SRC Commercial Law Review

ATENEO LAW SCHOOLCOMMERCIAL LAW REVIEW ATTY. ALEXANDER C. DY SECURITIES REGULATION CODE[1] 2 SEMESTER, SY 2011ND 2012 I. GENERAL PROVISIONS 1. Nature of SRC – “Blue Sky Law” to protect public from unscrupulous promoters, who state business or venture claims which have really no basis, and sell shares or interests therein to investors, who are then left holding certificates representing nothing more than a claim to a square of a blue sky. (a) (b) 2. SRC Being Self-Executory – Sec. 72.1 Contractual Stipulations Against SRC – Sec. 71: Void except against those in good faith State Policy Underlying SRC – Sec. 2: (a) Establish a socially conscious, free market that regulates itself; (b) Encourage the widest participation of ownership in enterprises; (c) Enhance the democratization of wealth; (d) Promote the development of the capital market; (e) Protect investors; (f) Ensure full and fair disclosure about securities; (g) Minimize, if not totally eliminate, insider trading and other fraudulent or manipulative devices and practices which distorts the free market. 2.1. Compared with RSA (B.P. Blg. 178) – To protect the public from unsound, fraudulent and worthless securities, i.e., “truth in securities act” [PSE v. CA, 281 SCRA 232 (1997)] in three ways: (a) Requiring through the process of registration issuers of securities to furnish the public with full and accurate disclosure of all material facts concerning the issuer and the securities so that the public may know what it is buying; (b) Limiting margin and borrowing requirements to prevent undue speculations; and (c) Punishing those who manipulate the market and from misrepresentations, manipulations and fraudulent practices covering securities. 2.2. Regulatory Controls Covered: (a) Registration process by which a corporation or issue offers and sells its securities to the public. (b) Reporting requirements assuring continuous flow of disclosures and information about the securities and issuer whose securities are traded. (c) “Anti-fraud provisions” applicable to price manipulations, insider trading, misstatements or misrepresentations by corporate management and others. (d) Regulations on market participants like brokers, dealers and salesmen and securities exchanges. (e) Sanctions against those who violate provisions of SRC, as well as civil liability and/or damages to investors injured by such violations. (DECASA, pp. 2-3) (f) Removal of quasi-judicial functions of the SEC to allow it to concentrate on its regulatory functions and powers, including the promulgation of rules and regulations and to exercise investigatory powers. II. SECURITIES AND EXCHANGE COMMISSION (SEC) 1. The Nature and Composition of SEC – Sec. 4.1: SEC shall administer provisions of SRC (a) (b) 2. Composition and qualifications – Sec. 4.1, 4.2, 4.3: "Collegial body" composed of Chairperson and four (4) Commissioners Meetings – Sec. 4.5 (c) Powers that Can Be Delegated – Sec. 4.6: All except its review or appellate authority and its power to adopt, alter and supplement any rule or regulation. (d) Internal Review Powers – Sec. 4.6: SEC may review upon its own initiative or upon the petition of any interested party any action of any department or office, individual Commissioner, or staff member. (e) Obligation to Indemnify – Sec. 6.1 (f) When Commissioners and Officers Personally Liable – Sec. 6.2 Statutory Bases of the Powers and Functions of SEC - Sec. 5.1: SEC shall act with transparency and shall have the powers and functions provided by: (a) The Securities Regulation Code; (b) Pres. Decree No. 902-A; (c) The Corporation Code; (d) The Investment Houses Law; subject to the provisions of existing laws. (b) Formulate policies and recommendations on issues concerning the securities market. regulations and orders. (j) Punish for contempt. order the examination.(e) The Financing Company Act. 3. (e) Supervise. after proper notice and hearing. upon any of the grounds provided by law. or revoke. approve. (d) Regulate. civil or military as well as any private institution. clearing agencies and other SRO. and . Powers and Functions of SEC – Sec. in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court. reject. (l) Issue subpoena duces tecum and summon witnesses to appear in any its proceedings and in appropriate cases. files and records. search and seizure of all documents. (i) Issue cease and desist orders to prevent fraud or injury to the investing public. partnerships or associations which are the grantees of primary franchises and/or a license or permit issued by the Government. (c) Approve. 5. investigate or supervise the activities of persons to ensure compliance. association or person in the implementation of its powers and functions. (k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision. the franchise or certificate of registration of corporations. and issue opinions and provide guidance on and supervise compliance with such rules. advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto. (m) Suspend. partnerships or associations. revoke or require amendments to registration statements. tax returns. amend or repeal rules. and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it. papers. regulations and orders.1 (a) Jurisdiction and supervision over all corporations. suspend. monitor. (h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government. (f) Impose sanctions for the violation of laws and the rules. and registration and licensing applications. corporation. suspend or take over the activities of exchanges. both direct and indirect. (g) Prepare. and (f) Other existing laws. firm. regulations and orders issued pursuant thereto. voting trust certificates or similar instruments (f) of Catch-all – Other instruments as SEC may determine in the future. Corporation Code: Substituted Service Upon SEC. instrument.e. certificates of interest or participation in a profit sharing agreement. and include: (a) Equity Instruments (represent ownership rights in a corporation. (d) (e) Trust Instruments – Certificates of assignments. Sale. (b) Debt Instruments (issuer required to repay principal amount loaned by fixed maturity date.2: SEC jurisdiction over all cases enumerated under Section 5 of Pres. Note: “Public offering” for purposes of registration. fraud schemes. 55: Settlement Offers. III. election and termination cases of directors. Removal of Quasi-Judicial Functions of SEC – Sec. “Merit System” (RSA) [PSE v.1: Shares. certificates of deposit for a future subscription. evidences of indebtedness[2]. General Rule on Registration of Securities – Sec. means a random or indiscriminate offering of securities in general to anyone who will buy.1. Derivatives[5] – option[6] and warrants[7]. the express powers granted SEC to achieve the objectives and purposes of these laws.[8] 2. debentures. 5. intra-corporate disputes. assets upon dissolution)) – shares of stock. CA. 8. Offer for Sale Distribution of Securities 2. 66: Revelation of Information Filed with SEC.. at stated rate of interest) – bonds.. contract. proprietary or nonproprietary membership certificates in corporations. and (ii) Sec. and petitions for suspension of payments and/or rehabilitation) have been transferred to the appropriate Regional Trial Courts. trust certificates. 3. (iii) Sec. asset-backed securities[3]. or which are necessary or incidental to the carrying out of. participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate.(n) Exercise such other powers as may be provided by law as well as those which may be implied from.e. trustees and officers. REGISTRATION OF SECURITIES 1. Decree 902-A (i. i. notes. 128. (c) Investment Instruments – investment contracts[4]. management. whether solicited or unsolicited. 4. Definition of “Securities” – Sec. whether written or electronic in character. gas or other mineral rights. fractional undivided interests in oil. 281 SCRA 232 . certificates participation. Note: See: (i) Sec.1: (a) Filing and Approval of Registration Statement by SEC – Note: “Full Disclosure” (SRC) vs. surplus profits. 2: Require the registration statement to contain such information or documents as it may.1: Registration requirement shall not as a general rule apply to the following classes of securities: (a) Government Issues: Those issued/guaranteed by the Philippine Government. prescribe.4: Keep and open to public inspection at reasonable hours on business days. and may dispense with any such requirement.5: Audit the financial statements. (d) Sec. and acting as an instrumentality of said Government. 12. 8. (b) Giving of Information Prior to Sale Note: Sec. assets and other information of a firm applying for registration of its securities. (c) Sec. 8. by rule. 8.(1997)] – Now.2: Grant "conditional approval" of the registration statements. SEC Power on Securities Transactions: (a) Sec. Housing and Land Use Regulatory Board. any political subdivision or agency thereof. or may require additional information or documents. province or political subdivision thereof on the basis of reciprocity. Exempt Securities – Sec. 9. 281 SCRA 232 (1997)].3: Define the terms and conditions under which any written communication. the Register of Securities and all documents or information with respect to the securities registered therein. or the Bureau of Internal Revenue. (b) Issuances by Foreign Governments: Those issued/guaranteed by any foreign government with which the Philippines maintains diplomatic relations. including written information from an expert. or any state. (but SEC may require compliance with the specified form and content of disclosures). (e) Sec. depending on the necessity thereof or their applicability to the class of securities sought to be registered. (e) Bank Issues. not exempted . (b) Sec. (d) Those which by law are under the supervision and regulation of the Office of the Insurance Commission.2. SEC has no power to look into merits of securities to be sold to the public. Note: If bank is listed in Exchange. when necessary to insure full disclosure or to protect the interest of the investors and the public in general. Note: SEC has no power to reverse decision of PSE Board denying listing of securities [PSE v. 2. shall not be deemed to constitute an offer for sale. except their own shares of stock: Those issued by a bank except its own shares of stock. CA. including any summary prospectus. 8.1 covers only securities sold or offered for sale or distribution within the Philippines. (c) Certificates issued by a bankruptcy receiver/trustee duly approved by the proper adjudicatory body. or any person controlled or supervised by. 8. 3. provided that the security surrendered has been registered under the Code or was. administrator. to its stockholders or other security holders. where no commission or other remuneration is paid or given directly or indirectly in connection therewith. or mortgagee or any other similar lienholder selling or offering for sale or delivery in the ordinary course of business.from complying with reportorial requirements as such [Union Bank v. where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. (g) Transaction pursuant to right of conversion: Issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion. or trustee in insolvency or bankruptcy. guardian. subscription or delivery by the owner thereof. SEC. upon . to liquidate a bona fide debt. (b) Sale of foreclosed securities: By or for the account of a pledge holder. by rule or regulation after public hearing. would at the time of such conversion fall within the class of securities entitled to registration under the Code. (c) Isolated transaction: An isolated transaction in which any security is sold. 10. and that the security issued and delivered in exchange. a security pledged in good faith as security for such debt. (f) Issuance of bonds to a single purchaser: Issuance of bonds or notes secured by mortgage upon real estate or tangible personal property.1: Registration requirement shall not apply to securities sold or offered for sale in the following transactions: (a) Judicial sale of securities: At any judicial sale. and such owner or representative not being the underwriter[9] of such security. Note: Sec. (h) Broker’s transactions: Broker’s transactions. (d) Stock dividends: Stock dividend or other distribution out of surplus by a corporation. if sold at the conversion price. or sale by an executor. 358 SCRA 479 (2001)]. actively engaged in the business authorized by its articles of incorporation. (e) Sale of shares to stockholders not underwritten: Sale of capital stock of a corporation to its own stockholders exclusively. not for the purpose of avoiding the provisions of the Code. not being made in the course of repeated and successive transactions of a like character. receiver. exempt from the provisions of the Code. 9. or for his account.2: SEC may. 4. when sold. add to the class of exempt securities if it finds that the enforcement of the Code with respect to such securities is not necessary in the public interest and for the protection of investors. on any registered Exchange or other trading market. executed customer’s orders. Exempt Transactions – Sec. and that upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. offered for sale. Note: Sec.2: Power to Include Other Exempt Transactions – SEC may exempt other transactions. where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. (ii) Registered investment house. (l) Sale to qualified buyers: The sale of securities to any number of the following qualified buyers: (i) Bank. (j) Exchange of securities with existing security holders: The exchange of securities by the issuer with its existing security holders exclusively. CA. and only when the purpose for soliciting. shall file with SEC a notice identifying the exemption relied upon on such form and at such time as SEC by rule may prescribe and with such notice shall pay to SEC a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities. (k) Private placements: The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. (iii) Insurance company. when no expense is incurred. (v) Investment company. if it finds that the requirements of registration under the Code is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering. knowledge.3: Formal Application for Exemption – Any person applying for an exemption. or amount of assets under management. 203 SCRA 504 (1991)] . compensation or remuneration is paid or given in connection therewith. Example: Issuance from authorized but previously unissued capital stock may be granted exemption [Nestle Philippines v. 10. or (vi) Such other person as SEC may by rule determine as qualified buyers. and experience in financial and business matters.(i) Pre-incorporation subscription or subscription to a capital increase: Subscriptions of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock. on the basis of such factors as financial sophistication. or its authorized capital increased. giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated. or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions. net worth. (iv) Pension fund or retirement plan maintained by the Philippine Government or any political subdivision thereof. 10.[10] Note: Sec. or no commission. 12. SEC Power over Pre-need Plans [11] and Commodity Futures Contract[12] – Sec. REPORTORIAL REQUIREMENTS 1.1 to 14. But See: Pre-Need Code. (b) Prospectus – Sec. 17. and (h) Ruling – Sec.3 8.5(b). 14. 12.4 to 14.1.5. Notice to Dealers and Brokers – Sec.1.4. (g) SEC Power for Production of Books – Sec. Effectivity of Registration Statement – Sec. 12.The following provisions apply to the procedure for registration of securities: (a) Application – Sec. 12. 11: Until otherwise mandated by a subsequent law. and having 200 or more holders each holding at least 100 shares of a class of its equity securities (“Public company”).4. 6. Sec.1 – Shall file with the SEC (a) Annual Report. 7. 13. Amendments to the Registration Statement – Sec. Suspension of Registration – Sec. 13. Action When There is False Statement – Sec. Procedure for Registration of Securities . (e) Fees – Sec. Grounds for Rejection and Revocation – Sec.7.0 Million (or such other amount as SEC shall prescribe).5 7. and (iii) With assets of at least P50. (a) Sec.5(a). (d) Signatories to the Registration Statement – Sec. Periodic and Other Reports of Issuers – Sec.1 to 15.2 and 12.3. and (b) Periodic Reports .5 7. 12. 13.3 7. 15. (c) Other Information – Sec. Sec. 12. (e) Written Consent of Expert – Sec. 74.2. 16.4 7. 12. which transferred regulation and supervision of pre-need plans to the Insurance Commission.1. 12. IV. 13.4. 17. 12. (d) Certification by Selling Stockholders – Sec. 13. SEC shall continue to regulate and supervise commodity futures contracts and pre-need plans and the pre-need industry. (ii) Has a class of securities listed for trading on an Exchange.4.3. 14.2: Every issuer who: (i) Has sold a class of its securities pursuant to a registration.1 7. Order Suspending Sale of Securities – Sec. (f) Notice and Publication – Sec. Withdrawal of Registration Statement – Sec. 12.6.2.6.5.6 7. furnish each holder of such equity B. Obligations for Tender Offers – Sec. PROTECTION OF SHAREHOLDER INTERESTS 1. (c) File with SEC and send to the issuer copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request. .1(a) to (d) to the: (a) Issuer of the security. (d) Pay at the time of filing of the statement with SEC a filing pay a fee of not more than one-tenth (1/10) of one percent (1%) of the proposed aggregate purchase price. submit a sworn statement containing the information in Sec. 18. and (c) SEC.1(a): Any person. or group of persons acting in concert.1. V. (b) Exchange where the security is traded. 17.1: Any person who acquires directly or indirectly the beneficial ownership of more than 5% of such class of a Covered Issuer. shall within ten (10) days after such acquisition (or such reasonable time as fixed by SEC). or materials making a tender offer or requesting or inviting letters of such a security.3 – Shall also file with the Exchange where securities are listed a copy of any report filed with SEC (c) Sec. or (ii) Any class of equity security of a corporation with assets of at least P50. 17. 18. Reports by 5% Holders of Equity Securities – Sec. (b) Publish all requests or invitations for tender. are obliged to do the following: (a) Make a tender offer to stockholders by filing with SEC a declaration to that effect.0 Million and having 200 or more stockholders with at least 100 shares each.5 – Shall and security the annual report. 19. who intends to: (a) (b) Acquire at least fifteen percent (15%) of: or Acquire at least thirty percent (30%) over a period of twelve (12) months of: (i) Any class of equity security of a listed corporation. and furnish the issuer a statement containing such of the information required of issuers as SEC may prescribe. Tender Offers 1.(b) Sec. to: (i) the issuer. in the light of the circumstances under which they are made. records. 20.1(b): Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and regulations as SEC may prescribe. for the purposes of this subsection. or any solicitation of security holders in opposition to or in favor of any such offer. not misleading. no proxy shall be valid and effective for a period longer than five (5) years at one time. When Securities Offered Exceed the Offer Made – Sec. SEC shall. consent or authorization. 20. or manipulative acts or practices. 19. When Term of Tender Offer Varied – Sec.4: No broker or dealer shall give any proxy. it shall be valid only for the meeting for which it is intended. (ii) the Exchange where traded. 2. 22. deceptive. 22: Every Covered Issuer shall: (a) Sec.3: Unless otherwise provided in the proxy.1(d) 1. (c) Sec. request. or invitation.1. and accounts which. . to a person other than the customer.1: Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by SEC. (a) Sec. and (iii) to SEC. for its own account or customer.1(c) 1. 20. (b) Sec. Internal Record Keeping and Accounting Controls – Sec. (d) Sec. such acts and practices as are fraudulent.2: It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made.2. define and prescribe means reasonably designed to prevent. as follows: 3. 20. 19. Withdrawal of Securities Deposited Pursuant to a Tender Offer – Sec.Note: Sec. Unlawful and Prohibited Acts Relating to Tender Offers – Sec.4. Rules on Form.5: A broker or dealer who holds or acquires the proxy for at least 10% (or such percentage as SEC may prescribe) of the outstanding share of the issuer. in respect of any security carried for the account of a customer. without the express written authorization of such customer.1(e) 1. shall submit a report identifying the beneficial owner within ten (10) days after such acquisition. in connection with any tender offer or request or invitation for tenders.1: Make and keep books.3. 19. signed by the stockholder or his duly authorized representative and filed before the scheduled meeting with the corporate secretary. 20.2: Proxies must be in writing. deceptive. in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the issuer. or manipulative. Issuance and Solicitation of Proxies – Sec. 19.5. Proxy Solicitations 2. 19. 1. or to engage in any fraudulent. a statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale. a statement with SEC.2: Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) Transactions and access to assets are pursuant to management authorization.(b) Sec. Suits to Recover — Suit to recover such profit may be instituted before the RTC by the issuer. irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period exceeding six (6) months. (ii) Financial statements are prepared in conformity with generally accepted accounting principles that are adopted by the Accounting Standards Council and the rules promulgated by SEC with regard to the preparation of financial statements. unless such security was acquired in good faith in connection with a debt previously contracted. shall file: (a) At the time either such requirement is first satisfied or within ten (10) days after he becomes such a beneficial owner. or the sale and purchase. 4. any profit realized by him from any purchase and sale. 23. of the security involved.2 Unfair Use of Information – Sec.2: For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner. or (ii) A director or an officer of the issuer of such security. 23. of any equity security of such issuer within any period of less than six (6) months. shall inure to and be recoverable by the issuer. and with the Exchange where it may be listed.1: Every person who is: (i) Directly or indirectly the beneficial owner of more than 10% of any class of any equity security of a Covered Issuer. shall also file with the Exchange. Transactions of Directors. or officer by reason of his relationship to the issuer. or officer. 22. or any transaction or transactions which SEC by rules and regulations may exempt as not comprehended within the purpose of this subsection. and (b) Within ten (10) days after the close of each calendar month thereafter. director. of the amount of all equity securities of such issuer of which he is the beneficial owner. and also in the Exchange where listed. if there has been a change in such ownership during such month. or any sale and purchase. or by the owner of any security of the issuer in the name and in . and (iii) Recorded assets are compared with existing assets at reasonable intervals and differences are reconciled. director. 4.1 Reportorial Requirements – Sec. Officers and Principal Stockholders 4. shall file with SEC. directly or indirectly. SEC may. but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to make such delivery or deposit within such time.behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter. 5. but no such suit shall be brought more than two (2) years after the date such profit was realized. 23. or does not within five (5) days after such sale deposit it in the mails or other usual channels of transportation. time and price. by such rules and regulations as it deems necessary or appropriate in the public interest. MANIPULATION.1: It shall be unlawful for any person acting for himself or through a dealer or broker. or (ii) If owning the security. for the sale or purchase of any such security. or . by a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market. to sell any equity security of such issuer if the person selling the security or his principal: (i) Does not own the security sold. Manipulation of Security Prices and Practices – Sec. (ii) “Improper matched order” – By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size. directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market: (i) “Wash Sale” – By effecting any transaction in such security which involves no change in the beneficial ownership thereof. 4. define and prescribe terms and conditions with respect to securities held in an investment account and transactions made in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market. otherwise than on an Exchange. SECURITIES FRAUD. 38 (See discussions under Exchange) VI. 23. does not deliver it against such sale within twenty (20) days thereafter. INSIDER TRADING 1. 24. Note: Sec. for such security.4: The foregoing prohibition shall not apply to any purchase and sale.3: It shall be unlawful for any such beneficial owner. Independent Directors – Sec. director.3 Unlawful Sale of Securities – Sec. or officer. or that to do so would cause undue inconvenience or expense. or sale and purchase of an equity security not then or thereafter held by him in an investment account. has or will be entered by or for the same or different parties. Note: Sec. 25: No member of an Exchange shall.(iii) (b) By performing similar act where there is no change in beneficial ownership. whether of the same or a different class of the same issuer or of a controlling. unless otherwise allowed by the Code or by rules of SEC. or commonly controlled company by others. 2. allow certain acts or transactions that may otherwise be prohibited under this section. having due regard to the public interest and the protection of investors.3: The foregoing provisions notwithstanding. or (b) To effect any short sale[18] or any stop-loss order[19] be executed in connection with the purchase or sale of any security. controlled. (d) To make false or misleading statement with respect to any material fact. call. which he knew or had reasonable ground to believe was so false or misleading. controlled. Regulation of Option Trading – Sec. a series of transactions in securities that: (i) Raises their price to induce the purchase of a security. (e) To effect. or commonly controlled company by others. or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as: “marking the close”. (ii) Depresses their price to induce the sale of a security.[16] “boiler room operations”. either alone or others. of the same issuer or of a controlling. alone or with others. in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. directly or indirectly endorse or guarantee the performance of any put. whether of the same or a different class. . Manipulative Devices – Sec.2: It shall be unlawful for any person: (a) To use or employ. may. 3.[13] “painting the tape”. by rules and regulations.[15] “hype and dump”. any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging. straddle. option or privilege in relation to any security registered on a securities exchange. SEC. 24. fixing or stabilizing the price of such security. 24.[14]“squeezing the float”.[17] and such other similar devices. To effect. for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. (c) “Circulating unverified rumor-based market information” – To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security. while in possession of material information with respect to the issuer or the security that is not generally available to the public. or (v) A person who learns such information by a communication from any of the foregoing insiders. or artifice to defraud. or director. scheme.1: Employ any device. Insider Trading 5. 3. 26. 26. 26: It shall be unlawful for any person. (iii) A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public. (ii) A director or officer (or person performing similar functions) of. Note: Fraud or deceit required. in the light of the circumstances under which they were made. in connection with the purchase or sale of any securities to: (a) Sec. “call”. or officer of an exchange. 4. or (b) If the other party selling to or buying from the insider (or his agent) is identified. 246 SCRA 738 (1995)]. unless: (a) The insider proves that the information was not gained from such relationship. practice or course of business which operates or would operate as a fraud or deceit upon any person. (iv) A government employee.The terms “put”. Examples: “Churning”[20]. directly or indirectly. “option”. Fraudulent Transactions – Sec. “Single practice”[22]. transaction. “Scalping”[21].1 Definition of “Insider” – Sec. right or convertible security. or a person controlling the issuer. or “privilege” shall not include any registered warrant. not mere negligence. clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public. the insider proves: (i) that he disclosed the information to the other party. 5. CA.8: The term “insider” means: (i) The issuer. or (c) Sec. 27.2 Insider’s Duty to Disclose When Trading – Sec. on the part of offender [SEC v.1: It shall be unlawful for an insider to sell or buy a security of the issuer.2: Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made. (b) Sec.3: Engage in any act. or . “straddle”. not misleading. “Front Running”[23] day trading 5. 26. Note: Sec. 27. or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy. Deceptive or Manipulative Practices – Sec. SEC Power to Issue Rules and Regulation to Prevent Fraudulent.4 .3 Presumption on Insider Trading – Sec. 27. sell or hold a security.4(b): The term “securities of the issuer sought or to be sought by such tender offer” shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.(ii) that he had reason to believe that the other party otherwise is also in possession of the information. 27. Meaning of “Material nonpublic” – Sec. and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a such violation. 27. where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information. those acting on its behalf.3: It shall be unlawful for any insider to communicate material nonpublic information about the issuer or the security to any person who.4 Prohibition to Disclose – Sec. or such insider’s spouse or relatives by affinity or consanguinity within the second degree. 5. shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information. legitimate or common-law. the issuer of the securities sought or to be sought by such tender offer.1: A purchase or sale of a security of the issuer made by an insider.2 to 72. 27. becomes an insider. 5. those acting on its behalf.2: For purposes of this Section.5 Prohibitions on Tender Offer Situations – Sec.4: It shall be unlawful where a tender offer has commenced or is about to commence for: (a) Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer. the issuer of the securities sought or to be sought by such tender offer. information is “material nonpublic” if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information. Note: Sec. 27. 6. to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror.1: This presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material nonpublic information at the time of the purchase or sale. by virtue of the communication. or any insider of such issuer. and (b) Any tender offeror. 5. 72. president.2: No broker or dealer shall effect any transaction in securities or induce or attempt to induce the purchase or . or an agent or a person whose functions are solely clerical or ministerial. 28.1. 28 4. salesmen and those associated with them as forming the “professionals” of the securities market. dealers. cannot collect fees [Nicolas v. Prohibitions Professionals – Sec.1 and Obligations of Securities Market Broker-Director Rule – Sec.2.5: “Associated person of a broker or dealer” is an employee thereof who. directly exercises control of supervisory authority. associated person or salesman. Note: Purpose is to protect public and strengthen securities mechanism. manager. as a condition for registration that: (a) If natural person – pass written examination (proficiency/knowledge). (c) Sec. shall not include any employee of an issuer whose compensation is not determined directly or indirectly on sales of securities of the issuer. for its own account or for the account of customers.3: “Broker” is a person engaged in the business of buying and selling securities for the account of others. 3. (b) Sec. If not registered. 3.1: No broker or dealer shall deal in or otherwise buy or sell. 28. Requirements.2 Dealings in Compliance with SEC Rules – Sec. comptroller. securities listed on an Exchange issued by any corporation where any stockholder. 3. provide bond/security. 30.7: Forpurposes of registration.3: exempted from registration by SEC. 28.VII. secretary or any office of trust and responsibility. vice-president. 2. 4. 288 SCRA 307 (1998)] 3. 28. 28. Mandatory Registration of Security Market Professionals with SEC – Sec. (a) Sec. 30. by a dealer.13: “Salesman” is a natural person.4: “Dealer” means any person who buys and sells securities for his/her own account in the ordinary course of business. treasurer. issuer or broker to buy and sell securities. (d) Sec. requiring.4: SEC shall promulgate rules and regulations. among other things. If located outside the Philippines – written consent to service of process upon SEC. Securities Market Professionals – SRC classifies brokers. director. CA. is at the time holding office in said issuer corporation as a director. but does not include a salesman. or authorized clerk of said broker or dealer and all the relatives of the foregoing within the fourth civil degree of consanguinity or affinity. but Note: Sec. SECURITIES MARKET PROFESSIONALS 1. employed as such or as an agent. (b) If broker or dealer – minimum net capital. unless Sec. Qualifications for Registration – Sec. and (c) 4. 3. or is a controlling person of the issuer. including the establishment of minimum net capital requirements. Revocation.2 . and the carrying and use of deposits and credit balances of customers.1 Preventive Suspension – Sec.sale of any security except in compliance with such rules and regulations as SEC shall prescribe to ensure fair and honest dealings in securities and provide financial safeguards and other standards for the operation of brokers and dealers. 29 5. Refusal or Suspension of Registration of Securities Market Professionals – Sec. 5. 29. the acceptance of custody and use of securities of customers. Exchanges 3. and this fact shall be reflected in the order ticket and the confirmation slip. 33.1: File application for registration. 3. and (d) Other transactions of a similar nature as SEC may define. 168 SCRA 276 (1988)]. EXCEPT as follows: (a) Any transaction by a member-broker acting in the capacity of a market maker. Broker-Dealer Segregation Rule – Sec. CMS Stock Brokerage. 33. 33. Prohibition on Use of Unregistered Exchange – Sec 32.3 4. v. 34. Ledesma & Co.. Compliance Requirements for Exchanges – Sec. exclusive rights and privileges which the courts have fully recognized.4 Additional Fees of Exchanges – Sec. an exchange has the power to adopt its own constitution.VIII. rules and regulations so far as they are not contrary to law or public policy and which will secure to the members. 3. Regulation of Over-the-Counter Markets – Sec.2: n all instances where the member-broker effects an Exchange transaction for its own account or the account of an associated person or an account with respect to which it exercises investment discretion.. Note: The rules and regulations of the stock exchange form part of the contract covering securities transacted within the facilities of the exchange [Carolina Industries.1 2. Inc. because like any other association.3 SEC Action on Application – Sec. 34. CA. 32. 3.1 Obligation of Broker When Self-Dealing – Sec. SEC Powers with Respect to Exchanges and Other Trading Market . vs.2 Administrative Sanctions – Sec. EXCHANGES AND OTHER SECURITIES TRADING MARKETS 1.1: It shall be unlawful for any memberbroker of an Exchange to effect any transaction on such Exchange for its own account. and Sec. 97 SCRA 734 (1980)]. Anyone who becomes a member of the exchange voluntarily submits himself to the operation of those rules and is expected to be bound by and to respect them [Lopez. the account of an associated person. 34.1 Definition of Exchange – Sec.7: “Exchange” is an organized marketplace or facility that brings together buyers and sellers and executes trades of securities and/or commodities. 3. (c) Any transaction to offset a transaction made in error. it shall disclose to such customer at or before the completion of the transaction it is acting for its own account.2 3. Inc.3 and 33. Locsin.2 3. or an account with respect to which it or an associated person thereof exercises investment discretion.3 Registration of Exchanges – Sec.4 2. by-laws. 35 3. 40: Comply with registration requirements of SRO. Inc. (b) Any transaction reasonably necessary to carry on an odd-lot transactions.2: 2. denial of listing application. 36. But if management prerogative of PSE.1: If in SEC’s opinion such action is necessary or appropriate for the protection of investors and the public interest so requires for 30 days.2 4. 36. i. an Exchange may withdraw its registration or suspend its operations or resume the same. which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. 37 6. 4. 281 SCRA 232 (1997)].4.3 Uniform Trading Rules – Sec. with approval of the President of the Philippines. its parent or subsidiaries. SEC has no power [PSE v.6 Establishment of Trust Fund – Sec.e. an “independent director” shall mean a person other than an officer or employee of the corporation. . Size and Location – Sec. 4. whichever is the lesser.4 4.4 To Determine Number. 38: Every Covered Issuer shall have at least two (2) independent directors or such independent directors shall constitute at least 20% of the members of such board. For this purpose. 33.5 5. 36..3 4. Independent Directors – Sec. or if more than 30 days but not exceeding 90 days. 36.1 Power over an Exchange – Sec.5 Rules for Prompt Clearance and Settlement – Sec.2 Power to Suspend Trading – Sec. or any other individual having a relationship with the corporation. Registration of Innovative and Other Trading Markets – Sec. 36.6: Upon appropriate application in accordance with SEC rules and regulations and upon such terms as SEC may deem necessary for the protection of investors. CA. (e) News disseminating services. processing. SELF-REGULATORY ORGANIZATIONS 1. (h) Securities-rating agencies.1: The Code grants SEC the following powers with respect to securities-related organizations: (a) To register them as SRO. 3. or otherwise. (g) Statistical agencies. with full powers to deny membership.1: SRC defines them as "organizations whose operations are related to or connected with the securities market such as but not limited to associations of:" (a) Brokers and dealers. 2. a communications network. on a current and continuing basis. as necessary and appropriate for the protection of investors and the public interests. (c) Custodians.1: Self-regulatory organizations ("SRO") may be granted much independence by SEC when they are organized and operated in a manner that they become responsible for the administration and enforcement of the relevant provisions of the Code. barring any person from becoming associated with their members. information with respect to such transactions or quotations.IX. which are engaged in the business of: (a) Collecting. SEC can register as SRO only "securities-related organizations. 39. and their own rules and regulations. a terminal display device. Powers of SEC with Respect to Securities-Related Organizations – Sec. its rules and regulations. . information with respect to transactions in or quotations for any security. Under SRC. or coordinating the distribution or publication of. participating in. whether by means of a ticker tape. or (b) Distributing or publishing. The Nature of Self-Regulatory Organizations – Sec. (b) Transfer agents. and to discipline their members and persons associated with their members under fair procedures. or assisting. 39. and (i) Securities information processors. (b) Otherwise to grant them licenses to operate. (f) Proxy solicitors. (d) Fiscal and paying agents. or preparing for distribution. (d) Computer services. 39. What Are "Securities-Related Organizations"? – Sec. 6 8. 40.1 Registration of Securities Association – Sec. 42 1.1 Definition – Sec. including requiring all participants in the securities market to cooperate within and among themselves and require electronic integration of their records. Periods in Registration of SRO – Sec.6 8. 1.4 4.2 Prohibition on Use of Unregistered Clearing Agency – Sec. 40 6.2 Requirements of Securities Association – Sec. Registration and Dealings in Securities 2.1 Regular Disciplinary Proceedings – Sec. 4. 39. 40. investor or securities intermediary.1 Recognition of Uncertificated Securities“[24] – Sec. 41 1.3 Membership Procedural Rules – Sec. 39. Clearing Agencies 1. Procedure on Adoption or Changes of Rules by SRO – Sec.2 Summary Disciplinary Proceedings – Sec. Securities Association 4. supervise. SRO Powers and Obligations – Sec.3 Registration of Clearing Agencies – Sec.6: “clearing agency” is any person who acts as intermediary in making deliveries upon payment to effect settlement in securities transactions. 43: Notwithstanding Section 63 of the Corporation Code. as a condition for their operations.2 4. SRO Disciplinary Proceedings 8. 40 8. a corporation whose securities are registered or listed on a securities Exchange may: (a) If so resolved by its Board of Directors and agreed by a shareholder. or record the transfer of some or all of its shares into the name of said shareholders. ACQUISITION AND TRANSFER OF SECURITIES AND SETTLEMENT OF TRANSACTIONS IN SECURITIES 1. 40 7. 40.3 Notice and Appeal to SEC – Sec. suspend or otherwise discontinue. 3. 40. and (d) To prescribe rules and regulations necessary or appropriate in the public interest or for the protection of investors to govern SRO and other organizations licensed or regulated.7 9. 44 2. issue shares to.4 Evidentiary Value of Clearing Agency Record – Sec.5 5. to ensure transparency and facilitate exchange of information.5 X. SEC Control and Supervision over SRO – Sec. investors or. 39.(c) To regulate. examine. securities . 2 Rules on Transfers of Securities – Sec. a security. a pledge of. 43: Transfers of securities. is properly constituted and the instrument proving the right pledged shall be considered delivered to the creditor under Articles 2093 and 2095 of the Civil Code if a securities intermediary indicates by book-entry that such security has been credited to a specially designated pledge account in favor of the pledgee. 2. issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name. without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name. (d) The registration of a transfer of a security into the name of and by a registered clearing agency or its nominee shall be final and conclusive unless the clearing agency had notice of an adverse claim before the registration was made. may be validly made and consummated by appropriate book-entries in: (a) Securities accounts maintained by securities intermediaries. when a transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred. so far as the corporation is concerned. and (b) If so provided in its articles of incorporation and by-laws. but this is without prejudice to any rights which the claimant may have against the issuer for wrongful registration. (b) Such transfer has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of security or right transferred.4 Pledging a Security or Interest Therein – Sec. including the unrestricted negotiability of that security by reason of such delivery. or (c) The stock transfer agent. SEC by rule may allow other corporations to provide in their articles of incorporation and by-laws for the use of uncertificated securities. . including an uncertificated securities.intermediary in the form of uncertificated securities. including an uncertificated security. with the following legal effects: (a) Such bookkeeping entries shall be binding on the parties to the transfer. (b) In the stock and transfer book held by the corporation. or release of a pledge of. 45: In addition to other methods recognized by law. 2. and (e) Nothing shall preclude compliance by banking institutions and their stockholders with the applicable ceilings on shareholdings prescribed by law. transfer of uncertificated shares shall only be valid. (c) However. in order to achieve the objectives of the Government with due regard for promotion of the economy and prevention of the use of excessive credit. 50 3. 1.1 Purpose – Sec. 48.2 and 48. however. or (b) 100% of the lowest market price of the security during the preceding thirtysix (36) calendar months.3 Margin Allowance Standard – Sec. 48: The margin is required for the purpose of preventing the excessive use of credit for the purchase or carrying of securities. 48.1: SRC mandates that the margin allowance shall be based upon the following standard: An amount not greater than whichever is the higher of (a) 65% of the current market price of the security. such book-entries are created shall be governed by the registered clearing agency’s rules.2 Indirect Violations of Borrowing Restrictions – Sec. SEC Power Over Securities Ownership – Sec. In case of a registered clearing agency. the procedures and the exact time at which. Margin 1. the corporation shall not be bound by the foregoing transactions unless the corporate secretary is duly notified in such manner as SEC may provide.1 .3 2. Liabilities of Controlling Persons. Aider and Abettor 1. 47 XII. the Monetary Board may increase or decrease the above percentages.Such pledge has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of such security or right pledged. Enforcement of Margin Requirements and Borrowing Restrictions 3. Note: However. LIABILITIES AND PENALTIES 1.1 Indirect Violations of Margin Requirements – Sec. MARGIN AND CREDIT 1. but not more than 75% of the current market price. 48.1 Liability of Controlling Persons – Sec. 50 XIII. 51.1 Restrictions on Borrowings – Sec. and Dealers 2. Prohibition on Extension of Margin – Sec. 3. 49 3. Borrowings by Members.1 1. 14.2 SEC Rules on Margin – Sec. Brokers. 2 1.1 4.S. [4] Under the “Howey Test”. Civil Liability Transactions . with references to Atty. a . No. Decasa’s Securities Regulation Code. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans – Sec. v. [2] “Evidences of Indebtedness” are written representations of debt securities or obligations of corporations.1 Causing False or Misleading Statements to be Filed with SEC – Sec. 60 8. (3) with expectation of profits. Amended SRC IRR] [3] “Asset-backed securities” are certificates issued by Special Purpose Entity (SPE). index of prices or rates. the repayment of which shall be derived from a cash flow of assets in accordance with the plan. p.2 Other Remedies Available – Sec.2 5. Securitization Act of 2004]. such as long-term commercial paper (maturity more than 365 days) or short-term commercial paper (maturity of 365 days or less). foreign exchange rate. SPE is either Special Purpose Corporation (SPC) or Special Purpose Trust (SPT). citing SRC Rule 3-1. commodity price.1 2. and Examination of Exchanges and Members 2.4 Unlawful Aiding and Abetting – Sec. 5 citing R. 56 4.5 Substantial Assistance – Sec. security price.2 3.1.3 1. p. Civil Liability for Manipulation of Security Prices – Sec. [DECASA. 62 10. SEC.3 Hindering or Obstructing Act – Sec. transactions. 57. (2) in a common enterprise. 51. Reports. 69 11. 57. 63 10. Rules on Rights and Damages Claim 10. 51. Civil Liabilities on Account of False Registration Statement – Sec. 24 7. Communicat-ions and Reports – Sec.2 Obvious Rule Liability Rule – Sec.5 2. 73 [1] This Outline is based primarily on Dean Cesar L. as indicated. 546 SCRA 567 (2008)] [5] “Derivatives” are financial instruments whose value changes in response to the change in a specified interest rate. Civil Liability on Account of Insider Trading – Sec. Records. or schemes whereby a person: (1) makes an investment of money. 27. 51. Civil Liabilities Arising in Connection With Prospectus. “Investment Contracts” are contracts. Villanueva’s Commercial Law Review. and (4) primarily from the efforts of others [Power Homes Unlimited Corp. [DECASA. 2007 and 2009 Editions. Lucila M.4 1. 52. 51.1 Keeping of Records – Sec.A.Sec. 58 for Fraud in Connection with Securities 6.1 and 61. 7. 52. 2004 Edition.2 9. 9267.1 For Actions on False Registration and Manipulative Devices – Sec. Penalties for Violation of the Code – Sec. Limitation of Actions – Sec. Accounts.2 Report on Extension of Credit – Sec. and then goes into marketing campaign to hype its price. 6 citing SRC Rule 3-1. [DECASA. leaving the late investors with shares of very deflated price. It is settled at a future date. even though this is lower than the current market price. p. [DECASA. and resells to. to buy (call options) or sell (put options) an underlying security at a predetermined price. or similar variable or underlying factor. and experienced sales people who talk to hundreds of people across the country every day skilled but dishonest salespeople. 23. Amended SRC IRR] [6] “Options” are contracts that give buyer the right. 6 citing SRC Rule 3-1.15: “Underwriter” is a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another company.” constitute fraudulent telemarketing operation involving high-pressure sales of securities. It requires no initial or little net investment relative to other types of contracts that have similar responses to changes in market conditions. interment.1. p. 10. in anticipation that the price will decline and that he will be able to cover the sale by purchasing them back at a later date at a lower price. The order is a hedge against market decline.2. 6 citing [8] DECASA. but not the obligation. p." [14] “Painting the tape” represents an illegal practice by traders who manipulate the market by buying and selling a security to create the illusion of high trading activity and to attract other traders who may push up the price.” is a practice whereby a speculator buys a particular stock. {DECASA.credit rating or credit index. [9]Sec.F. p. [Sec. Amended SRC IRR] [13] "Marking the close” represents the practice of executing the last transaction or series of transactions at or near the close of the trading day in order to affect its closing price. which can only be extended in accordance with SEC rules and regulations and/or Exchange rules.9] [12] “Commodity futures contracts” are contracts providing for the making or taking delivery at a prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof. with or without interest or insurance coverage and includes life. [DECASA. In a typical boiler room. [11] “Pre-Need Plans” are contracts which provide for the performance of future services or the payment of future monetary considerations at the time of actual need. 77-78] [20] “Churning” is a situation where a broker-dealer is the sole or dominant market-maker in a particular security and creates a market in that security by repeated purchases from. pension. which is customarily offset prior to the delivery date. education. often with years of experience selling dubious products and services over the phone. sit shoulder to shoulder at phone banks all day to call potential investors using sophisticated sales scripts and highpressure sales techniques. [DECASA. [DECASA. called the expiry date. [18] “Short sale” occurs when a speculator sells stocks which he does not own. p.F. 41 citing SRC Rule 11(1)(2). which can only be extended by the SEC upon stockholders’ approval. 3. Its course of conduct violates anti-fraud . Warrants generally have a longer exercise period than options and are evidenced by warrant certificates. and includes standardized contracts having the indicia of commodities futures. called the exercise or stake price. to selfrighteous repetition of "this company is changing the world" mantra. its individual retain customers at steady increasing prices. called the expiry date. [15] “Squeezing the float” refers to a wide range of practices from deadpan acceptance of abnormally high price-to-sales ratios. [17] “Boiler room operations. This is done by borrowing stocks from another party who still receives the dividends paid on the stocks while the short sale remains in effect. [16] “Hype and dump. 78] [19] “Stop loss order” is an order placed to protect a recognized gain in the price of securities against potential loss. on or before a predetermined date. p. 3. for which planholders pay in cash or installment at stated prices. to crystal ball gazing ten years out in order to find profits. telephones. and then sell his lot at huge profit. The order reflects the lowest price that a seller is willing to sell at. pp. [10]Sec. The opportunity for manipulation arises because the offer does not reflect the current market price. and other plans which SEC may from time to time approve. Amended SRC IRR] [7] “Warrants” are rights to subscribe or purchase new shares or existing shares in a company on or before a predetermined date. a rented space with desks. 3. p. 81] [22] “Single day trading practice” is a practice of buying and selling shares in a single trading session. where the investors settle their accounts at the end of the day.14: “Uncertificated security” is a security evidenced by electronic or similar records. prioritize their own dealer accounts by executing their own orders on a particular issue ahead of their clients. [DECASA. [DECASA. [DECASA. p. 81] [24]Sec. there is a risk meeting possible deficiencies in the customer’s account resulting from the transaction.provisions if the broker-dealer does not make a full disclosure to the customers of the nature of the market with the intent to defraud or with the wilful and reckless disregard for the interest of the customers. p. While the transaction is not prohibited. 81] [23] “Front running” is a market malpractice whereby brokers. . and may encourage “free riding” which is an improper extension of credit or purchase of shares without the intent of paying at all or with the intent of paying only if the price goes up by the settlement date. [DECASA. also acting as dealers. 81] [21] “Scalping” is a situation in which a broker-dealer or investment adviser recommends the purchase of securities without disclosing its practice of purchasing such securities before making the recommendation and then selling them at a profit when the price rises after the recommendation is disseminated. p. 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