Banking Notes September 19

III. Other Tax Matters
A. Applicable Taxes
1. Income Tax
2. DST
BIR RR 9-94, Section 8: If the loan agreement and security device are evidenced by 1 agreement (omnibus agreement), pay only the higher DST
e.g. 1 borrower entered into the ff transactions (I'm not sure if this is accurate…should find the applicable DST rates):
Transaction DST to be paid
*200M Loan agreement 300T
*100M Loan agreement 150T
*50M Loan Agreement 75T
*REM securing the 200M and 100M loan 600,010
*CM securing the 200M & 100M loan 600,010
*guarantee securing the 50M loan 0
*but if there's an omnibus agreement, pay P700,010 or P675,010

From Sir's lecture the other meeting:
If the bank lends money, the interest is subject to gross receipts tax (normally 5%) but the same amount is includable as part of the gross income of the bank, the net taxable portion of which is taxed by income tax (30% beginning 2009).
DST also imposed on certain bank transactions:
-loan agreements and PNs: .5% of the amount in the transaction
-pledges, mortgages, trust receipts: .2% of the amount involved in the transaction
-but if combine loan+security (omnibus agreement): .5% (higher between the two)
-if assignment: P15.00 (tax certificate)

3. Gross Receipts Tax

B. Taxation of FCDUs and OBUs
RA 9294
GR: All income derived from transactions with NONRESIDENTS are EXEMPT from all taxes
X: interest income from foreign currency loans with RESIDENTS: subject to 10% final tax rate

From Sir's lecture the other meeting:
FCDUs are taxed differently.
The income of FCDUs
from foreign currency transactions: 10% final witholding tax (should be with residence: include local KB, local branches of Foreign banks, other fcdus, obus)
It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them).

If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate (10%)
-if the counterparty is a nonresident: income derived by that nonresident is not taxable here; similarly, the income by FCDU is not taxed.
SO favorite customer of a FCDU is a nonresident, as there is no tax!

C. Tax Minimizing Structures
1. Omnibus Agreement
*An omnibus loan agreement is a loan agreement with the mortgage agreement already included as one of the provisions
*should also include a waiver (if mortgage is REM) of the credit preferences in NCC as a loan agreement with pari passu provision requires that the loan agreement should not be notarized. However, REM is required to be notarized. To comply with the latter requirement, the creditor in the loan agreement should waive the preference of credit provision in the NCC and specify that the notarization is only for the purpose of the loan agreement
*An omnibus agreement is a tax minimizing structure because for executing transactions, DST is required to be paid for each transaction. However, as the omnibus agreement combines two transactions, only 1 DST is required to be paid (BIR RR 9-94, Section 8 requires the higher rate be paid)

Mondragon Leisure and Resorts Corp. v. CA
F: Mondragon International Philippines, Inc. (MIPI), Mondragon Securities Corporation (MSC) and Mondragon Leisure and Resorts Corporation (MLRC) entered a lease agreement with CLARK DEVELOPMENT CORPORATION (CDC) for the development of Mimosa Leisure Estate.
-Omnibus agreement in this case composed of:
*loan agreement for US$20M
*Pledge of US$20M worth of MIPI shares of stocks
*assignment, transfer and delivery of all rights, titles and interest in the pledged shares
*assignment of leasehold rights over the project and all the rights, title, interests and benefits to and under any and all agreements in connection with the project
***the case does not really show how an omnibus agreement is a tax minimizing scheme but gives an example of an omnibus agreement

2. "Originating bank" structure (a.k.a. "Fronting Strcuture")
(from Sharry's Notes)
This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of foreign lenders. It is a form of tax avoidance.
In this structure, a foreign bank acts as creditor on record while domestic bank participates silently.

From Reviewer:
In this structure, a fronting entity/bank which enjoys TAX-EXEMPTION or a LOWER TAX RATE under prevailing tax laws "FRONTS" for what would otherwise be direct lenders to a borrower.

The fronting bank (F) lends dollars/money to borrower (B), a local company, w/o need of witholding taxes on interest payments because of the tax-exemption or tax treaty overrides (lower taxes).

F is actually a "FRONT", and thereby turns around and executes a participation agreement w/local banks FCDUs, in effect making these local bank FCDUs "silent participants".

Another variation involves the booking of the "front" (like IFC) of an "A" loan in its books, and another "B" loan, participated in by local banks for which the "front" acts as such.

From Sir's lecture last time:
Originating bank structure
=fronting bank structure
-idea is the borrower would look for a bank that is exempt from Philippine income tax
Either under
*tax treaty
*NIRC
- SEC 32: Financial institutions getting …from their government
(a)  Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and
(iii) international or regional financial institutions established by foreign governments.

*Feeling ni Cha ganito un…
Bank doesn't want to pay tax when it lends money (interest income tax and other income taxes from its transactions). (Check TAX 1 FOR WHO ARE EXEMPT FROM PAYING INCOME TAXES!). So they would search for other banks who are EXEMPT from paying taxes.

IV. Project Financing
Reviewer on Project Financing:
Project Financing is the financing of an economic asset capable of generating enough revenues to cover operation costs and debt servicing for a duration of time longer than the life of such asset. It is most often undertaken in projects involving electricity and power generation, transportation infrastructures and the like.

What usually happens is that a sponsor undertakes to cover the initial financing of the project, lenders are resorted to cover the deficiency, a SPECIAL PROJECT VEHICLE (SPV) is established (which is usually a joint venture or limited partnership) to undertake the building of the infrastructure, the SPV enters into a loan agreement with the lenders backed by securities: mortgage over the assets of the SPV and pledge of equity of sponsors…. (hay, basta on page 10)

SIR in lecture
Relates to infrastructure projects you see around
e.g. MRT, power plants, skyway…

You have a project, its economic life more or less is more than 25 years (must exceed the term of the loan). It is anticipated by the lenders that the project would earn revenues because the lenders would look at the revenues…
-it is a without recourse transaction so the lenders usually need an offtaker
If the project does not earn revenues, the lenders would not get paid. So it is essential for the project to have an offtaker (entity that's going to buy the public project?)
e.g. in powerplant project
OFFTAKER: NPC (WON NPC uses the electricity generated by the power plant, NPC has to pay)
In MRT
Offtaker: DOTC (even if nobody rides the train, DOTC would still pay the periodic lease payments)

Sponsors of the project
-it would establish a special purpose company

SPONSORS >>>establish>>> SPECIAL PURPOSE COMPANY (SPV) >>> Sponsors would provide an EQUITY which would fund the project (but it's not sufficient) so there would be lenders that would put money in the company
LENDERS: mainly banks and multilateral development banks such as ADB, US EXIM Bank or Japan EXIM Bank…
>>>The project company would mortgage to the lenders (trustee designated by the lenders) the property/equipment/facilities
>>>there would be REM, CM, pledge of shares (pledged by the sponsors in favor of the lenders not because the shares are very valuable on the standpoint of the lenders…but for the lenders to be able to take over the project company just in case the sponsors would not be able to pay the loan
>>>to make sure that the revenues are all delivered and remitted to the lenders, there's the TRUST RETENTION ACCOUNT/AGREEMENT wherein all revenues from the project would be remitted
e.g. all payments from NPC are remitted to the trust account managed by the trustees of the lenders. If for instance there's a need to pay the employees of the project company, a request would be made to the trustee of the account to release (disburse) money from the account
(the diagram drawn by sir "looks like a waterfall" so it is called cash waterfall account)
>>>the issue is WON the company could be owned by foreigners (as usually, foreigners provide the funds)
-SC ruling said that (implicitly) yes, because the actual operation is nationalized, not the facilities - para ngang may ganito na pinabasa on MRT

Operation Maintenance Agreement
-usually lenders require technicians to run the facility to make sure that it would earn revenues
Inter-Creditor Agreement
-lenders agree among themselves how to synchronize their activities in case there's a default

OMNIBUS AGREEMENT
-contain all these agreements!!!


A. Mechanism
-without recourse financing
-There must be a guaranteed taker/purchaser of the output of the project
-e.g. MRT >>riding public
Power plant >> NPC
-lenders look to revenues of the project as the main soure of the payment (hence, it is important that the project is earning money)

B. BOT and similar arrangements
-there are several
Field List transfer: the arrangement in MRT
Rehabilititate-Operate-Transfer: rehabilitate
Rehabilitate-Own:

*Unsolicited Proposal
e.g. Megaworld Proposal
-develop hectares of land in Global City
e.g. Terminal 3

BOT Law

V. Derivative Transactions
A. Concept
Financial asset derived from another financial asset
i.e. option on treasury bill
CALL OPTION: option to buy
PUT OPTION: option to sell
-the option is called a derivative
*buyer: one who wants the option
seller/writer: one giving the option
*American Option: exercise option before the strike date (any time during the option period)
-more flexible but higher premium
*European Option: exercise option on the strike date (end of the option)
-stricter but lower premium
*Bermudan Option: Exercise option on any date

DERIVATIVE CONTRACT
-contract for the differences
-concerned with the differences between the price on strike date and price on trade date
i.e. forward foreign exchange contract
TRADE DATE: P57 = $1
After 3 months (strike date): P60 = $1
-the buyer is said to be "in the money" because ha has a gain of P3/$1

BUT IF DURING THE STRIKE DATE…
P56 = $1
-buyer is "out of money" because he loses P1/$1. Hence, he shall forego the option and will buy the dollars elsewhee.

*CURRENCY SWAP
-simultaneous purchase and sale of currency involving the same counter party

From reviewer:
DERIVATIVE
-a financial instrument, the value of which is dependent upon the price of one or more other assets, such as commodities, foreign currencies, etc.
-rephrase: they are financial assets which derive their value from other financial assets such as:
(1) equity, securities
(2) fixed-income securities
(3) foreign currency and
(4) commodities
-aka Contracts for differences: difference between agreed future price and actual price

DERIVATIVE TRANSACTION
-one that involves derivatives
-purpose: manage risks of exposure/investment to the underlying financial assets it represents
-it can either be OPTIONS OR FORWARDS
a. OPTIONS
*CALL OPTION: the buyer is given the right (not obligation) to purchase an asset at a specified price on or before a specified date
*PUT OPTION: the seller/rider is given the right (not the obligation) to sell an asset for a specified price on or before a specified date
b. FORWARD
-involves the OBLIGATION to either buy or sell an asset at a specified price on or before a specified date
Illustration:
Co. A will buy US$1M 6mths from now at PhP40=US$1
ForEx Rate in 6mths Situation
PhP50=US$1 In the money
PhP30=US$1 Out of the money; but in the market
PhP40=US$1 At the money; exercise forward given assured amount

common examples of Derivative Transactions:
*currency swap
*forward contract
*call option
*put option

From Sharry: This is a contract for differences. The income is derived from the difference between agreed settlement price and actual market price on the agreed settlement date.

On CURRENCY SWAP:
-It is the simultaneous buying and selling of currencies involving spot (near leg) and forward (far leg) rates.
 
***A bank cannot engage in derivative transactions without necessary BSP license.

Example ni sir from lecture
FORWARD: buy currency from the future
e.g. you're a borrower, you earn an interest rate every 6 months at $1. You want to lock the interest rate. Let's assume that the Exchange rate is $1=P50
-you enter into a forward contract, you buy $1 which is equivalent to P50.
…6 months from now:
Supposing exchange rate is
$1.00=P60 You made the right decision! In the money: you would exercise your option! (you anticipate a gain)
$1.00= P50 Out of the money: the market price 6 months from now is lower than the agreed price under the forward agreement - you would not exercise your option to buy (you would just lose the premium you paid). You would buy somewhere else not under forward contract
$1.00=P55 At the money

2 Derivatives In the Philippines
1. Equity related securities
2. Exchange for Debt Securities

All other transactions outside the exchange are called OTC (over the counter):

IN US
1. New York Future Exchange
2. New York Cotton Exchange
3. CSCE (Coffee Sugar and Cocoa Exchange)
-commodities Exchange

In Exchange: you have remedy: clearing agency makes sure that the buyer is able to pay and the seller is able to deliver

Exchange Traded Derivatives
-governed by agreements in prescribed forms
-OTC derivatives: there's an organization that took initiative to provide uniform documentation (International Swaps and Dealers Association -ISDA) - see below

CROSS-CURRENCY SWAP
(refer to diagram on page 48 of the reviewer)

A. BSP Licensing Requirements
Section X602 (BSP Circular)
-the license will enable the licensee to engage in currency forwards and currency swap

2 Types of License:
a. Regular Derivative license: any bank, NBQB, affiliate
b. Expanded Derivative License: only Commercial and universal banks can apply

BSP Circ. No. 102-95
Section 2. General Authority
-any
*BANK
*NBQB
*And or its subsidiaries/affiliates
…may engage in financial derivatives activities upon prior approval of the BSP
-a bank may engage in derivative activities BOTH in its RBU and FCDU/expanded FCDU

BSP Circ. No 297-01
a. for expanded derivatives authority
SCOPE: ONLY UBs and KBs
-what may be done after acquiring license: may
*trade
*Sell
*deal
*take positions in currency swap
*forward of any tenor as well as all other derivatives for their own account or on behalf of customers
b. For regular derivatives authority
SCOPE: other Financial institutions (Fis) supervised by the BSP pede
-what may be done after acquiring license: may
*sell derivative products to its customers PROVIDED
>FI shall hedge such derivatives
>the risk being hedged is already existing with the FI itself
c. No license derivatives
SCOPE: UB and KB w/ no license
-what may be done:
*trade
*sell
*deal
*take positions for their own account or in behalf of customers in currency swaps and
*forwards w/ tenor of one year or less
*sell other derivative products of licensed entities to its customers PROVIDED
>customer currently has a risk w/ the bank it wishes to hedge
d. For engaging in derivative transactions as end-users
SCOPE: Banks, NBQB, Other BSP supervised FI
-no license needed as they are purely end-users

BSP Circ 594
-latest Circular on derivative transactions

*if banks does hedging, no need for license but other than that, needs special license
*corporates (corporations): not governed by BSP, it would depend on the articles of incorporations on WON they could enter into derivative transactions (or else, transaction is ultra vires)
---in other jurisdictions, corporates does not do ultra vires transactions: they could do anything! But sir thinks it's better to regulate the activities of the corporates…because it sounds good…ultra vires…:) )


B. ISDA Master Agreements
1992 ISDA MASTER AGREEMENT
(international swap dealer's association)
-standardize documentation
-cannot modify terms of agreement
-have to use schedule to change the agreement
-one of the most carefully drafted agreement
-has 7 pages long of lists of Derivative Agreements

Cross-out netting
-you have a master agreement which you want to amend: you can't just cross it out. The master agreement stays as is, you have to make a schedule to the master agreement whch reflect the amendment

SCHEDULE
-contains the terms agreed upon by the parties
-actual transactions evidenced by confirmation
-contains a serial agreement clause (any and all transactions are considered as one agreement)
>>>gross out netting provision satisfies the delivery requirement to render a future contract valid

If there's a default on the part of 1 party, all of these transactions are netted such that only 1 number emerges.
Single agreement: all the agreements treated as a single transaction
(then sir discusses cherry picking) - See below

Onapal Philippines Commodities, Inc. v. CA
F: Onapal is a registered and licensed commodity futures broker.
Susan Chua was invited by Diaz, Account Exec. Of Onapal, to invest in the commodity futures trading by depositing P500k
Chua signed a Tradig Contract and other documents w/o being aware of the risks involved
Chua was asked to deposit again P300k. She wanted to withdraw her money but DIAZ wouldn't allow her
Chua instituted the present action to recover her money

I: WON the TRADING CONTRACT is VALID
HELD: VALID IN ITSELF BUT TRANSATION CARRIED OUT TO IMPLEMETN IT VOID

Commodity Fixtures Contract
-specie of securities
-agreement to buy or sell a specified quantity and grade of a commodity at a future sale at a price established at the floor of exchange

Terms of Contract signed by Chua
-Onapal will act as broker and will directly transmit the order of customers (includes Chua) to its principal Frankwell Enterprises in HK. The later will then place the order to Tokyo Exchange.
-however, in this case, there was no evidence that the orders and the money were transmitted to Frankwell.

*the trading contract IS VALID IN ITSELF because it complies with the RULE AND REGULATIONS ON COMMODITY FUTURES TRADING
*BUT the transaction which was carried out to implement the contract DEVIATED from the true import of the agreement
>no actual delivery to Frankwell
>final settlement is made by payment of the differences of prices

-the dealings became mere speculative contracts in which parties merely GAMBLE in the rise and fall of prices WHICH IS ILLEGAL
As such, the trading contract became in the nature of a GAMBLING CONTRACT WHICH IS NULL AND VOID.

Onapal v. CA: In ISDA, there is netting off of agreements which may give rise to gambling issues. In case there is but pretended delivery of goods involved in the transactions, the Civil Code provision prohibiting gambling is violated.

SIR: There's a section that pending the issuance of SEC of rules of trading of securities of futures, trading is suspended. However, in the document called HISTORY OF BACKGROUND of SEC, what is suspended is public trading of commodity future transactions
Onapal happened when commodities trading was still allowed. The problem in this case is that even if the contract was valid, its implementation was such that there was no delivery of the commodity, in violation of ART 2018, NCC
The issue now is WON cross-currency swapping after this, or contracts about currencies, is comprehended in ART 2018. In other words, is ForEx securities? Share of stocks? NO, NO…But is it goods?
Look at A1636: Goods defined. It excludes money and legal tender in the Philippines. It is implied to include foreign exchange. If that is the case, then is Forex supposed to be contemplated under Art 2018? SIR says no, because introductory paragraph of A1636 states that the definition of goods undr that article is for the title of sales, not under the title of aleatory contracts. SO A2018 does not contemplate forex.


First Philippine International Bank v. CA
F: First Philippine International Bank went insolvent
H: Cherry picking (liquidator picks out the contracts not favorable to the insolvent bank) is not allowed. The conservator is not allowed to disregard contracts unfavorable to the insolvent bank.
-power of conservator is not unilateral...

SECTION 70, insolvency law
-prohibits the sale, transfer, etc. of the assets of the insolvent 1 month prior to filing for insolvency
-does not apply to banks and insurance companies because they have their own set of insolvency rules

FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers granted to the conservator, enormous and extensive as they are, cannot extend to the post facto repudiation of perfected transactions. Otherwise, they would infringe upon non-impairment of contracts clause in Constitution.

SIR:
-because of the single transactions clause, there's no cherry picking because there would only be one cherry to pick
+page 177 of sir's book



VI. Securitization
A. Concept
-means by which the seller/originator discounts receivables to the buyer on a true sale basis
-absolute transfer: creditors of the seller cannot reach the assets
-without recourse transaction
-buyer must be a Special Purpose Entity (special purpose corporation or special purpose trust)
>>the SPE repackages the receivables in the asset pool and issues a security known as ABS (Asset Bracket Security)
(See part B)
-receivables transformed into securities

DIFFERENTIATED FROM AN SPV:
SPV: involves bad debts
Securitization: performing receivables (credit card receivables, PLDT)

B. Asset-backed securities
>>ABS is sold to investors who look to revenues collected from the asset pool
>>there is overcollateralization in this situation

BSP Circ. 185
-Originating bank cannot use its own trust department to issue ABS, has to do it through another bank


C. Securitization Act of 2004 (RA 9267)
SECTION 3. Definition of Terms. - For purpose of this Act, the term:
(a) "Securitization" means the process by which assets are sold on a without recourse basis by the Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS) by the SPE which depend, for their payment, on the cash flow from the assets so sold and in accordance with the Plan.
(b) Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the repayment of which shall be derived from the cash flow of the assets in accordance with the Plan.
(c) "Assets", whether used alone or in the term "Asset-backed securities," refer to loans or receivables or other similar financial assets with an expected cash payment stream. The term "Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt instruments: Provided, That receivables that are to arise in the future and other receivables of similar nature shall be subject to approval by the Securities and Exchange Commission (SEC) or the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the term "Assets" shall exclude receivables from future expectation of revenues by government, national or local, arising from royalties, fees or imposts.
(d) "Asset Pool" means the group of identified, homogeneous assets underlying the ABS.
(e) "Commission" refers to the Securities and Exchange Commission (SEC).
(f) "Credit Enhancement" means any legally enforceable scheme intended to improve the marketability of the ABS and increase the probability that the holders of the ABS receive payment of amounts due them under the ABS in accordance with the Plan.
(g) "Originator" means the person or entity which was the original obligee of the Assets, such as financial institution that grants a loan or a corporation in the books of which the Assets were created in accordance with the Plan.
(h) "Plan" means the plan for securitizations as approved by the Commission
(i) "Secondary Mortgage Institution (SMI)" means an entity created for the purpose of enhancing a secondary market for residential mortgages and housing-related ABS.
(j) "Seller" means the person or entity which conveys to the SPE the Assets forming the Asset Pool in accordance with the Plan. In most instances, the Seller may itself be the Originator.
(k) "Servicer" refers to the entity designated by the SPE to collect and record payments received on the assets, to remit such collections to the SPE, and perform such other services as may be specifically required by the SPE, excluding asset management or administration.
(l) "Special Purpose Entity (SPE)" means either a Special Purpose Corporation (SPC) or a Special Purpose Trust (SPT).
(m) "Special Purpose Corporation (SPC)" refers to a juridical person created in accordance with the Corporation Code of the Philippine solely for the purpose of securitization and to which the Seller makes a true and absolute sale of assets.
(n) "Special Purpose Trust (SPT)" means a trust administered by an entity duly licensed to perform trust functions under the General Banking Law, and created solely for the purpose of securities and to which the Seller makes a true and absolute sale of assets

SIR: even if securitization act passed 2004, not much securitization transaction under the act
-quite recently, because of the subPrime prices, securitization acquired bad reputation
-SP Entity (SPE), which can be an SPC or SP trust, will be the one to issue the asset-backed securities (ABS)
ABS: receivables that were acquired by the SPE
--it's source or repayment would come from the obligors of the receivables
--the holders of ABS are looking to the payments from the obligors, in a sense, it's a limited recourse
HOW DONE: Collateralization
e.g. Issue is P1M, the pool of receivables supporting it is 1%,

SELLER of the receivables = originator = Globe, Smart, PLDT…
Servicer = can also be the originator
SPT: trust department can act as one. A mere account w/n trust department (there can be several SPTs in one trust department)
SPC: corporation that is formed and established for the purpose of that single securitization transaction
--more cumbersome: should have board of directors, meet reporting requirements of SEC…etc.
----HOWEVER, if you use an SPT, it would be easier than SPC!
-but why is it that there's not much securitization transactions: a bank that want to enter a securitization transaction CANNOT USE ITS OWN TRUST DEPARTMENT! The SPT must be independent from the ORIGINATOR!
-sir says this should be reversed as the trust department of a bank is separate and distinct from the bank's operations!
-what entity in the Philippines expect lots of receivables? BANKS!!!
WON a bank can purchase ABS? BSP issued Circ 468 that states that bank can acquire ABS (to that effect, there's underlying securities mentioned but sir said that it's the same as ABS)
e.g. share of LGUs on the tobacco taxes were securitized (but there's a provision in the new act which prohibits securitization of tax revenues. Sir says the example is not covered by the prohibition because it is not revenue flow, it is not liquid yet…)


VII. Due Diligence
Due diligence team in a lawfirm: examines an entity…

2 types:
1. Prospectus
Due Diligence
-derived from securities act where there's astatement to the effect that securities to be sold to the public must be registered with SEC and there must be a prospectus accompanying statement and the facts mentioned therein must be accurate in all material respect, no omissions which would make any statement in it misleading. In that act, it was a defense on the part of the issuer that it has exercised DUE DILIGENCE in making the RS in the prospectus. That defense is supported by the issuer's employing a DUE DILIGENCE TEAM.
~so balik sa DUE DILIGENCE TEAM: inspects the documents of the company, transactions, etc. to make sure that all material information about the company is correct…

Under SRC, due diligence is no longer a defense. The KNOWLEDGE DEFENSE is the only defense left: the issuer or underwriter might escape liability if proves that purchaser had knowledge of the fact incorrectly stated. DUE DILIGENCE may be mitigating circumstance in admin case before SEC but not defense.
2. Acquisition Due Diligence
e.g. Philamlife is being sold by AIG, there are several lawyers and underwriters…Nyek, moot because transaction was aborted



I. Certain Financial Products/Exoteric Structures (not EXOTIC!!!)
A. Trade Account/Brokering
e.g.
SMC has several dealers…SMC delivers products to SMC, Dealers would not pay all at once
SMC could mandate a bank to look for investors that would buy the receivables
-bank acting for several investors, investors would enter agreement with the bank to look for investments
When SMC sells receivables to a bank representing several investors, the bank merely gives PARTICIPATION PARTICIPATES/CONFIRMATION SALE to the investors, this way the bank receives commission (Manila Type of Trade Brokering)

B. Credit-Linked Notes/Deposits
E.g. Foreign bank buys RP bonds? For $1M
-but foreign bank worries about credit-worthiness of RP (no-election news…) so it wants to get rid of the transaction with RP. SO bank issues CLN to a local bank, local bank gives $1M to foreign bank in exchange of CLN. The agreement is that the CLN would carry a higher interest than the credit rate… then I'm lost…
Cash settlement: foreign bank would sell its holdings of RP bonds to market (and probably for a lesser price). The proceeds of the sale would then be paid to the local bank
Physical settlement: the RP bond is delivered to the local bank; this is better because the RP bond is the most prime (nonrisk item) in the Philippines. If worse comes to worst, the local bank would still be paid in Pesos.

IX. Certain Other Matters
A. Anti-Money Laundering Act
Financial Action Task Force (FATF): a task force organized by developed countries which identified noncooperative countries (Philippines was formerly included in it, together with Nauru and Russia)
-if the Philippines did not comply with it w/n the deadline, there's a sanction! (money - remittances to the Philippines would be cross checked, meaning delay in the receipt of remittances in the Philippines)
-however, 1st AMLA was not compliant in certain aspects.
AMLC: authorized to freeze assets but this power taken out from it, should petition CA for freezing of assets (but this is problematic because a mole in the SC could easily inform the money-launderer of the attempt to freeze the latter's assets, and thus the account would be w/drawn) - The 2nd AMLA was inferior from the 1st one but it became compliant because the one who checked it wined and dined with Congressmen!
On cases when there's no need for freezing order from CA:
*Hi-jacking
*Drug trafficking
(as if the first thing that the violators would do is to deposit the proceeds of their illegal acts in the banks!)
-there's also suggestion that lawyers be whistle-blowers: BUT THIS WOULD NOT DO BECAUSE OF THE CONFIDENTIALITY AGREEMENT BETWEEN LAWYERS AND CLIENTS
-there are many recommendations of the FATF: but only few are taken
-among the recommendation is to amend the bank secrecy law…
-threshhold amount lowered…if you transact with covered institutions and the amount of the transaction is above the threshold, the bank is obligated to file a CTR…but even if lower than the threshold and the bank would be suspicious, the bank could still file a "suspicious transaction report" (CHA: I don't know why it's CTR when it stands for suspicious transactions report…)

B. Securities Regulation Code
-statute in Securities law, among which are:
*Truth in lending act
*GBL provs: truth in borrowing act
*SRC: truth in securities act
-persons who want to sell securities need to comply with the requirements of registration by SEC
Exceptions:
1. Exempt securities: when sold to the public, no need to register it (example, gov't securities issued to the public…)
2. Securities sold in transactions classified as exempt in SEC: e.g. Private placement
---just file with SEC a notice/form of exception w/n 10d from date of sale
3. Offshore offering: not covered by SEC because SEC would not have jurisdiction over sale of securities outside the Philippines
*SEC could come up with a list of exempt securities and transactions
*some of the list are discussed in Sir's book…which is unfortunately out of stock… hehe.

-Any public offering of securities is prohibited unless the securities are registered w/ SEC and SEC has declared effective the Registration Statement
PRIVATE PLACEMENT: sale to not more than 19 nonqualified buyers (qualified buyers are the banks, financial institutions)
PUBLIC OFFERING: random or indiscriminate offering to the public (any member of qualified buyers)
Qualified buyers: they can fend for themselves

***To avoid regulation by the SEC:
OFFSHORE OFFERING: a contract is signed abroad and payments are made through FCDU

INSIDER TRADING: when you are in possession of information not known to the public, you're not supposed to trade with that shares until the public was made aware of the information (only after disclosure can an insider trade)
-insider trading rules meant to remedy the asymmetry in information to make the insider and non-insider pari passu in terms of information
-INSIDER: given, you have access to non-public information from an insider (insider becomes the Tipper, you become a Tippee)
-insiders mandated to disgorge "short-swing profit" (if you were able to detect transactions in which the insider has made money, then the net gain must be disgorged by the insider) - turnover the profit to the company

Tender-offer
-if you intend to acquire at least 35% of the outstanding capital stock of a public company, e.g. listed company, whether alone or in concert with other persons, you need to make a tender-offer to the remaining shareholders who might be left out (because 67% is control).
In a case, the SC has ruled that the 35% can be direct or indirect shareholding

Continuing disclosure requirements
-for corporations

FINALS: Oct 17
-from security devices til end (focus on the principles, not on ready-made answers!)