporation shall not be less than 10 nor more

than 30 days from the declaration. In case no record date is specified, the

record date shall be deemed fixed at fifteen (15) days from such

declaration. [Secs. 3 and 10 of the Amended Rules Governing

Pre-emptive and other Subscription Rights and Declaration of Stock or

Cash Dividends of Corporations whose Securities are Registered under

the Revised Securities Act or Listed in the Exchange, April 12, 1991].

Disclosing Stock Dividends

Q: How should a corporation disclose a declaration of stock dividends?

A: If the stock dividend is from the unissued:

(1) The corporation is required to notify the Exchange by phone, after 10

minutes, and immediately confirmed in writing by fax after the

declaration of stock dividends by the Board of Directors.

(2) All corporations declaring stock dividends must secure approval of

stockholders within 45 days from such declaration, notify the Exchange

by phone and immediately confirmed in writing by after the ratification

of the stock dividend by the stockholders specifying the amount of the

stock dividend. The Exchange requires that it be notified by phone or fax

within 10 minutes


(3) The record date set by the corporation shall not be less than 10 nor more

than 30 days from the approval of the stockholders. In case no record

date is specified, the record date shall be deemed fixed at fifteen (15)

days from such approval. Provided, however, that the record date shall

not be less than 10 trading days from receipt of notice by the Exchange.

[Secs. 2 and 10 of the Amended Rules Governing Pre-emptive and other

Subscription Rights and Declaration of Stock or Cash Dividends of

Corporations whose Securities are Registered under the Revised

Securities Act or Listed in the Stock Exchange, April 12, 1991]. cdt

If the stock dividend is taken from an increase in authorized capital stock:

(1) Upon the declaration of the stock dividend by the Board of

Directors, the corporation should notify the Commission and the

Exchange within 10 minutes by phone after the Board's meeting

declaring the stock dividend and immediately confirmed in writing

by fax.

(2) The approval of the stockholders must be secured within 30 days

from the declaration of the Board.

(3) Within 45 days from the date of the approval of the stockholders,

the application for the increase in authorized the capital stock and

for the registration of the securities must be filed with the

Commission together with all requirements necessary for approval

and within the same period the application for listing of shares to

cover the dividend declaration shall be filed with the Exchange.

(4) The record date shall be fixed by the Commission which shall not

be less than 10 days or more than 30 days after all clearances and

approvals by the Commission shall have been secured.


Disclosing Pre-emptive Rights

Q: How should a corporation disclose pre-emptive rights declaration?

A: Pre-emptive rights should be made as follows:

(1) Upon the decision by the Board of Directors to offer pre-emptive rights by

the Corporation, notice thereof shall be sent to the Commission and the

Exchange within 10 minutes by phone from the approval and

immediately confirmed in writing.

(2) In making the disclosure, the Corporation shall state the ratio, offer price,

record date, payment terms and the offering period of the rights issue.

(3) If the offered shares shall come from an increase in authorized capital

stock, the Articles of Incorporation should be first amended and

approved by the SEC to reflect the increase.

(4) The Corporation, subject to the approval of the Exchange, may set the

record date for pre-emptive rights provided it has obtained a favorable

endorsement form the Listing Committee. The record date shall not be

less than 10 trading days from receipt of notice by the PSE. cdtai

Disclosing Stockholders' Meeting

Q: What are the rules in disclosing stockholders' meeting?

A. For the holding of any stockholders' meeting and its agenda, the Exchange

must be given at least ten (10) trading days written notice before the

stockholders' meeting.

Q: What rule should be observed in disclosing stockholders who are entitled

to vote and the closing of books?

A: The Exchange shall be given not later than five (5) trading days after the

record date fixed by the issuer the list of stockholders who are entitled to

notice and to vote at a regular or special stockholders' meeting; and to

give ten (10) trading days notice prior to the closing of transfer books.

Disclosing Pre-Emptive Rights, Stock Dividends and Cash Dividends of

Exempt Securities (i.e. commercial banks)

Q: Are "Exempt Securities" excused from complying with the SEC-Amended


Rules Governing Pre-Emptive and other Subscription Rights and

Declaration of stock or Cash Dividends of Corporations Whose

Securities are Registered under the Revised Securities Act or Listed in

the Stock Exchanges?

A: No. Exempt securities are not excused from complying with the

abovementioned SEC Rule. The said securities are only exempt from the

registration requirements. Thus they must comply with the said Rules as

well as those pertaining to the full disclosure requirements of the

Revised Securities Act.

TRADING OF SECURITIES ON EX-BASIS

Q: How is the Ex-date determined?

A: According to Circular No. 402 dated September 7, 1995, effective

September 22, 1995, "Whenever listed companies announce a date for

closing of books or a record date for any of their corporate action, the

Exchange shall automatically determine the ex-date for which

transactions prior to this ex-date shall be entitled to the announced

corporate action (stock and cash dividends, stockholders' meeting, rights

offering, etc.). This ex-date shall be computed as seven trading days

before the announced record date."

ENSURING ACCURATE DISCLOSURES

Rules in Writing Disclosures

Q: How should a disclosure or public announcement be worded?

A: As stated earlier in Art. 1 of the PSE By-Laws, disclosures should not only

be fair and timely but also full and accurate. Clearly, while the Exchange

does not approve the announcement nor guarantees its accuracy when it

discloses the same to the members, a listed company should not make a

false statement in a public announcement. Thus, in preparing the

contents of a disclosure or public announcement, a listed company

should be guided by the following:

(1) Be factual, clear and succinct and avoid boosterism;

(2) Contain sufficient quantitative information to allow investors to evaluate

its relative importance to the activities of the listed issuer;

(3) Bad news should not be buried or concealed. It must be disclosed in the


same manner and with the same clarity and emphasis as good news. Its

impact must not be minimized by equivocal or misleading statements. cdtai

Q: What is the PSE policy on boosterism on disclosures?

A: It is the PSE's policy that boosterism on the disclosures should be avoided.

This is also known as "unwarranted promotional disclosure activity."

Q: What is boosterism on disclosures?

A: "Boosterism on disclosures" or "promotional disclosure activity" are

disclosures from listed companies which exceed that which is necessary

to enable the public to make informed investment decision. Such activity

includes in appropriately worded news release, public announcements

not justified by actual developments in the company's affairs,

exaggerated reports or predictions, flamboyant wording and other form

of overstated or over-zealous disclosure activity which may mislead

investors and cause unwarranted price movements and activity in a

company's securities, omission of important unfavorable facts, or the

slighting of such fact, presentation of favorable possibilities as certain,

or as more probable than is actually the case, presentation of projects

without sufficient factual basis, and negative statements phrased so as to

create a positive implication.

Soft information

Q: What listed company activity or development may not be required to be

disclosed?

A: Soft information is not required to be disclosed. Soft information is an

information that is indefinite in nature where it is in the company's and

shareholder's interest to wait until it is certain before it is disclosed to the

public.


Q: What does soft information include?

A: Soft information includes:

1. "Forward looking" or predictive information — e.g. earnings forecasts,

financial projections.

2. Subjective, evaluative information — e.g. management's beliefs and

opinions asset appraisals.

3. Uncertainties and developments in process — e.g. corporate transactions

in the planning stage or preliminary negotiations, bid submissions.

Forward Looking Statements

Q: What are forward looking statements? How should forward looking

disclosures be prepared?

A: Forward looking statements are disclosures about the company's future

prospects. Forward looking statements include not only projections or

estimates but also subjective statement about a company's view of the

future. Of all types of disclosure statements, forward looking statements

create the greatest risk of facing a plaintiff class action. Thus, the

following guidelines may be used in preparing forward looking

statements:


1. In making public estimates of revenue and earnings, it is important that the

external statements be consistent with internal planning and budgeting

documents, and of refraining from making optimistic forward looking

statements at times when the company is in possession of undisclosed

information that might seriously undermine the statement. [In re Adobe

Systems, Inc. Securities Litigation, 787 F. Supp. 912 (N.D. Cal. 1992)]. cdt

2. Corporate managers have to be aware not only of the own disclosures, but

of what others are saying about their company which requires a

disclosure which must be transmitted with a degree of intensity and

credibility, sufficient to effectively correct or counter-balance any

misleading impression created by the one-sided representations. [In re

Apple Computer Securities Litigation, 886 F. 2d 1109 (9th Cir. 1989)].

3. Forward looking statements, even if reasonable at the time they are made,

can continue to alter the legal landscape for months to come. [If

subsequent events or information casts significant doubt on the

continued reliability of an earlier statement, there may be a legal duty to

correct that statement.] Moreover, even if there is no duty to

affirmatively correct a previous statement, the fact that it is no longer

reliable in light of subsequent events has an impact on what subsequent

statements the company can make. Therefore, when planning a public

statement, it is necessary to consider and take into account what previous

statements have been made, and whether or not they have been affected

by subsequent events. [Kirby vs. Cullinet Software, Inc., 721 E Supp.

1444 (D.MA. 1989)].

Preliminary Negotiations

Q: What are the issues to be considered in preliminary negotiations?

A: The issues to be considered in preliminary negotiations are:

* when does the company start disclosing;

* when does the negotiation become material.

Q: Is there a duty to disclose preliminary negotiations?

A: No. A listed company is not required to disclose even if the preliminary

negotiation is material. This has been upheld by the U.S. Supreme Court

in the 1988 case of Basic Vs. Levinson (108 S. Ct. 978, 1988) that there

was no inherent duty to disclose the existence of merger negotiations as

long as the public company maintains a consistent silence and "no


comment" position about the existence of negotiations.

Q: When then is the company, engaged in preliminary negotiations, required

to disclose to the Exchange?

A: Before the Basic vs. Levinson Case, the basic rule adopted was the

agreement-in-principal test which means that there was already an

agreement between the parties on the price and structure of the proposed

transaction. This guideline was however rejected by the U.S. Supreme

Court in the Basic case. In the Basic Case, the court used the

probability/magnitude test where events are speculative or contingent,

i.e. — the question of materiality will depend at any time upon

balancing the probability that the merger negotiation will lead to an

agreement and the anticipated magnitude of the event in light of total

company activity. cd

Q: What factors determine the existence of the probability/magnitude test?

A: This is determined on a case-to-case basis, such as, the degree of interest

in the transaction at the highest corporate levels. With regard to the

magnitude of the transaction, facts such as the size of the different

companies involved and the potential premiums over current market

price must be considered.

Q: What instances require disclosure during the preliminary negotiations?

A: (1) When trading in the company's stock, the company or its directors may

have a duty to disclose material information they possess before

engaging in any transaction.

(2) When confidentiality is not maintained resulting in a leak of the

information.

(3) When disclosure is necessary to correct an earlier affirmative statement

that would be misleading absent disclosure of the negotiation.


(4) SEC rule requiring disclosures such as the quarterly reports.

(5) When the listed issuer receives a notice of intention to make a tender-offer

or take-over offer.

(6) When the information is requested by the PSE through the Compliance

and Surveillance Department.

Q: In the preceding instances, how does the company make the disclosure?

A: If the company chooses to make a statement on preliminary negotiations,

the statement must be true and complete. In addition, it must be

responsible enough to update the information disclosed when material

changes in the information occur.

Q: What are the sanctions against false and misleading disclosures?

A: As stated, while the Exchange is not obligated to check or approve the

announcements, where suspicious of falsity arise, the same may be

checked. In instances where falsity is verified, the Exchange may in

serious cases delist the corporation. In other instances, the Exchange

may file a report of the fraud committed to the SEC for its proper action

such as suspension or revocation of the registration of securities. (Secs.

15 & 16, RSA). Moreover, the person or corporation responsible for the

false disclosure may be sued in court to recover the consideration paid

for such security with interest thereon, less the amount of any income

received thereon, upon tender of such security, or for damages if he no

longer owns the security. In addition, exemplary damages may likewise

be awarded in cases of bad faith, fraud, malevolence or wantonness.

(Sec. 13, RSA).

Q: Is there any prescriptive period in filing an action based on false

statements?

A: Yes. Under Sec. 14 of the RSA, no action shall be maintained to enforce

any liability on false statements (Secs. 12 & 13, RSA) unless brought

within two years after the discovery of the facts constituting the cause of

action and within five years after such cause of action accrued.

COMMUNICATING THROUGH THE PRESS AND MARKET ANALYSTS

Press and News Releases


Q: Are press releases prohibited?

A: Generally speaking, press releases are not prohibited provided the SEC

approval to the same (pursuant to the SEC Rules) was acquired prior to

the release. cdasia

Q: What is the purpose of the SEC rule requiring their approval to the

releases?

A: The reason behind this requirement is to assure the public of the veracity

and authenticity of the facts stated in the releases.

Q: What happens if the Exchange receives a press release without the

stamped approval of the SEC-BED?

A: A Trading Halt will be issued when the Exchange receives a press release

from a company which does not have an SEC-BED stamp of approval.

The trading halt will immediately be lifted after the approved press

release has been disseminated to the member-brokers of the Exchange.

This prevents any person to take undue advantage of the information.

Q: Is the PSE's approval to the press and news release required?

A: No. As stated, the Exchange does not approve the contents of the

disclosures submitted for public dissemination.

Q: Is the PSE's approval necessary prior to its release to the public?

A: No. If the release is to be given during trading hours, the exchange requires

that a copy of the press release be submitted to the Exchange at least 30

minutes prior to the public release to enable the Exchange to appraise if

the news in the release is significant enough to warrant a trading halt.

Q: If the approval of the Exchange is not necessary to disseminate a press

release, why does the Exchange monitor and write listed companies


about releases in newspapers or media?

A: The Exchange writes the companies regarding news found in print and

media to verify the reports stated as most of the news printed or

announced by the media shows material information which the

Exchange is not informed of. Thus it should be stressed that press

release do not relieve the listed company from disclosing material

information to the Exchange by phone or fax within 10 minutes and

confirmed in writing within 2 hours of any corporate meeting or activity

or agreement.

Q: What is the basis of the Exchange to require that copies of press releases

be provided them?

A: Sec. 11 of RSA which mandates that every issuer of a security registered

with the Exchange shall file a duplicate original of such information,

documents, and reports required by the SEC with the Exchange.

Talking to Analysts

Q: Can a listed corporation disclose non-public material information to

analysts?

A: U.S. cases are unanimous in holding that selective disclosure of material

information when the same is not yet public is discouraged as buying on

the basis of the information makes the analyst or his clients liable for

insider trading. Thus, information received or obtained by an analyst of

prior to public disclosure cannot be used by the analyst.


ANSWERING RUMORS AND REPORTS

Q: Is a listed company required to clarify or confirm rumors or reports not

originating from them?

A: Yes. A public circulation of information, whether by an article published in

a newspaper, by a broker's market letter, or by word of mouth, either

correct or false, which has not been substantiated by the issuer and

which is likely to have, or has had, an effect on the price of the issuer's

securities or would likely to have a bearing on investment decisions by

investors must be promptly and properly clarified or confirmed.

Q: Why should a company correct a false rumor or report that did not

originate from them?

A: It is necessary for the company to correct a false rumor or report to prevent

the creation of a false market. In addition, if the company keeps its

silence, it might be construed by the investing public as a tacit approval

by the company of the rumor, release or report.

Q: How should a company correct a rumor? cdt

A: Rumors or reports of a supposedly factual basis is such that it is manifestly

based on erroneous information, or the listed company or any of its

executive officers is wrongly attributed as the source. the listed company


should respond promptly to the supposed factual elements of the rumor

or report. If a rumor or report contains a prediction that it is clearly

erroneous, the listed issuer should issue should issue an announcement

to the effect that the issuer itself has made no such prediction and

currently knows of no facts that would justify making such a prediction.

ENSURING FAIR DISCLOSURES

TRADING HALTS

Q: What is a trading halt?

A: A trading halt is a temporary halt or suspension of the trading of the listed

company's securities through the facilities of the Exchange.

Q: What causes a trading halt? What is its purpose?

A: Trading halts are caused by a significant material information or

announcement known to a few and which has not been disseminated to

the Exchange. Its purpose is to enable all market participants to have an

equal opportunity to see the news, digest it and understand its full

impact. It is usually done when the disclosure is made during trading

hours. The Exchange may halt the trading of the listed company's

securities to provide an opportunity for the material information to be

properly disseminated.

Q: Is a trading halt automatic for all disclosures given during trading hours?

A: No. As explained earlier, the Exchange requires notification by phone at

least 10 minutes after the meeting or agreement/event and to be

immediately confirmed in writing by fax. The purpose for this

requirement is to enable the Compliance and Surveillance Department to

make a determination whether the announcement is important enough to

warrant a halt in the trading of the securities. aisadc

Q: How long does a trading halt last? When will trading be resumed?

A: From the time the Compliance and Surveillance Department determines

the existence of a material information that has not been disseminated to

the public, a trading halt will be enforced until after one hour from

distribution of the notice by the Department to the public or the next day

if the notice is circulated after trading hours.


Q: What are the benefits of a trading halt?

A: A trading halt benefits the investing public because somebody with the

news is unable to take advantage of somebody else who does not know it

yet. It therefore puts the investing public and the insider in the same

position. It also benefits the company because it gives them an

opportunity while trading is halted, to talk to analysts and express their

view to the analysts. In the U.S., some companies request for trading

halts so they can arrange a conference with all analysts.

Q: Why does the exchange implement a trading halt in spite of a submission

of a press release?

A: In cases of press releases, a trading halt is implemented only when the

press release submitted was not approved by the SEC. The reason for the

halt in trading is the inability of the Exchange to disclose the information

to the public in the absence of the SEC approval.

FREEZING DUE TO UNUSUAL

TRADING ACTIVITY

Q: What is unusual trading activity?

A: Unusual trading activity occurs when the trading of the securities of a

listed company is active without any apparent publicly available

information which could account for the activity.

Q: What is the implication when unusual trading activity occurs?

A: Unusual trading activity may signify trading by persons who are acting

either on unannounced material information or on a rumor or report,

whether true or false, about the company.


Q: What action is undertaken by the Exchange in this situation?

A: If the trading price of the shares moves 50% upward or 40% downward

from the previous closing price, the price of the securities is frozen.

Q: Is trading still allowed during a price freeze?

A: Yes. When freezing occurs, trading is still allowed but the movement of

the price is not allowed to move up beyond 50% or move down beyond

40% from the previous closing price.

Q: What is the reason for freezing the prices?

A: When unusual trading activity occurs, the market action itself may be

misleading to investors, who are likely to assume that a sudden and

appreciable change in the price of a listed issuer's securities must reflect

a parallel change in its business prospects.

Q: Does unusual trading activity occur only when the prices move upward by

50% and downward by 40%? cdtai

A: No. Unusual trading activity occurs even if the prices do not move 50% or

40%, when the Department determines there is unusual trading activity,

the Department will make inquiries with the listed company if they are

aware of any reason that would justify the unusual trading. The listed

company must respond promptly to any inquiries made by the Exchange.


Q: What guidelines should the company apply when responding to inquiries

of the Exchange?

A: In responding to inquiries of the Exchange, a listed company may be

guided by the following:

(1) If the unusual trading activity results from the "leak" of material

information, the information in question must be announced promptly. If

the unusual trading activity results from a false rumor or report, the

Exchange's policy on correction of such rumors and reports should be

complied with; and

(2) If the listed issuer is unable to determine the cause of the unusual trading

activity, the exchange may suggest that the issuer make a public

announcement to the effect that there are no undisclosed recent

developments affecting the issuer that would account for the unusual

trading activity.

Q: Does a halt or a suspension occur when an unusual trading activity is

detected?

A: No. A trading halt or a suspension is not utilized when unusual trading

activity occurs.

Q: Why does a halt occur when unusual trading activity is detected?

A: A trading halt is utilized when upon inquiry of the Compliance and

Surveillance Department, they were informed of a material information

not yet disclosed which in all probability is the cause of the unusual

activity. If the information of the Department cannot be disseminated

immediately, the Department will enforce a trading halt pending

disclosure.

Q: Can the listed company refuse to respond to the inquiries of the

Exchange regarding the unusual trading activity? If not, what sanctions


will be applied against the listed company?

A: No. In the event the listed companies refuse to respond to the inquiries

of the Exchange regarding the unusual trading activity, the Exchange

may suspend the trading of the securities.

PENALTIES:

Q: What is the penalty for non-compliance with the PSE disclosure

requirements?

A: Subject to the provisions on delisting, any violations of the terms and

conditions of the Listing Agreement and the Manual of Listing Rules of

the Exchange, except for fraud of the market, manipulation and other

offenses under the Revised Securities Act, shall make the issuer liable

for the following penalties within a period of twelve months:

First Violation P50, 000. 00

Second Violation of a

Similar Nature P75, 000. 00

Third Violation P100, 000. 00

Fourth Violation Suspension of trading the issue

for a period of one (1) month

Fifth Violation Ground for delisting

An additional fine of P1,000.00 shall be imposed for each trading day during

which the offense continues until and including the day on which the violation is

corrected. Failure to pay within one month from the imposition of the penalty will

result in the suspension of trading of the securities of the violator.

Offenses involving fraud, concealment, and other offenses specified in the

RSA shall be referred to the Board for its appropriate action.

THE GENERAL RULE


In cases of doubt as to whether disclosure should be provided or not, the

presumption must always be in favor of disclosure. However, if disclosure is to be

made, the disclosure must be full, fair, timely and accurate. aisadc

Types of Market Manipulation

1. What is manipulation?

Manipulation is defined as:

a. a series of transactions designed to raise or lower the price of the

security or to give the appearance of trading for the purpose of

inducing others to buy or sell;

b. an intentional interference with the free forces of supply and

demand; and

c. an economically irrational trading.

2. Do we have a policy against price manipulations?

The policy against price manipulations can be found in Sec. 26, 27, 28 & 29 of

the Revised Securities Act which states that:

a. Section 26a, Nos. 2 (i) and 6 entitled Manipulation of Security Prices:

"Sec. 26a: (2) To effect, alone or with one or more other persons, a

series of transactions in securities that (i) raises their price for the purpose of

inducing the purchase of a security, whether of the same or a different class, of

the same issuer or of a controlling, controlled, or commonly controlled company

by others;

(6) To effect, either alone or with one or more persons, any series of

transactions for the purchase and/or sale of any security registered in a securities

exchange for the purpose of pegging, fixing or stabilizing the price of such

security."

b. Section 27b entitled Manipulative and Deceptive Devices:

"Sec. 27b: To use or employ, in connection with the purchase or sale

of any security, any manipulative or deceptive device or contrivance;"


c. Section 28 entitled Artificial Measures or Price Control:

"Sec. 28: It shall be unlawful for any exchange to adopt and enforce

artificial measures of price control of any nature whatsoever without the prior

approval of the Commission which may be given only if it serves public interest

and benefits the investors;" and

d. Section 29 No. 1 entitled Fraudulent Transactions:

"Sec. 29: It shall be unlawful for any person, directly or indirectly, in

connection with he purchase or sale of any securities (1) To employ any device,

scheme or artifice to defraud . . ." cdtai

3. What are the common manipulation schemes?

A. HYPE AND DUMP MANIPULATIONS

1. Purchase of a privately owned company of that of a public shell company.

* A manipulator and his close associates may purchase the

outstanding capital stock of a dormant public shell company for a

nominal amount. They then merge it with their privately held

company.

* The manipulators would then gain control of a majority of the free

trading stock of the merged entity.

** The manipulator sometimes obtains possession and control

of certificates for the shell's stock from the stock transfer

agent, free of all restrictive legends.

** The shares of the shell company are often reverse-split

four-to-one or more to reduce the number of shares, or split

forward to increase the number of shares.

** Stock certificates are often reissued in the name of the

merged entity to relatives and associates of the manipulator

who acts as nominees under the manipulator's control.

** The "public float" (shares not under their control) is sharply

reduced.


* The manipulators would then look for a broker-dealer who is

willing to make a market in the stock of the newly merged

company.

* They would then hire a promoter who would "hype" the virtues of

the company, its products and the stock. The broker-dealer then

generates trading volume and advances the bid-price. When the

market price reaches a high level, the manipulators and his

associates would then bail out.

2. Formation of a new company.

* The manipulator and his associates usually formulates the idea of a

new company as well as their formation.

* They then actively promote the company to the broker-dealer

community.

* The company may effect a:

** blank check offering, which means that they will be free to

decide later on what business it will engage in and the

public is asked to invest in the company without knowing

what that business would be;

** blind pool offering which identifies only the general type of

business the company will engage in; and

** hot issue if it will purportedly engage in a trendy line of

business such as high technology, mergers or acquisitions.

* The officers and directors of the company may be related or

associated with the manipulators, have little work experience,

given large blocks of stock prior to the initial public offering and

may have agreed with the manipulators to resign at any given time.

* The shares of stock of the company usually go to the officers and

directors of the company and to associates or individuals who has

nothing to do with the company.

* The company may have very little private capitalization since it


depends on the proceeds of the initial public offering.

* The prospectus of the company is generally prepared by the

manipulator, without or little input from the nominee officers and

directors. It often contains false and misleading information

regarding the company's assets, prospects and offering proceeds. It

also falls to disclose the involvement of the manipulator and his

associates with any securities violations. It is then reviewed and

filed with the Commission by attorneys and accountants associated

with the manipulator.

* The offering is usually underwritten by a firm associated with the

promoter and securities are purchased by nominees with funds

loaned to them for that purpose. The underwriter, who is also the

lead market maker, dominates the market through price leadership

and control of "floating supply."

* When listed, match trades usually occur between and among

nominee accounts. Promotional materials, such as attractive

brochures, hype the stock to the desired level. After which, the

manipulators ball out and the market collapses.

B. BAIT AND SWITCH MANIPULATIONS:

1. Broker-dealers with boiler-room operations.

* These firms have branches all over the country with large customer

pools. They specialize in marketing low-priced

over-the-counter-securities. They hire young and inexperienced

people who employ specific and detailed marketing schemes. They

use high pressure sales techniques.

2. Underwriters.

* The broker-dealer underwrites the initial public offering of an

over-the-counter security of a company which they may have a

significant stake in.

* They promote the IPO of the new security by distributing periodic

brochures or newsletters which recommends the issue. They may


also hold meetings to promote the new company.

* The branch managers and sales representatives are provided with

various incentives to sell the new security such as permitting the

branch manager to purchase the shares in the IPO at discounted

prices. cdtai

* Various schemes are used by broker-dealers to control and profit

from the IPO such as:

** purchasing customers at certain branch offices for the

broker-dealers own account and in turn sell them to

customers at other branches at a higher price;

** disseminating false and misleading information about the

security to induce customers to sell their shares to the

broker-dealer at below market prices and in turn the

broker-dealer would sell the shares in the open market at

prevailing market prices.

C. HIGHEST BIDDER OR TRANSACTIONS AT PROGRESSIVELY

HIGHER PRICES

* The manipulator is usually the highest bidder in order to support or

raise the price of a security. This also happens when new investors

enter the market since it exhausts the supply of the securities thus

making the others raise their bid. This is also similar to pump and

dump.

D. TRADITIONAL OR CLASSIC MANIPULATIONS

1. Demand side Manipulation Schemes.

A. Commencing market with arbitrary quotes that bear no logical relation to

the issuer's business history, earnings, assets and products.

B. Marking the close.

* Upping the quoted inside bid at or near the close of the market to

send a positive signal to the market. A market maker will usually

drop its bid back at opening of market next morning, unless it has


captive accounts in which to place shares he had to purchase at

higher price.

* Purchasing the stock at or near the close of the market.

C. Painting the Tape.

* Buying activity among nominee accounts at increasingly higher

prices or causing fictitious transaction reports to appear on the

"ticker tape."

D. Squeezing the Short Interest.

* Calling for certificates in short sales to force sellers to purchase

more shares in the market to cover their short positions and

accordingly to increase the price of the stock.

* Engaging in wash sales to move shares from an account at one firm

to a new account at another firm to "squeeze" short sellers, thereby

forcing them to "cover" in the market at increasingly high prices.

E. Advancing the bid both to increase the price and to attract further trading

interest. This conduct is highly suspicious when retail sales exceed retail purchases. cdasia

F. Manipulation of Immediate After market.

* It is a case wherein the defendant oversold the IPO unit offerings

during the registration's waiting period. The other investors were

solicited to provide a check for the full indication of interest prior

to effective date. The underwriter then reduced the allocation for

each investor and placed the remainder of the shares in the hands

of the nominees. Prior to the opening of the after market, the

representatives of the defendants filed out order tickets for after

market trades at a pre-determined price. The after market opened

but the firm's trader began executing after market orders of the IPO

investors at a higher level. Thus, such action drove the increased

the actual market price to such level. In order to supply such

demand, the nominee accounts sold their shares with a profit.

* Another case is when an investor in an IPO are required to buy a

common stock in the immediate after market; and broker allocated


common stock for sale in the immediate after market at a series of

pre-determined and increasing "tick" prices, the lowest of which is

still higher than the actual price of the warrants.

2. Supply Side Manipulation Schemes.

A. Reducing the Floating Supply.

* Purchasing the significant amount of security's float which in turn

makes its price highly sensitive to demand.

B. Tying Up Large Blocks.

* This happens when brokers refuse to execute sell orders or when

they request their clients to withhold a significant number of shares

in relation to the trading float so as making the market sensitive to

demand.

3. Going on the Box.

* Inserting bid and asked quotations on the board before the

broker-dealer's participation in the distribution is complete.

4. Inducing after market purchases while in distribution

* It happens when brokers solicits indication of interest, requests

submission of checks from investors for the total amount and then

cuts back on the allocations to each investor using the balance of

the payment submitted to purchase shares in the aftermarket

pursuant to order tickets written before the aftermarket opens.

5. Entrance of improper stabilizing bid

6. Free Riding and Withholding

* The broker dealer is supposed to distribute the entire offering at the

public offering price and not withhold shares for registered

representatives and their families when the issue is likely to trade at

an immediate premium in the aftermarket.

7. Work Out Market


* It is when the trader acts essentially as a broker and in which a

customer offers to sell are not accepted unless an equivalent or

greater order to buy exists.

8. Scalping

* It is a practice in which a person, like an investment advisor,

purchases securities for his own account before recommending that

security and then sells the shares at a profit upon the rise in the

market price following the recommendation. cdtai

9. Reaching Across the Market

* This is to purchase shares above the manipulator's current

quotation. In order to raise the bid, the manipulator "takes out" the

asking price of the other market makers to prevent locking the

market when bid is made.

10. Raising the Price to Improve Exchange Ratio.

11. Churning.

* Excessive trading in an account, which usually result in buy/sell

activities against the financial interests of the customer.

12 Box in the Stock.

* It is when an individual has physical possession of a sufficient

number of the issuer's shares to control the market and to make it

nearly impossible for market makers to deliver the securities they

have sold by settlement date. This produces a thin market and

reduces liquidity. The manipulator then locks up the supply and

provides him the ability to sell when he desires and at a profit.

13. Daisy Chain.

* It is a pattern of fictitious trading activity by a group of persons

who lure the innocent people into the scheme who bails out the

manipulators. They are then left with the securities since there is no

one to sell it to.


14. Flipping.

* It happens when one office buys a particular stock for customers

while another office simultaneously recommends that its customers

sell the stock. Thus the stock is shifted from one office to the other.

The firm then makes a profit and the brokers receive commissions.

15. Ponzi Scheme.

* A fraudulent investment scheme whereby each tier of investors is

paid off using the money provided by each later tier of investors.

16. Chain Letter Rally.

* This occurs when speculators support the manipulators thereby

increasing the volume and price movement.

17. Wash Sales.

* When an order to buy and to sell is placed at the same time even if

beneficial ownership does not change.

18. Failure to Disclose.

* When there is a failure to disclose control or association of the

purchase or sale of a security which then allows a manipulator to

convey to the market that the demand or supply for securities is

genuine when in fact it is related to his own position.

19 Guarantees or Payments.

* Guaranteeing purchasers against loss or making payments to

induce others to purchase or sell the security. cdt

20. Use of Nominee Accounts.

* The use of a nominee or a fictitious account to manipulate a certain

stock conceals the actual control and purpose of the manipulators.

Insider Trading


General

Q: What is insider trading?

A: The illegal act of insider trading is discussed in Section 30 of the Revised

Securities Act of the Philippines as follows:

"a. It shall be unlawful for an insider to sell or buy a security of the

issuer, if he knows a fact of special significance with respect to the issuer or the

security that is not generally available, unless (1) the insider proves that the fact

is generally available or (2) if the other party to the transaction (or his agent) is

identified, (a) the insider proves that the other party knows it, or (b) that other

party in fact knows it from the insider or otherwise."

Q: What is the present policy of the PSE on insider trading?

A: Under Art. 1 of the PSE By-laws, the PSE is mandated to:

"(b) . . . strengthen itself into an effective and professional

self-regulating organization as it provides one efficient and fair market for

buyers and sellers to conveniently and effectively transact listed securities

through member brokers."

Q: What is meant by a fair and efficient market?

A: In general terms, an efficient market exists where one party cannot

interfere with the free-market forces of supply and demand such that the

price of a given security is not an accurate reflection of the underlying

assets (both physical and human) and information pertaining to those

assets, of a given corporate body. On the other hand, a fair market is

achieved where all participants face the same conditions of trading, i.e.

no party can take advantage of an information that is attained from a

privileged information.

Q: What is the basic principle behind inhibiting insider trading?

A: The obligation of inhibiting oneself from using insider information rests

on two basic principles:

(1) the existence of a relationship giving access, directly or

indirectly, to information intended to be available only for a

corporate purpose and not for the personal benefit of anyone, and


(2) the inherent unfairness involved where a party takes advantage of

such information knowing it is unavailable to those with whom

he is dealing. 1

Q: What is the purpose of outlawing insider trading?

A: It must be emphasized that the primary purpose of Sec. 30 of RSA is to

outlaw the use of inside information by corporate officers and principal

stockholders for their own financial advantage and to the detriment of

the uninformed public security holders-those who sold or bought shares

without the benefit of the inside information. 1a

Q: Is there an exception to the rule?

A: Yes. Insider trading does not exist when (1) the insider proves that the fact

is generally available or (2) if the other party to the transaction (or his

agent) is identified, (a) the insider proves that the other party knows it, or

(b) that other party in fact knows it, from the insider or otherwise." cda

Q: What are the elements of insider trading?

A: Elements:

(1) An insider

(2) buys or sells a security

(3) due to knowledge of a fact of special significance

(4) which is not generally available.

INSIDERS

Q: Who is an insider?

A: An insider as defined in Sec. 30 (b) of the RSA is any of the following:

(1) the issuer ( i.e. every person who issues any security);

(2) a director or officer of, or a person controlling, controlled by, or

under common control with the issuer;


(3) a person whose relationship or former relationship to the issuer

gives or gave him access to a fact of special significance about

the issuer or the security that is not generally available; or

(4) a person who learns such a fact from any of the foregoing

insiders as defined in this subsection, with knowledge that the

person from whom he learns the fact is such an insider.

They may be further classified into the following:

CATEGORY 1: CORPORATE INSIDERS — officers, directors, certain

employees and majority or controlling share-holders of the company at issue.

CATEGORY 2: TEMPORARY INSIDERS — underwriters, lawyers,

accountants and consultants who become "temporary" insiders because they have

obtained confidential information about the company while in a fiduciary *

relationship to the company.

CATEGORY 3: TIPPERS and TIPPEES — when an insider or temporary

insider described as the "tipper" provides material, nonpublic information or purchase

or sale recommendations to a third party known as the "tippee," who then trades on

the information or passes it on to the others who do so. In this instance, both the tipper

and the tippee shall be liable. cd

Q: What is the "misappropriation theory" of insider trading?

A: Under the "misappropriation theory", a person who, in breach of duty of

trust and confidence, misappropriated material, nonpublic information

from any source, and uses that information to her advantage in securities

transactions, is guilty of insider trading.

Q: What is an example of a person who can be held for misappropriation of

confidential information?


A: In the Winans case 2 a Wall Street Journal reporter, R. Foster Winans was

held liable for insider trading for misappropriating a WSJ's confidential

information about what stocks would be mentioned in the column by

tipping others to the information.

Q: Is the misappropriation theory applicable in the Philippines?

A: Our laws are clear as to who shall be considered insiders but silent as to

whether the misappropriation theory is applicable in the Philippines.

However, if the person who misappropriated the information can be

found to fall in any of the four classes of insiders, clearly the theory may

be applicable in the Philippines. cda

Q: What are the reasons for considering the misappropriation of

non-information insider trading?

A: Former US Chief Justice Burger explained in his dissenting opinion in the

Chiarelli case (which eventually became the foundation of the

misappropriation theory in subsequent cases) explained that by obtaining

material, non-public information by unlawful means, the person who

misappropriated clearly breached a duty to his employer thereby

subjecting him to the same duty as an insider to disclose the

misappropriated information or to abstain from trading. The other

reasons propounded was the "equal access theory" suggested in Texas

Gulf Sulfur case which simply contended that the duty to disclose arose

"as a result of the 'inherent unfairness' of turning secret information to

account for personal profit."

SIGNIFICANT INFORMATION

Q: What is significant information?

A: Sec. 30 (c) of the RSA cite two instances when a fact can be considered of

"special significance" if.

(a) in addition to being material it would be likely, on being made

generally available, to affect the market price of a security to a

significant extent, or

(b) a reasonable person would consider it especially important under

the circumstances in determining his course of action in the light

of such factors as the degree of specificity, the extent of its

difference from information generally available previously, and


its nature and reliability.

Q: Is material information sufficient to be considered specially significant?

A: No. While in the US material information is sufficient, in the Philippines,

the material information must be accompanied by a movement in the

market price of the security by a significant extent.

Q: What is "material' information?

A: Material information is that which induce or tends to induce or otherwise

affect the sale or purchase of the issuers securities.

Q: What are the examples of material information:

According to Chapter 5, number 1 of the Listing Guidelines of the

Philippine Stock Exchange:

"Material information shall include information relating to the issuer's

financial condition, prospects, development projects, contracts entered into in

the ordinary course of the business or otherwise, and other information with

significant impact on the issuer's operations such as, but not limited to the

following:

a. Declaration of a cash dividend;

b. Declaration of stock dividend or pre-emptive rights;

c. Capitalization issues, directors/officers/employee stock option plans,

warrants, stock splits and reverse splits;

d. All material resolutions taken up in a stockholders' meeting of the issuer;

e. All call to be made on unpaid subscriptions to the capital stock of the

issuer;

f. Any change of address of the registered office of the issuer or of its

transfer agents;

g. Any change in the directors, officers, auditors or transfer agent of the

issuer;


h. Any proposed amendment to the Articles of Incorporation and the

By-Laws;

i. Any change in shareholdings of directors, officers and stockholders

owning more than 10% of any class of any security as provided for under

Sec. 36, Chapter IV of the RSA;

j. Any action filed in court, or any application filed with the SEC, to




k. The appointment of a receiver or liquidator for the issuer or any of its

subsidiaries; cdtai

l. Any acquisition of shares of another corporation or any transaction


m. Any acquisition by the issuer of shares resulting in its holding 10% or

more of the paid-up capital of another listed corporation or where the

total value of its holdings exceeds 5% of net assets of an unlisted

corporation;

n. Joint ventures, mergers and acquisitions;

o. Any sale made by the issuer, of its shareholdings in another listed or




capital stock;

p. Firm evidence of significant improvement or deterioration in near-term

earning prospects;

q. The purchase or sale of significant assets;

r. A new product or discovery;

s. The public or private sale of a significant amount of additional

securities;

t. A call for redemption of securities;

u. The borrowing of a significant amount of funds;

v. Events of default under financing or sale agreements;

w. A significant change in capital investment plans;

x. A significant dispute or disputes with subcontractors, customers or

suppliers, or with other parties; and

y. A tender offer, take-over and merger for another corporation's securities.

Q: What if an insider bought securities based on a non-public information

that a 40% stock dividend will be declared but upon disclosure the share

prices did not move, is his purchase insider trading?

A: No, since the market price of the security did not increase by a significant


extent.

Q: What percentage of increase can be considered significant?

A: There is no rule as to what percentage of increase can be considered

significant.

Q: If there is no hard and fast rule in declaring an increase significant, what

factors can be considered in determining if the increase is significant?

A: The historical pricing and movement of the security may be looked into,

thus, if the increase and movement is unusual, the increase may be

considered a significant movement.

Q: Is all information a fact of special significance only if there is a

corresponding significant movement?

A: No. A fact of special significance need not have a corresponding

significant movement in its price if a reasonable person would consider

the fact especially important under the circumstances in determining his

course of action in the light of such factors as the degree of its

specificity, the extent of its difference from information generally

available previously, and its nature and reliability. (Sec 30-c(b), RSA). It

must be noted that Sec. 30 c-b was designed primarily for the case where

there is no market.

Q: Is there an instance when a fact of special significance as defined in 30-c

will be considered insider trading?

A: Yes. The fact that disclosure of insider information may be improper under

some circumstances, as where the insider is disabled from disclosing in

order to protect a corporate conference or preliminary negotiation, does

not excuse transactions by the insider without disclosure. In such a

circumstance, he has no alternative but to forego the transaction or be

liable for insider trading. (SEC v. Texas Gulf, supra). cdt

INFORMATION NOT GENERALLY AVAILABLE

Q: When is information already considered "generally available"?

A: In the Texas Gulf Case, an insider may not act at the moment the company

makes a public announcement of the information, but must wait "until

the news could reasonably have been expected to appear over the media

of widest circulation. The US Federal Securities Code from which we


copied our insider trading law clearly specified the a fact is "generally

available" one week after is it disclosed by means of a filing or press

release or in any other manner reasonably designed to bring it to the

attention of the investing public, otherwise, the burden of proving that a

fact is "generally available" is on the person who asserts.

The Revised Securities Act of the Philippines has failed to specify when a fact

is considered "generally available".

Q: Do rumors make the information public?

A: No as rumors are not specific and trustworthy 4 as an official statement

from the Exchange.

COUNTERVAILING FIDUCIARY DUTY

Q: Is a broker exempted from insider trading if he sold his customers account

based on his fiduciary obligation to his customers to sell in the event he

comes into possession of adverse information?

A: Brokers may not use his inside information to benefit his clients at the

expense of the general public. aisadc

PENALTIES

Q: What penalties are provided against insider trading?

A: If the Exchange finds insider trading, its usual course is to file the report to

the SEC under SEC. 45 of the RSA. If the person found liable for insider

trading is within its jurisdiction, such as a member, the Exchange may, if

evidence warrants, impose the penalties it may deem appropriate which

may include expulsion of the member. However, since most insider

trader found by the Exchange is outside their jurisdiction, the Exchange

can only file its investigative report to the SEC for its proper action.


The SEC can impose administrative sanctions or file for a criminal case. The

Administrative sanction can include suspension or revocation of its certificate, fine or

disqualification from being an officer or principal stock holder of an issuer. On the

other hand, a conviction in the regular courts for insider trading may entail

imprisonment of not less than 7 years nor more than 21 years imprisonment and or a

fine of not less than P5,000.00 nor more than P500,000.00. cda

In addition to the foregoing, civil actions for damages may be brought against

the insider by the stockholders.

Q: Can a class action be brought against insiders?

A: It has been held that a class action could be brought on behalf of all person

who purchased stock of a company on an Exchange during the period

that defendants were selling that stock on the basis of inside information.5

Q: How shall damages be measured by the courts?

A: The US Court applied two approaches in determining the damages:

(1) "The Draconian liability" leaves it to the course the "fashioning of

appropriate relief, including the proper measure of damages,"

(2) "The Disgorgement approach" states that any uninformed investor may sue

for the difference between what he paid (or received) for his stock and

the market value that it reached a reasonable time after public disclosure

of the inside information, but the total recovery by all such persons is

limited to "the amount gained by the insider as a result of his selling or

purchasing at the earlier date rather than delaying his sale or purchase

until the parties could trade on an equal information basis."

The Disgorgement approach seems to be the more reasonable

compromise between imposing the "Draconian liability or "no liability at

all.

Q: Is profit necessary to establish insider trading liability?

A: No.


FINAL ADVISE:

ABSTAIN UNTIL DISCLOSURE!!!

"Short-Swing" Liability

Q: Do we have a policy against "short-swing"?

A: The policy against "short-swing" can be found in Sec. 36 a & b of the RSA

which requires every person who beneficially owns, directly or

indirectly, more than 10% of any class of any equity security which is

registered pursuant to this act, or who is a director or an officer of the

issuer of such security to file with the SEC and, if listed, with the

Exchange (a) at the time of the registration or listing or within 10 days

after he acquires such status if the acquisition was after registration or

listing, a statement indicating the amount of all equity securities of such

issuer of which he is a beneficial owner, and (b) at the end of any month

in which he acquires or disposes any equity security of that company, a

statement indicating his ownership at the close of the calendar month

and such changes in his ownership as have occurred during the calendar

month. For the purpose of preventing the unfair use of information

which may have been obtained by any such officer, director or 10%

shareholder, the issuer or any of its stockholder suing on its behalf may

recover any "profit" realized by any of the foregoing person from any

purchase and sale or sale and purchase, of any equity security of the

company within a period of less than six months.

Q: Is the 10-day calendar disclosure required even if no changes in

ownership happened during the month?

A: No. The disclosure is required only if there has been a change in such

ownership during such month.

Q: In suing for "short-swing" profits, is it necessary to show that the

beneficial owner, director or officer actually took advantage of inside


information?

A: In suing for short-swing, it is not necessary to show that the defendant

actually took advantage of, or had access to, inside information. 1

PROFITS

Q: For Sec. 30-b, when is there profit?

A: Profits in "short-swing" exists whenever there is a purchase that can be

matched against a sale at a higher price that is made less than six months

after, or before, the purchase. (Smolowe v. Delendo, infra).

Q: What happens when the defendant engages in a series of transactions at

varying prices?

A: In these instances, the profit recoverable by the company is determined by

matching the highest-price sales against the lowest-price purchases. This

is allowed notwithstanding an overall trading loss during the six-month

period involved. 2

Q: Can sales of common shares be matched against purchases of other type

of securities?

A: Yes. There is no need to trace certificates in short-swings. For this purpose,

securities are fungible, thus, sales of common stock can be matched

against purchases of debentures convertible into common stock to

produce a "profit".

OFFICER AND DIRECTOR

Q: Who are officers for short-swing purposes?

A: Officers shall mean the president, the principal financial and accounting

officers, any vice-president in charge of a principal business unit,

division or function, and any other officer or person who performs

similar policy-making functions for the issuer. 3


Q: Can a purchase or sale of a director or officer before he assumed that

position or after be resigned be sued for "short-swing" liability?

A: It depends. A purchase or sale made by a person while he is a director or

officer can under certain circumstances be matched against a sale or

purchase made within 6 months but before he assumed that position or

after he resigned. 4 However, if both the purchase and sale were made

within the 6-month period following resignation as a director, the

purchase and sale will not be covered. 5

Q: Is the preceding rule applicable to 10% beneficial owners?

A: No. Sec. 30-b explicitly excludes from liability any transaction by a 10%

holder if he was not both at the time of the purchase and sale, or the sale

and purchase, of the security involved. The words 'at the time of' being

interpreted to mean 'simultaneously with' the purchase and sale, not

before or after. Hence, the purchase which makes a person 10%

shareholder cannot be matched against a subsequent sale to create a

liability 6 even if the purchase and sale was all within the 6-month

period. aisadc

PURCHASE AND SALE

Q: What shall be considered purchase and sale?

A: The exercise of an option is NOT a purchase of sale for "short-swing" but

a put or call option on common stock, or of securities convertible into

common stock is. Surrender of securities of one company for another

company as in mergers" may constitute purchase and sale if the insider

had power to put through the merger and there was a possibility for use

of inside information 7 but if the insider was the "forced seller" (defeated

tender-offeror) the disposition of his shares shall not be considered for

"short-swing".


EXEMPTED TRANSACTIONS FROM SHORT-SWING

Q: What transactions are exempted from short-swing?

A: Sec. 30 b specifically exempts securities acquired in good faith in

connection with a debt previously contracted. Likewise, US Courts have

ruled that transactions by officers and directors pursuant to employee

stock option plans and other employee benefit plans are exempt if the

plan is approved by the shareholders.

WITHIN ANY PERIOD OF LESS THAN SIX-MONTHS

Q: How should the 6-month period be counted?

A: In the US case of Stella v. Graham-Paige, 132 F. Supp 100 (SDNY 1955),

the court defined the six-month period by taking the date on which the

stock was purchased, finding the corresponding date six months later,

and then subtracting one day to determine the date on which the

six-month period terminates. For example if the purchase of stock was

made on March 27, the six-month period would end on September 26,

and the purchaser could sell on that date without incurring liability

because that period would constitute exactly 6-months, not less than

6-months.

SUITS

Q: When must the action to recover such profit be instituted?

A: The action to recover such profit may be instituted in any court of

competent jurisdiction within two years after the date such profit was

realized.

Q: When may a stockholder bring an action for profits in short-swing?

A: If the issuer shall fail or refuse to bring such suit within 60 days after

request or fail diligently to prosecute the same thereafter, the stockholder

may bring the action in the name and in behalf of the issuer.


Quick Guide on Corporate Disclosures

The purpose of this checklist is to set guidelines for corporate disclosures. The

key objectives are (1) to guide the listed companies on proper disclosures, (2) a

sensitivity to the gray areas, (3) a set of good disclosure and compliance practices and

(4) to propose to management on how they should handle sensitive, nonpublic

informations.

• GENERAL RULE REGARDING DUTY TO DISCLOSE

* All listed companies are required by the securities laws of the Philippines

to disclose all structured and unstructured material information. A company must

disclose when:

a. A major decision has been made during a corporate meeting.

— Under the Listing Rules of the Exchange, a listed company must disclose

material information (i.e. declaration of dividends, call on unpaid subscriptions,

change in officers, directors, etc.) immediately after it was discussed during a

corporate meeting.

b. Prior disclosures are no longer accurate.

— Previous disclosures made to the Exchange which are no longer accurate

must be updated by the company at all times so as not to mislead the investing public.

c. A material information is already made known to a select group of

people.

d. A disclosure has been partially made on the topic.

— A listed company must submit a complete disclosure regarding the topic


so as not to be misleading.

e. Rumors or leaks are already circulating regarding the company.

— A company must always confirm or deny the rumors circulating about

them to prevent the creation of a false market.

f. False statements has been made by a third party (i. e. the media).

— A company must always correct and update false statements made by third

parties such as analysts and the business media.

g. Unusual trading happens.

— A company must always disclose immediately to the exchange any

material non-public information if there is an unusual trading activity.

h. When requested by the Exchange thru the Compliance and Surveillance

Department.

• FUNDAMENTALS OF MATERIAL INFORMATION

* News should never be withheld on the basis that it is already available in

the market, since a formal confirmation from the listed company is important to

investors.

* An information is likely to be material when it diverts from public

expectations and perceptions especially if it is inconsistent with prior disclosures.

* An information is probably material when one spends time deciding

whether or not it is material.

* Check the market's reaction on previous disclosures.

— The true test of an information's materiality is when it has an effect on the

market when it is made public.

SOFT INFORMATION

* General Rule: Soft Information is not required to be disclosed but

if any disclosure is to be made, it must be done in good faith and

have a reasonable and factual basis.


* Disclosure of Soft Information must later on be updated or

corrected when a company revises or confirms its projections. cdasia

* Use prudent language so as not to mislead the public.

— It is important to stress the uncertain nature of the

information and avoid undue investor reliance which can

lead to litigation.

* Consider consulting with counsel first before disclosing any soft

information.

* Consider a review of your company's projections by an

independent consultant.

* Disclose or abstain: Consider the need to disclose soft information

when the company purchases or sells its own securities.

ANALYSTS AND ANALYSTS REPORTS

* Give equal treatment to all analysts and do not favor them over the

investing public, the media or the market in general.

* Schedule regular meetings and conference calls with analysts.

* Anticipate the questions that may be asked.

* NON Material Nonpublic information may be disclosed provided it

is consistent with prior disclosures.

* Material Nonpublic information may be disclosed provided it is

released to the public simultaneously.

* Take note of the information to be furnished to the analysts.

* Analysts' statements should not be adopted as one's own.

* Adopt a policy of "no comment" on reports made by analysts.

* Offer general statements in writing to rectify inaccurate analysts'

reports.


SHAREHOLDER INQUIRIES

* All investors, no matter what the size of the shareholdings, should

be entitled to the same information and treatment.

* Handle institutional investors with extreme care.

— Inquiries should be anticipated and answers to questions

about the company's recent disclosure should be prepared.

— Be ready for questions about management's action that may

be regarded as not maximizing the short term value of the

company's stock.

* Follow the same rules for analysts and media inquiries.

PREPARING FOR THE CORPORATE DISCLOSURE CRISIS

* Set procedures in advance.

— One can never predict when certain management changes and

sudden drop in the stock value would occur.

* Monitor trading closely.

* Disclosures should top the agenda for a crisis response.

* Seek the assistance of counsel and the members of the Board of

Directors when determining whether an information or an event is

material or not.

* Stop company transactions and prohibit trading by management

until disclosure procedures have been made and acted upon.

* It is permissible to include information on management's action

plans.

* At times, even if disclosure is not required, it is better to disclose in

order to maintain the credibility with the market or investors.

* Prepare a press release and a script for senior management and


personnel.

AVOID INSIDER TRADING LIABILITY

* The company nor its insiders can trade in the company's securities

if they possess material nonpublic information about the company.

* Do not tip/disclose nonpublic material information about the

company to those who do not have a valid reason for being told.

* The "misappropriation" doctrine.

— Fiduciary principles prohibit the improper use of any confidential

information obtained from or through the company. Confidential

information regarding a third party is also subject to the

prohibitions of trading and tipping.

* Protect the confidentiality of non public information.

— When there is a need to disclose nonpublic material information to

anybody, make sure that it is made clear to them that the

information is confidential and if possible. have them sign a

confidentiality agreement.

* Before an insider trades, he must make sure that the information

has already been disclosed and they should ask themselves why

they want to trade. cdt

* Avoid trading on information that has been disclosed but has not

been disseminated.

* Each company should have an insider trading policy which must be

approved by a legal counsel and implemented by the Board of

Directors.

— It should be known by all employees.

— It should be enforced by disciplinary procedures.

— It should address confidential information regarding third parties

and prohibit any trading in the securities of customers, suppliers


and joint venture partners.

— It should prohibit short selling on company's stock.

— It should be reviewed annually.

* Insiders should have a controlled means of trading in the

company's securities.

— There should be an established trading period and a pre-clearance

procedure. cd

PRESS RELEASES

* All Press Releases must secure the approval of the Securities and

Exchange Commission (SEC). Press Releases without SEC

approval will not be honored by the Exchange.

* All Press Releases, whether aimed at customers, industry groups,

or investors, must be regarded as communications with the

financial markets.

* Stick to the facts; avoid boosterism. Premature announcements of

new products, exaggerated claims, unwarranted promises, and

overly optimistic assessments of current conditions or future

prospects are centerpieces of plaintiffs' securities fraud lawsuits.

DISCLOSING BAD NEWS

— Bad news should not be buried or concealed; it must be disclosed

in the same manner and with the same clarity and emphasis as good

news.

— Bad news must not be minimized by misleading statements about

the uncertainty of its impact.

Continuing Listing Requirements

General

(1) Generally, the issuer must promptly submit to the Exchange for

publication any material information affecting such issuer which is


of interest to investors.

(2) Material information not yet disclosed to the Exchange should not

be divulged by the issuer, its agent and its advisers to any other

party.

(3) All notices to the Exchange as referred to in this Chapter must be

sent to the attention of the Compliance and Surveillance

Department. Any notice addressed to other Departments and

officials of this Exchange shall not be considered notice to the

Exchange.

Immediate Disclosure to be Made to the Exchange

(1) The issuer shall keep the Exchange and the Commission promptly

informed by phone or fax immediately within ten (10) minutes and

confirmed in writing within two (2) hours, of any material

information or corporate act, development, or event, the knowledge

of which:

(a) Is necessary to enable the investors to appraise the condition

of the issuer;

(b) Is necessary to avoid the creation of a false market for its

securities; and

(c) May reasonably be expected to materially affect market

activity in, and the price of, its securities.

Material information means that which induces or tends to induce

or otherwise affect the sale or purchase of the securities. Without limiting

the generality of the term, it shall also include information relating to the

issuer's financial condition, prospects, development projects, contracts

entered into in the ordinary course of the business or otherwise, and

other information with significant impact on the issuer's operation such

as, but not limited to the following:

(a) Any declaration of a cash dividend, stock dividend and pre-emptive

rights by the Board of Directors;


(b) The holding of any stockholders' meeting;

(c) A tender offer, take-over or reverse take-over and a merger for

another corporations securities. cdasia

(d) Capitalization issues, options, directors/officers/employee stock

option plans, warrants, stock splits and reverse splits;

(e) All material resolutions taken up in a stockholders' meeting of the

issuer;

(f) All call to be made on unpaid subscriptions to the capital stock of

the issuer;

(g) Any change of address of the registered office of the issuer or of its

transfer agents;

(h) Any change in the directors, officers, auditors or transfer agent of

the issuer;

(i) Any proposed amendment to the Articles of Incorporation and

By-Laws;

(j) Any change in shareholdings of directors, officers and stockholders

owning more than 10% of any class of any security, as provided for

under Sec. 36, Chapter IV of the Revised Securities Act;

(k) Any action filed in court, or any application filed with the SEC, to




(l) The appointment of a receiver or liquidator for the issuer or any of

its subsidiaries;

(m) Any acquisition of shares of another corporation or any transaction


(n) Any acquisition by the issuer of shares resulting in its holding 10%

or more of the paid-up capital of another listed corporation or

where the total value of its holdings exceeds 5% of net assets of an


unlisted corporation;

(o) Joint ventures, mergers, consolidation, take-overs, reverse

take-overs and acquisitions;

(p) Any sale made by the issuer of its shareholdings in another listed or




capital stock;

(q) Firm evidence of significant improvement or deterioration in

near-term earnings prospects;

(r) The purchase or sale of significant assets;

(s) A new product or discovery;

(t) The public or private sale of a significant amount of additional

securities;

(u) A call for redemption of securities;

(v) The borrowing of a significant amount of funds;

(w) Default of financing or sale agreements;

(x) A significant change in capital investment plans;

(v) A significant dispute or disputes with subcontractors, customers or

suppliers, or with any other parties.

(2) The issuer shall notify the Exchange of the holding of any

stockholders meeting and its agenda, by giving the Exchange at

least ten (10) trading days prior written notice thereof.

(3) The issuer shall submit the list of stockholders who are entitled to

notice and to vote at a regular or special stockholders meeting not

later than five (5) trading days after the record date fixed by the

issuer for the holding of such meeting; and the issuer shall also


give the Exchange ten (10) trading days notice prior to the closing

of transfer books.

Clarification or Confirmation of Rumors or Reports

(1) A public dissemination of information by any means, either correct

or false, which has not been substantiated by the issuer and which

is likely to have, or has had, an effect on the price of the issuer's

securities or would likely to have a bearing on investment

decisions by investors must be promptly and properly clarified or

confirmed with the Exchange.

(2) If rumors indicate that material information has been leaked, a

frank and explicit announcement thereof is required. If rumors are

in fact false or inaccurate, they should be promptly denied or

clarified.

(3) Generally, the issuer is not required to respond to rumors or report

predicting future sales, earnings or other data required. However, if

such report is manifestly erroneous, or if the issuer or its officers is

falsely cited as the source, the issuer must promptly deny or correct

such rumor, report or attribution.

Unusual Trading Activity

Unusual trading activity involving an issuer's securities occurs without any

apparent reason gives rise to the presumption that there is insider trading or a rumor or

report, whether true or false, about the company.

Whenever there is unusual trading activity in an issuer's securities, the issuer

must respond promptly to any inquiries made by the Exchange concerning the unusual

trading activity. In this connection:

(1) If the unusual trading activity results from the "leak" of material

information, the information in question must be material

information, the information in question must be announced

promptly. If the unusual trading activity results form a false rumor

or report, the Exchange's policy on correction of such rumors and

reports should be complied with; and cdtai

(2) If the listed issuer is unable to determine the cause of the unusual


trading activity, the exchange may suggest that the issuer make a

public announcement to the effect that there are no undisclosed

recent developments affecting the issuer that would account for the

unusual trading activity.

Policy on Thorough Public Dissemination

(1) Disclosure of material information should normally be made after

trading hours. If the disclosure is made during trading hours, the

Exchange may halt the trading of the listed issuers securities to

provide an opportunity for the material information to be properly

disseminated. Trading would resume after one (1) hour from the

announcement or dissemination or the next market day.

(2) Public disclosure of material information should be made by an

announcement released to the Exchange. Should the release be in

the form of a press or news release, the SEC approval to the same

pursuant to the SEC Rules must be submitted to the Exchange prior

to its release.

Content and Preparation of Public Announcement

The content of a press or other public announcement is as important as its

timing. Each announcement should:

(1) Be factual, clear and succinct and avoid boosterism;

(2) Contain sufficient quantitative information to allow investors to

evaluate its relative importance to the activities of the listed issuer.

(3) Bad news should not be buried or concealed. It must be disclosed

in the same manner and with the same clarity and emphasis as good

news. Its impact must not be minimized by equivocal or misleading

statements.

Update Prior Statements Which Are No Longer Accurate

Should subsequent events make a prior disclosure inaccurate, the issuer must

update and correct the prior disclosures.

Reporting Requirement


(1) Audited Annual Financial Report

The issuer shall furnish the Exchange not later than 105 days after the end of

its fiscal year, two hundred (200) copies of its Audited Annual Financial Report which

shall contain the requirements as required in SEC Circular 7 Series of 1988, and

among other things, the following:

(a) a consolidated balance sheet showing assets and liabilities at the

end of the latest concluded fiscal year, with comparative figures

from the previous year;

(b) a consolidated income and expense account for the latest fiscal

year, with comparative figures;

(c) an analysis of surplus account(s) covering the latest fiscal year,

with comparative figures;

(d) a similar set of financial statements:

(i) for the issuer as a separate corporate entity; and

(ii) for each subsidiary owned directly or indirectly;

(e) a review of operations, if any;

(f) the existence of management contracts if any and the amount of the

management fees.

(2) Annual Report

The issuer shall furnish the Exchange within fifteen (15) days from its annual

meeting, two hundred (200) copies of its Annual Report as required by SEC Circular

no. 7 Series of 1988.

(3) Semi-Annual Report

The issuer shall also furnish the Exchange two hundred (200) copies of its

Semi-Annual Report within sixty (60) days from the end of the first semester of its

fiscal year containing similar information as provided in par. 508 section (1) including

among others the following information:


(a) An updated list of the top twenty (20) shareholders and their

corresponding number of shares.

(b) A distribution schedule indicating number and percentage of

shareholders per range of shares, e.g. 200 shareholders (20%) with

1,000 to 10,000 shares, under the following format,:

Shareholdings No. of Total Percentage of

Holders Shares Total Issued

& Outstanding

Below 1,000 shares

1,000 10,000 shares

10,001 100,000 shares

100,001 500,000 shares

500,001 1,000,000 shares

(4) Quarterly Reports

The issuer shall also furnish the Exchange two hundred (200) copies of its

Quarterly Reports within thirty (30) days from the end of each quarter as required in

SEC-BED Circular No. 1, Series of 1987.

(5) Report on Beneficial Ownership as required by Sec. 36 of the

Revised Securities Act, which shall be filed 10 days from the end

of the month.

(6) Certified copy of the Annual Verification of the Bureau of Mines

for mining companies.

(7) Certificate of Good Standing of the issuer by the SEC to be

submitted within thirty (30) days after the end of the calendar year.

(8) Duplicate original of every other information, documents and

reports submitted to the SEC pursuant to Sec. 11 of the Revised

Securities Act. cda

Inspection and Monitoring

The issuer agree to allow authorized representatives of the Exchange to inspect

and obtain copies of documents relevant to the requirements of listing and the


representation in the prospectus.

Role of Market Surveillance

While an issuer should monitor the trading in its securities to detect any

unusual trading activity, the Compliance Department also monitors trading in the

Exchange. Where there is unusual trading activity in a listed security, and it appears to

the Compliance Department that the unusual trading activity cannot be explained by

known factors, the Department will normally require the listed issuer to issue an

announcement as soon as practicable. The announcement should state whether the

issuer an its directors are aware of the reasons for the unusual trading activity and

whether there is any material information which has not been publicly disclosed.

Footnotes

1. In re Cady, Roberts & Co., 40 S.E.C. 907 (1961).

1a. 69 Am Jur 2d p. 1018.

* means a legal relationship of trust and confidence, in which one person acts on behalf

of another person.

2. U.S. v. Winans, 612 F. Supp. 827 (S.D.N.Y. 1985).

4. In Re Investors Management Co., 44 S.E.C. 633 (1971).

5. Shapiro v. Merrill Lynch, 495 F. 2d 228 (2d Cir. 1974).

1. Smolowe v. Delendo, 136 F. 2d 231 (2d Cir. 1943).

2. Chemical Fund v. Xerox, 377 F. 2d 107 (2d Cir. 1967).

3. CRA Realty Corp. v. Croty, 878 F. 2d 562 (2d Cir. 1989).

4. Alder v. Klawans, 267 F. 2d 840 (2d Cir. 1959); Feder v. Martin, 406 F. 2d 260 (2d

Cir. 1969).

5. Levy v. Seaton, 458 F. Supp. 1 (S.D.N.Y. 1973).

6. Foremoset-McKesson v. Provident, 423 U.S. 232 (1976).

7. Newmark v. RKO, 425 F. 2d 348 (2d Cir. 1970).

1995 corp disclosure requirements

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