The Securities Regulation Code and its Implementing Rules and Regulations

Rule 39

1 Registration, Responsibilities and Oversight of Self-Regulatory Organizations and Other Securities-Related Organizations 39.1.1. Rules Governing a Self-Regulatory Organization which is an Organized Exchange 39.1.1.1. All organized Exchanges shall be subject to these procedures and requirements set forth in this Rule. 39.1.1.2. For purposes of this Rule: 39.1.1.2.1. Organized Exchange or Exchange means a registered Exchange, whether or not registered as an SRO under the Code. 39.1.1.2.2. Participant refers to any person who has been authorized to use the SRO's services and facilities. 39.1.1.2.3. Securities laws refers to the Code and rules, regulations and orders issued by the Commission. 39.1.1.2.4. SRO rule refers to the constitution, articles of incorporation, by-laws and rules, or instruments corresponding to the foregoing and such policies, guidelines, practices, conventions and interpretations of the SRO including the annexes, forms and checklists to such rule, other than those establishing or concerning solely matters of SRO administration under SRC Rule 40.3.3. 39.1.1.3. SRO Rulemaking 39.1.1.3.1. Subject to Commission approval and pursuant to the procedures set forth in SRC Rule 40.3, an SRO's power to adopt and amend rules shall also include the power to repeal existing rules and provide interpretative guidance; Provided that, an SRO shall not suspend, alter or modify the enforcement of rules, guidelines, or policies earlier approved by the Commission without the prior approval of the latter. 39.1.1.3.2. An SRO shall adopt comprehensive rules governing its organization and governance, qualifications and rights of shareholders, listing of securities, trading of securities, settlement of contracts, qualification of members and other participants, ethical conduct of members and other participants, supervision and control of members, financial and operational responsibility of members, and discipline of members and other participants. 39.1.1.4. Power over listed companies The SRO shall be solely responsible for processing and approving or rejecting applications for new listing of securities, suspension and delisting of listed issues and imposition of sanctions on listed companies for violation of SRO rules; Provided, however, that such powers shall be exercised pursuant to SRO rules. caITAC 39.1.1.5. Compliance and Surveillance 39.1.1.5.1. An SRO shall establish an independent audit, compliance and surveillance office separate from the Exchange or within the Exchange, and in such form and substance that the Commission, by order, may prescribe. Such office shall not be subordinated or otherwise controlled in its activity by the Exchange Board or its review unit, and shall be responsible for carrying out the SRO's enforcement role pursuant to the securities law and for the discipline of participants. Such office shall further submit to the Commission a copy of its findings within three (3) business days from completion or at the same time that such office provides a copy to the Board or a review unit, if such office is an entity separate from the Exchange, or to any person or unit outside of the office if such office is an integral unit within the Exchange, whichever is earlier. Nothing in this rule shall be understood to preclude the Commission from requiring such office to submit a status report or any other kind of report on any of the activities that it is performing. 39.1.1.5.2. The Compliance and Surveillance office, in order to protect the interest of investors and the public in general, and to arrest the further commission of violations of securities laws, prevent financial instability and damage to the capital market caused by delay, and/or risk manage Broker Dealer operations effectively, may summarily suspend or impose limitations upon the erring Broker Dealer without need of approval from the Exchange Board or its review unit. Provided, however, that the Exchange Board shall, within five (5) trading days from implementation of such order, convene to review, confirm, modify, or reverse the Compliance and Surveillance office's action. Failure by the Exchange Board or its review unit to resolve the summary order shall be deemed an automatic confirmation of the action taken by the Compliance and Surveillance office. 39.1.1.5.3. The SRO shall enforce compliance with provisions of the securities laws regulating brokers, dealers and trading on the SRO and SRO rules by its members. The SRO shall notify the Commission within forty eight (48) hours of any instance where it fails to enforce compliance with the provisions of the securities laws and its implementing rules and regulations, and of the SRO rules, which it believes is justifiable, and within ten (10) days submit a complete report of such an instance to the Commission. 39.1.1.5.4. An SRO shall enter into a Memorandum of Understanding with other SROs to clarify its oversight responsibilities over persons who are members of or participants in more than one SRO and coordinate with other SROs to ensure adequate oversight. Such plan shall be submitted to the Commission for approval under SRC Rule 39.1.3. 39.1.1.5.5. An SRO shall monitor market conditions and trading activity to detect violations of the securities law and SRO rules. 39.1.1.5.5.1. The SRO shall conduct market surveillance of all trading activity on the SRO pursuant to SRO rules setting forth surveillance procedures and guidelines. 39.1.1.5.5.2. The SRO shall monitor compliance by listed companies with continuing listing obligations; Provided, however, primary oversight for compliance with full disclosure regulation under the securities law shall remain the responsibility of the Commission. 39.1.1.5.6. The Commission may, on its own initiative, monitor the market to ensure that the SRO is fulfilling its functions and to ensure further that each activity or potential problem area in the market is adequately covered and being reasonably addressed. For this purpose, SROs, exchanges, operators of trading markets, trading participants and other market participants shall, upon request, provide the Commission or its authorized representatives direct access to their trading systems, platforms, repositories and databases for information about particular accounts, orders, trades, positions, clearing data, trading account codes and the names of clients corresponding to such codes, or any other information reasonably needed for effective market surveillance, reconstruction of trade events and conduct of trade analysis. 39.1.1.6. Periodic Examinations 39.1.1.6.1. The SRO shall periodically examine all its members to determine whether they are in compliance with the securities law and SRO rules governing, among other things, financial responsibility, dealings of members with the public, back office procedures, trading practices, and supervision and shall submit to the Commission for review and comment its audit calendar for the year on or before the 30th day of January of the succeeding year, provided that any amendment to the calendar shall be promptly provided to the Commission. The submitted calendar shall include the manner of selection and prioritization used by the SRO in formulating it. The manner of selection and prioritization shall be based on the historical and potential risks that each member posed to the market. This calendar shall be treated as confidential information. Periodic examination of each member firm shall be conducted without prior notice to the member firm. 39.1.1.6.2. The SRO shall file with the Commission monthly reports of its periodic examinations started and completed during the month, within ten (10) days after the end of each month, together with a summary of findings for audits completed. Periodic examinations of each member firm shall be made by the SRO pursuant to written procedures approved by the Commission. Where deficiencies are detected, the SRO shall either send a letter to the firm within three (3) business days of the completion of such examination directing that such deficiencies be corrected or, where such deficiencies show evidence of violations of the securities law, SRO rules and/or otherwise negatively reflect upon the firm's integrity or solvency, promptly notify the Commission through a brief written report and without delay, initiate an investigation. 39.1.1.6.3. The Commission may, on its own initiative, conduct periodic or parallel examinations of members to validate the SRO's findings and conduct on-spot audit inspections of the relevant SRO department to check if it is fulfilling its duties and responsibilities as an SRO. 39.1.1.7. Investigations 39.1.1.7.1. An SRO shall investigate suspected violations of the securities law and SRO rules based on complaints, examination audit findings or unusual trading activities or verified referrals from a member, other trading participant, SRO other than an Exchange, clearing agency, transfer agent, any registered person, or the Commission and take disciplinary action, where appropriate, pursuant to SRO rules. 39.1.1.7.2. The SRO shall be primarily responsible for conducting investigations which concern suspected violation of rules governing sales practices, financial and operational requirements, trading and floor related violations, and compliance procedures/supervision of members. ICHDca 39.1.1.7.3. The SRO shall promptly notify the Commission of any investigation which involves suspected violations of the securities law involving persons not subject to the SRO's jurisdiction, concerning the disclosure obligations of listed companies under the securities law, and/or involving fraud or manipulation. The SRO shall cooperate with the Commission which shall have primary investigative authority over such suspected violations. 39.1.1.7.4. The Commission shall not be precluded from initiating its own investigation ahead of, parallel to or following an investigation conducted by an SRO. In such an event, the SRO shall coordinate, cooperate, and provide a copy to the Commission, upon notice or order, documents, pieces of evidence or other information related to the case that it may have earlier gathered or are available in its database and which it may readily procure. Unless specifically ordered by the Commission or by a competent court to cease, the SRO shall continue to conduct its own investigation pursuant to its mandate. In case of conflict between the findings of the Commission and the Exchange, the former's decision shall prevail. For purposes of initiating its own investigation, the Commission, through the Chairperson, may designate any department, other than the Enforcement and Investor Protection Department or form the task force for the purpose of taking the lead in such investigation. 39.1.1.8. Discipline of SRO Members and Participants 39.1.1.8.1. An SRO shall discipline a member, to include suspension or expulsion, if such person has been found to have been engaged in a violation of SRO rules or provisions of the securities law, including, but not limited to, illegal sales practices, financial and operational requirements, trading and floor related violations, and/or violation of SRO listing rules. 39.1.1.8.2. In any disciplinary hearing by the SRO, other than a proceeding brought pursuant to SRC Rule 39.1.1.8.3, the SRO shall bring specific charges, provide notice to the member or participant charged, afford such person charged with an opportunity to defend against the charges, and keep a written record of the proceedings. A determination to bring a disciplinary sanction shall be supported by a written statement of the offense, a summary of the evidence presented, and a statement of the sanction/s imposed. 39.1.1.8.3. The SRO may summarily suspend a member or person associated with a member who has been expelled or suspended from another SRO, and/or suspend a member who the SRO finds to be in such financial or operating difficulty that the member cannot be permitted to do business as a member with safety to investors, creditors, other members, or the SRO; Provided, however, that the SRO immediately provides written notice to the Commission of the action taken. Any person aggrieved by a summary action pursuant to this SRC Rule shall be promptly afforded an opportunity for a hearing by the SRO in accordance with SRC Rule 39.1.1.8.2. The Commission, by order, may stay a summary action motu proprio or upon application by any person aggrieved thereby if the Commission determines summarily or after notice and an opportunity for hearing (which may consist solely of the submission of affidavits or presentation of oral arguments) that a stay is consistent with the public interest and the protection of investors. 39.1.1.8.4. The SRO shall promptly notify the Commission in written reports of any disciplinary sanction imposed on any member or participant. Within thirty (30) days after receipt of such notice, any aggrieved person may appeal to the Commission from, or the Commission motu proprio within such period, may institute review of, the decision of the SRO, at the conclusion of which, after due notice and opportunity for hearing which may consist solely of review of the record before the SRO, the Commission shall affirm, modify or set aside the sanction. In such proceeding, the Commission shall determine whether the aggrieved person has engaged or omitted to engage in the acts and practices as found by the SRO; whether such acts, and practices, or omission constitute willful violations of the securities law or SRO rules, whether such provisions were applied in a manner consistent with the purposes of the securities law; and whether, with due regard for the public interest and the protection of investors, the sanction is excessive or oppressive. 39.1.1.9. SRO Discipline by the Commission The Commission may, if in its opinion such action is necessary or appropriate in the public interest or for the protection of investors, or otherwise in furtherance of the purposes of the securities law, after due notice and an opportunity for a hearing: 39.1.1.9.1. Suspend for a period not to exceed twelve (12) months or revoke the registration of an SRO, or censure or impose limitations on the activities, functions and operations of the SRO as an SRO, if the Commission finds that the SRO has willfully violated or is unable to comply with any provision of the securities law or SRO rules, or has failed to enforce compliance therewith by a member or participant; 39.1.1.9.2. Take over the activities of an SRO pursuant to SRC Rule 40.5; 39.1.1.9.3. Suspend for a period not exceeding twelve (12) months or to expel from the SRO any member who is subject to an order of the Commission under Section 29 of the Code or is found to have willfully violated any provision of the securities law, or effected, directly or indirectly, any transaction for any person who such member had reason to believe was violating, in respect of such transaction, any of such provisions; 39.1.1.9.4. Remove from office or censure any officer or director of the SRO if it finds that such officer or director has violated any provision of the securities law or the rules of such SRO, abused his authority or has failed to enforce compliance with any of such provisions; and/or 39.1.1.9.5. Take other actions as may be reasonably necessary to enforce the provisions of the Code. 39.1.1.10. SRO Reporting An SRO shall submit the following reports to the Commission: 39.1.1.10.1. Monthly reports on dockets of examinations and investigations being conducted to be submitted on or before the 15th of the following month, containing the docket number, name of SRO examiner/investigator, how audit/examination originated (investor complaint, examination, surveillance), name of the member or participant, including a listed company being audited/investigated, nature of the violations alleged, status, findings, sanctions imposed and other courses of action taken by the SRO relative thereto; 39.1.1.10.2. Monthly reports on risk based capital adequacy requirements by members; 39.1.1.10.3. Quarterly reports on the result of investigations conducted with respect to the trading of listed companies to be submitted on or before the 15th of the month after each quarter; 39.1.1.10.4. Annual report to be submitted on or before the 30th of every January containing information on the number of newly listed issues; delisted/suspended issues and reasons therefor; the number, type of securities; issuers of current listed issues. The report shall also include profile of investors and their investments such as estimate of number of investors in the market by type (retail, institutional, qualified buyer, etc.), investment portfolio, amount of investment, mode of access (traditional or online), geographical location of investors, and other relevant market data. 39.1.1.10.5. Such other report as may, from time to time, be required by the Commission from the SRO; TCAScE 39.1.1.10.6. The reports on examination and investigation being conducted, the results thereof, and the cases resolved shall also include the following information: (1) Names and designations of the persons allegedly responsible for the violations; (2) Description of the nature of the violations with brief narration of the participation of the persons allegedly responsible for such violations; (3) Supporting documents. Further, if the persons allegedly responsible for the violations have existing registration with the Commission (e.g., salesman, associated persons) such fact shall be indicated in the report. In this case, the SRO shall initiate proceedings to suspend or revoke such registration, if warranted, without prejudice to the filing of a criminal case. On the other hand, if the persons allegedly responsible for the violations are not registered with the Commission, such fact shall be indicated in the report. In this case, the SRO shall initiate a criminal case against such persons if warranted; 39.1.1.10.7. The SRO shall inform the public of violations of its own rules, the SRC and its implementing rules committed by, its trading participants, issuers and the persons responsible for the violations and the sanctions it has imposed. For this purpose, the SRO shall immediately publish on its website and/or the pertinent Exchange's website the nature of violations and sanctions imposed on the trading participants, issuers and the persons responsible for the violations, as soon as the SRO affirms the sanctions or the period to appeal or move for reconsideration with SRO lapses without the aggrieved party taking the appeal or move for reconsideration. The SRO shall likewise post on its own website and/or the pertinent Exchange's website the list of trading participants whose regular and special audits did not result in any examination findings or are fully compliant. The reports containing the results of examinations and investigations on trading participants, issuers and the persons responsible for the violations, shall remain posted and accessible in the website of the SRO and the Commission for the guidance of the investing public. 39.1.2. Registration of Associations of Brokers and Dealers and Other Self-Regulatory Organizations 39.1.2.1. An application for registration as an Association of Securities Brokers and Dealer shall be filed on SEC Form 39-BD accompanied by copies of the statements and exhibits required to be filed with it under Section 40 of the Code and SEC Form 39-BD. 39.1.2.2. Any other application for registration as a Self-Regulatory Organization shall be filed on SEC Form 39 accompanied by the statements and exhibits required to be filed with it under Section 40 and SEC Form 39; Provided, however, that an applicant for registration as an Exchange and SRO shall file Form 33-SRO and an applicant for registration as a Clearing Agency and SRO shall file SEC Form 42-SRO. 39.1.2.3. Every SRO shall maintain the integrity of its registration and report to the Commission any material change within seven (7) days from the occurrence of such change through the filing of SEC Form 39-A. 39.1.2.4. For registered SRO whose fiscal year ends on December 31, SEC Form 39-AR shall be filed with the Commission depending on the last numerical digit of its registration number as prescribed by the Commission. SRO whose fiscal year ends on a date other than December 31 shall file SEC Form 39-AR 110 calendar days after the close of such fiscal year. 39.1.2.5. Amendments to its registration shall be filed, at least one copy of which shall be signed and attested, in the same manner as required in the case of the original registration. All amendments shall be dated and numbered in the order of filing. One amendment may include a number of changes. 39.1.2.6. In addition to the formal filing of amendments and the annual return, every registered SRO shall send to the Commission copies of any notices, reports, circulars, loose leaf instructions, riders, new additions, lists, or other records of changes covered by amendments or supplements when, as, and if such records are made available to members and/or participants of the SRO. 39.1.3. Allocation of Regulatory Responsibilities among Self-Regulatory Organizations 39.1.3.1. Any two (2) or more Self-Regulatory Organizations (SROs) may file with the Commission a plan for allocating among SROs the responsibility to receive regulatory reports from persons who are members of or participants in more than one SRO, to examine such persons for compliance, or to enforce compliance by such persons, with the Code and rules and regulations adopted under it, and the rules of such SRO, and to carry out other specified regulatory functions with respect to such persons. 39.1.3.2. Any plan filed under this Rule may contain provisions for the allocation among the parties of expenses reasonably incurred by the SRO having regulatory responsibility under the plan. 39.1.3.3. After appropriate notice and opportunity for comment, the Commission may, by written notice, declare such a plan, or any part thereof, effective if it finds the plan, or any part thereof, necessary or appropriate in the public interest and for the protection of investors, to foster cooperation and coordination among SROs. 39.1.3.4. Upon the effectivity of such a plan, or part of it, any SRO which is a party to the plan shall be relieved of responsibility to any person for whom another SRO is responsible under the plan, to the extent of the responsibility allocated. 39.1.3.5. After the Commission has declared a plan or part of it effective pursuant to SRC Rule 39.1.3.3, or has acted pursuant to SRC Rule 39.1.3.6, an SRO relieved of responsibility may notify customers of, and persons doing business with, such member or participant of the limited nature of its responsibility for such member's or participant's acts, practices and course of business. 39.1.3.6. If a plan declared effective pursuant to SRC Rule 39.1.3.3 does not provide for all members or participants or does not allocate regulatory responsibilities, the Commission may, after notice and opportunity for hearing, designate one or more SROs responsible for specified regulatory responsibilities with respect to such members or participants. 39.1.4. Rules Governing Registrars of Qualified Institutional and Individual Buyers 39.1.4.1. Authorized Registrars — The following entities which have been granted the appropriate secondary license by the Commission may be authorized to act as Registrar upon proper application and compliance with registration requirements under these rules: 39.1.4.1.1. Banks with respect to their registration as broker-dealer, Government Securities Eligible Dealer, Government Securities Brokers and/or underwriter of securities; 39.1.4.1.2. Brokers; 39.1.4.1.3. Dealers; 39.1.4.1.4. Investment Houses; 39.1.4.1.5. Investment Company Advisers; and 39.1.4.1.6. Issuer companies with respect to offerings of their own securities. 39.1.4.2. Initiation and Cessation of Function as Registrar — An entity that wants to act as registrar of qualified buyers shall inform the Commission in writing of such intention before it can perform the duties and responsibilities of a Registrar by filing SEC Form 39-Registrar. If a registrar-entity no longer wants to act as Registrar, it shall inform the Commission in writing of such intention at least thirty (30) days before the intended cessation date. Notwithstanding the cessation of its Registrar functions, an entity shall continue to comply with its record-keeping obligations under these rules. 39.1.4.3. Registrar's Internal Procedures — A Registrar shall establish its own internal procedures to guide its personnel in evaluating the qualifications of applicants for qualified buyer status; Provided that, only registered persons (salesman, fixed income market salesman, certified investor solicitor and associated person) shall conduct such evaluation, It shall act with due diligence in the conduct of the evaluation and ensure that the required supporting documents are submitted to it at the time of registration. These documents shall be considered and treated as records of the Registrar in accordance with the applicable provisions of the Code. cTDaEH 39.1.4.4. Responsibilities of a Registrar — The duties and responsibilities of a registrar in relation to applicants for registration and registrants (persons who have been registered as qualified buyers) shall be as follows: 39.1.4.4.1. Ensure that the applicants for registration affirm in writing that the information and documents that they have submitted to it are true and correct; 39.1.4.4.2. Inform the applicants that the qualifications prescribed for registration should be maintained during the registration period. 39.1.4.4.3. Require the registrants to submit an undertaking that they shall refrain from representing themselves or dealing in securities as qualified buyers if, after their registration, there are circumstances that disqualify them from enjoying that status, such as — diminution of their net worth below the prescribed minimum, or commission of acts that constitute misrepresentation, fraud or deceit under the SRC and its implementing rules and regulations. 39.1.4.4.4. Prepare a letter of undertaking for the registrant and cause its signature, which shall state, among others, that the registrant shall comply with the requirements for qualified buyer status, and that the registrant authorizes the Commission's representatives to inspect and examine the documents it submitted to the registrar. 39.1.4.4.5. Issue a certificate of registration in favor of the registrant who shall acknowledge receipt thereof. The certificate of registration shall be valid for three (3) years from the date of registration. 39.1.4.4.6. Inform the applicant that the SEC Information Sheets and the supporting documents will be submitted to the Commission as required in these rules for purposes of verification, and may be used in pursuance of an investigation, examination, official inquiry or as part of a surveillance procedures, and/or in compliance with other pertinent laws, and secure the applicant's written consent to such submission. 39.1.4.4.7. File with the Commission a report using SEC Form 39-Registrar — AR which shall include the following information: total number of registered qualified institutional and individual buyers; number of registered qualified individual buyers whose registrations have been effective for more than three (3) years; number of registered qualified institutional and individual buyers whose registrations have been renewed for during the covered year; number of registered qualified institutional and individual buyers whose registrations have expired during the covered year; key objectives for the investment being considered as stated in the Information Sheet; status of current portfolio investments; current total portfolio of securities; intended investment horizon; appetite for risk; current net worth; years of experience in trading in securities personally or through a fund manager. This report shall be filed with the Commission not later than thirty (30) days from the end of the covered calendar year. 39.1.4.4.8. Report to the Commission any change in the information provided in their application forms and other information that may be required under these rules or orders. Such report must be in SEC Form 39 — Registrar-A and must be filed within seven (7) days from such change. 39.1.4.5. Registry Book of Qualified Buyers — A registrar shall maintain and make available for inspection by the Commission's representatives a registry book of qualified buyers, in manual or electronic form, which shall contain a chronological listing of the following information of qualified buyers based on the dates they were qualified and registered: 39.1.4.5a.1. The names of the qualified buyer; 39.1.4.5a.2. Name and designation of the registrar's personnel who conducted the evaluation; 39.1.4.5a.3. Date of evaluation; and 39.1.4.5a.4. Other details that the registrar may deem necessary. The following shall also be maintained by the registrar: 39.1.4.5b.1. Signed SEC Information Sheet; 39.1.4.5b.2. Applicant's written consent to the submission of such information and verification procedures to be conducted by the Commission; and 39.1.4.5b.3. Supporting documents required by the registrar and submitted by the applicant to prove financial capacity and sophistication. The supporting documents that may be required in evaluating the applicant's financial capacity and sophistication include the certified true copies of income tax returns, audited financial statements, statements of account and certificates of deposit issued by the applicant's bank, statements of portfolio investments issued by the applicant's securities brokers or investment managers, certificates of employment with statement of income issued by the applicant's employer and other sources of information which are equally objective, reliable and verifiable that may prove financial capacity and sophistication. If, after verification a qualified buyer is found to be no longer entitled to that status due to intervening events, the registrar shall note that fact in the registry that such person in no longer a qualified buyer. 39.1.4.6. Report of List of Qualified Buyers — A registrar shall submit to the Commission the list of persons on whom it conferred the status of "qualified institutional buyers" and "qualified individual buyers", within seven (7) days from the date of conferment or renewal of said status. The list shall contain the following information: 39.1.4.6.1. The names of the qualified buyers; 39.1.4.6.2. The name and designation of the Registrar's personnel who conducted the evaluation; 39.1.4.6.3. Date of evaluation; 39.1.4.6.4. Date of registration as qualified buyer; and 39.1.4.6.5. Signed SEC Information Sheet and, supporting documents required by the Registrar and submitted by the applicant to prove financial capacity and sophistication. The applicant's written consent to the submission of such information, verification and use to be conducted by the Commission. 39.1.4.7. Central Registry of Qualified Buyers — The Commission shall maintain a central registry of qualified institutional and individual buyers based on the reports submitted by the Registrars. A Registrar may request the Commission to treat such report as confidential pursuant to Section 66 of the Code. 39.1.4.8. Other Records — A Registrar shall maintain and make available for inspection by the Commission's representatives the registrant's application forms, information sheets and proof of qualifications for a period of at least five (5) years. It shall retain the records that relate to an on-going investigation beyond this period until the Commission declares the case closed and terminated. The Commission may require the Registrar and any qualified buyer to furnish it with copies of the records mentioned in the preceding sections or to file reports based on the same records. 39.1.4.9. Review of Registration — The Commission reserves the authority to review the registration of qualified buyers to ensure that the requirements prescribed herein are complied with. Non-compliance with any of these requirements shall cause the revocation of the certificate of registration of the qualified buyer and shall constitute a ground for the imposition of sanctions against the Registrar and the registrant if warranted. 39.1.5. Rules Governing Credit Rating Agencies [SEC MC 07 (2014)] 39.1.5.1. Definition A credit rating agency (CRA) means any corporation principally and regularly engaged in the business of performing credit evaluation of corporations and business projects or of debt issues with the intention of assessing the overall creditworthiness or of ascertaining the willingness and ability of the issuer to pay its financial obligations as they fall due, and which assessment is translated by credit ratings periodically and publicly announced. 39.1.5.2. Scope and Limitations 39.1.5.2.1. The accreditation of a CRA does not relieve it from its liabilities and responsibilities. 39.1.5.2.2. The Commission shall not be liable for any liability or loss that may arise from the selection of the said CRA by any issuer. 39.1.5.2.3. The accreditation of a CRA shall continue until suspended or revoked by the Commission after due notice and hearing. 39.1.5.2.4. No person or entity shall, under pain of sanctions under the Code, hold itself out as an accredited credit rating agency or otherwise regulated in providing credit rating services unless it has been accredited by this Commission under these rules. 39.1.5.3. Requirements for Accreditation 39.1.5.3.1. To qualify for accreditation, a credit rating agency shall submit proof of compliance with the following requirements: 39.1.5.3.1.1. The CRA must be a stock corporation; 39.1.5.3.1.2. It has a paid-up capital of at least Ten Million Pesos (PhP10,000,000.00); 39.1.5.3.1.3. It has qualified and independent officers and personnel to conduct the rating activities; 39.1.5.3.1.4. It has no conflict of interest with prospective clients; 39.1.5.3.2. The CRA must submit among others, the following supporting documents: 39.1.5.3.2.1. List of shareholders and their corporate affiliations; 39.1.5.3.2.2. List of other business activities, if any; 39.1.5.3.2.3. Copies of the company's Articles of Incorporation and By-Laws; 39.1.5.3.2.4. A statement pertaining to ownership structure and possible conflict/s of interest; 39.1.5.3.2.5. Names, professional qualification and independence of staff involved in the rating decision ("rating specialists"); 39.1.5.3.2.6. A written code of conduct which insures the independence of the rating specialists and the rating agency from the issuers it is rating; 39.1.5.3.2.7. Disclosure of affiliations, training, assistance or support it receives from international rating agencies, if any; 39.1.5.3.2.8. Rating scales, criteria, measurements, symbols and the like, which it has in use; 39.1.5.3.2.9. Operating procedures, rating policies, rating criteria and other rationale used in arriving at a rating; 39.1.5.3.2.10. Copy of model written agreement with issuers; and 39.1.5.3.2.11. Manual on Corporate Governance. An applicant may request confidentiality of the foregoing information except its operating procedures, rating policies and rating criteria. 39.1.5.3.3. All applications for accreditation shall be accompanied by an initial filing fee of Sixty Thousand Pesos (PhP60,000.00) or such amount as the Commission may determine through its Scale of Fees and Charges. 39.1.5.3.4. All accredited credit rating agencies shall ensure that the information set forth in their application form and all documents appended thereto are current, true and correct. Any change in such information shall be filed with the Commission no later than ten (10) business days from the occurrence of such change. CHTAIc 39.1.5.3.5. An annual fee of Twelve Thousand Pesos (PhP12,000.00) or such amount as the Commission may determine, shall be paid yearly at least forty five (45) days prior to the anniversary date of the CRA's accreditation. If such annual fee is not paid, the registration of the CRA shall be suspended until payment is made, provided that if the same is not paid prior to the thirtieth (30th) day after the required payment date, such accreditation shall be automatically terminated and any issuer which has been rated by such rating agency shall be required to obtain a new credit rating within thirty (30) days after notification by such agency of such termination. 39.1.5.4. Operating Requirements 6 39.1.5.4.1. Pre-Rating Requirements 39.1.5.4.1.1. A CRA and the entity it proposes to rate must sign a written contract, covering the CRA's obligation to render credit rating services. This contract will list all CRA obligations included in the provision of credit opinion, the main service. A written contract enables the rated entity to better understand a CRA's deliverables, and is in line with high standards of ethical conduct. A well-drafted contract will avoid any disparity between a CRA and the rated entity regarding the responsibilities and obligations of each party, and will forge a formal legal relationship between the two. In the contract, the obligations of the rated entity for cooperation and provision of updated information to conduct periodic surveillance shall be clearly spelled out and the rights of the rated entity over the use of ratings clearly communicated. Conditions for contract termination, including withdrawal of assigned ratings, shall also be clearly spelled out. This contract shall also be the underlying legal document for arbitration between a CRA and the entity, shall the need arise. Each CRA shall have a standardized version of such a document for each type of rating, and use it consistently. 39.1.5.4.1.2. A CRA shall not promise, assure, or guarantee a particular rating outcome — either implicitly or explicitly — while soliciting business. Considering that ratings shall be based on an analytical decision by a rating committee and not the subjective view of an individual, no rating outcome shall be promised or committed either implicitly or explicitly to the rated entity and/or the arranger while soliciting business. No employee with business development responsibility or any other representative of the CRA shall be allowed to promise, assure, or guarantee — either implicitly or explicitly — a particular rating outcome. Any employee who does shall face disciplinary proceedings, including possible dismissal. CRAs shall provide objective and fair credit opinions for use by debt market investors. The assignment of a rating shall therefore be derived purely from independent and unbiased views based on the determinants of credit quality and not on any assurance or guarantee given beforehand. 39.1.5.4.1.3. Rating definitions, policy for use, and rating criteria shall be explained to the rated entity before rating services are engaged. A CRA shall explain to an entity that is being rated the scope and use of the ratings, as well as the broad credit assessment framework followed. This shall be done before or at the time the CRA is engaged to enable the entity to make an informed decision about that engagement. This shall be communicated using standard presentations, brochures, and other materials, and disclosed on the CRA's website to minimize misinterpretation. A CRA shall clearly communicate the rating definition and the rating scale. It shall also make clear that the ratings do not constitute recommendations to buy, hold, or sell any security, and shall inform the entity how to use the rating. Policies for use of ratings, conditions for withdrawal, and possible circumstances for rating actions shall also be clearly communicated. 39.1.5.4.1.4. The basic policies, practices, and methodologies used for assignment of ratings shall be published and freely available in print and on the website. Each CRA shall make a well-defined rating policy and rating methodology freely available to entities being rated, investors, market intermediaries, regulators, and other interested parties. Such disclosure shall help develop — among investors and issuers — an understanding of the credit risk assessment framework and related policies and practices. A CRA's policy for assigning, revising, and withdrawing ratings shall be clearly outlined and made public. The validity of the rating shall be stated up front. A CRA shall institute a policy of not withdrawing any rating until the instrument that is rated has been redeemed in full; this shall allow the agency to fulfill its role of communicating the credit quality of the rated instrument at all times to investors. No ratings shall be withdrawn until redemption of a rated instrument except when the CRA requests the Commission to withdraw ratings and the same is approved due to local market conditions and CRA's publication of a notice to the market about the withdrawal, the reason for it, and the rating outstanding on the instrument as of the date prior to withdrawal. Depending on the reason of withdrawal, the Commission may require the CRA keep its rating on "notice of withdrawal" for some pre-specified period, and withdraw the rating once this period has expired. Accredited CRAs shall publish their withdrawal policies and ensure strict compliance with disclosed policies. 39.1.5.4.1.5. Adequate resources shall be made available. A CRA must devote sufficient resources to ensure the high analytical quality of all its credit risk assessments. These resources shall include personnel with adequate skills, and facilities such as access to required information and tools and software to analyze information. Moreover, a CRA shall invest regularly in personnel training. A CRA shall allocate financial resources for business development functions, outreach activities, and surveillance processes. In addition to its initial capital stock, a CRA shall build up its resources by increasing its paid-up capital to at least PhP15 Million after three (3) years reckoned from date of its accreditation or from the effectivity of this Rule for those already accredited. After said period, the Commission may prescribe additional capital taking into account the volume of rating activities of the accredited CRA. 39.1.5.4.1.6. The organizational structure and design of the rating process shall ensure that rating decisions are not influenced by rating fees, any other revenues or business potential from the rated entity, or the consequences of a rating action. The rating process must ensure that the final rating assigned is not influenced by the amount of rating fees received from the rated entity. A CRA shall publicly disclose its broad fee structure, including the minimum and maximum rating fees charged for any issue or issuer. EATCcI Personnel with business development responsibility shall be separate from those with analytical responsibility to ensure that business pressures do not influence ratings assigned. Compensation of CRA's rating analysts shall be independent of rating fees and the final rating assigned. Analytical staff and rating committee members shall not know the rating fee charged for the specific issues that they rate. The business relationship of an entity with a CRA shall in no way influence the process of assigning a rating to that entity or any of its group entities. Business relationships should be kept completely isolated from the analytical process. All CRAs shall remove employees with business development responsibility from the analytical process to prevent influence of the business development viewpoint on the credit risk assessment. If complete segregation of responsibilities between business development and analytical process is not doable considering the size and structure of the company, sufficient measures shall be established to eliminate or reduce the threat of influence of fees over the process of assigning ratings. These measures shall be clearly provided in the CRA's manual of operation. 39.1.5.4.2. Rating Definitions and Recognition of Default 39.1.5.4.2.1. A CRA should disclose whether its ratings indicate the probability of default on the rated instrument, issuer, or expected loss (which factors in recoveries post-default). Ratings shall indicate either probability of default or expected loss. A CRA shall adopt the probability of default approach for ease of operation and due to the lack of data and experience in assessing recoveries after default in most economies in the region. The rating communication and all communications in relation to rating symbols shall clearly state what the particular rating indicates. 39.1.5.4.2.2. A missed payment on a debt obligation on a due date or after a pre-specified grace period (if any) shall constitute default. A CRA shall adopt a consistent and uniform default definition. Such definition of default shall be rigorous and transparent to make a CRA's ratings more meaningful and accurate. It shall be clearly articulated and strictly applied. Considering that CRAs accredited by the Commission cater primarily to bond market investors, a missed payment on a debt obligation as on a due date or after a pre-specified grace period (if any) shall constitute default. The filing of bankruptcy before any missed payment on debt obligations, and involuntary rescheduling of debt obligations that is harmful to investor interest (such as lower coupon, extension of maturity, and interest waiver), shall also be considered a default. A CRA shall adhere to its disclosed definition of default without exception, ensuring easier recognition of default. Such a definition shall not include any subjective grace period, and the resulting default statistics shall therefore not be influenced by any subjective factors and may be used by investors as an important input for credit pricing and provisioning requirements. In case a CRA adopts a default definition that is divergent from the above requirement, such a divergence shall be disclosed and highlighted in all CRA communications relating to default. The CRA shall also provide the rationale for adopting a particular default definition; ensuring that investors are clear about the ideology behind the rating. Irrespective of whether a CRA adopts an expected loss or probability of default approach for the assessment of credit quality, it shall adhere strictly to its objective default definition and ensure that default statistics are computed and published based on this definition. 39.1.5.4.2.3. Policies and Processes for Ratings 39.1.5.4.2.3.1. The CRA's operations manual shall have robust rating policies and methodologies and shall be consistently applied across ratings. The credit rating process shall detail the various steps and activities involved in assigning a credit rating, starting from the signing of the rating agreement, to the assignment of the rating and subsequent actions such as rating dissemination and surveillance. Every CRA shall have an operations manual that provides step-by-step Rule for rating analysts to conduct rating assignments and that formalizes the rating process. Each step in the process shall also adhere to a strict timeline. Since lack of cooperation from the issuer can delay assignment execution, barring such exceptions, all CRAs shall adopt well-defined timelines for completion of each rating assignment. A CRA shall strictly adhere to timelines not only for new ratings, but also for subsequent rating actions. However, a CRA shall not compromise analytical quality to arrive at quick rating decisions. A CRA shall publicize the approximate timeline of the rating process to set market expectations. It shall ensure transparent dissemination of information about rating policies and methodologies. It shall endeavor to increase awareness by users about its rating process, policies, and methodologies. 39.1.5.4.2.3.2. A CRA should have well-defined and updated credit rating criteria, which are uniformly applicable across companies. Every CRA shall refine its criteria and benchmarks proactively, taking into account changes in the market environment. Robust criteria assist in accurate assessment of credit risk for an entity. Ratings are subjective credit opinions based on various qualitative and quantitative factors; the robustness of ratings can be preserved only through consistent application of updated rating criteria. Besides developing criteria for in-house use, CRAs shall publicize a broad criteria framework. They shall ensure consistent application of criteria for easier comparison of ratings and meaningful default and transition statistics. 39.1.5.4.2.3.3. A CRA shall have a well-planned training program for all its employees. A CRA shall target each year a minimum number of training days for all employees and centrally monitor them to ensure programs are fully implemented. CRAs shall ensure training programs are given high priority at all times. To ensure adequate funding, a CRA shall allocate a separate budget for training programs, monitoring it strictly for any underuse. DHITCc 39.1.5.4.2.3.4. For interactive ratings, the rating process shall include a detailed meeting with the management of the issuer to gain a better perspective of the rated entity. Open dialogue between a CRA and an issuer shall be made to gain deeper insight into the issuer's governance, policies, and corporate strategy. It shall help the analyst to understand factors such as financial and business plans and management policies, which can have a critical bearing on the rating. It shall likewise provide a forum for analysts to arrive at a qualitative assessment of management competence. Although the issues discussed in a management meeting can vary, key issues shall be listed for such management meetings to gain maximum advantage. Insights that can emerge from management meetings for rating assignments in manufacturing and services sector include: the status and prospects of the issuer's industry; the issuer's financial policies and objectives, the reasoning behind them, and its plans for achieving them; a broad overview of the issuer's major business segments, and comparisons with competitors; and, an issuer's capital expenditure plans and alternative financing options, both in its own right and as a means of assessing the management's risk appetite. Although a CRA shall not be influenced by the financial projections of the issuer or the issuer's view of its prospects, these projections shall be considered as valuable tool in the rating process because they serve as a fair indicator of: management plans; management's assessment of possible challenges; and its planned solutions to deal with such problems. 39.1.5.4.2.3.5. Policy relating to active dependence on third parties. While executing rating assignments, analysts often rely on third-party certifications, such as the auditor's report on annual accounts, along with reports and representations from bankers, solicitors, valuers, actuaries, and other professionals. Each CRA shall adopt a uniform and consistent policy on the degree of reliance it will place on such third-party information and certification. This aspect shall be disclosed in the rating rationale to highlight the role clarity plays between a CRA and such third parties. 39.1.5.4.2.3.6. Rating analysts should be competent to perform their tasks. A CRA's rating analysts shall have the necessary skills to perform their tasks and are well-versed in risk assessment methods. A CRA shall not employ any analyst with a tainted reputation as it can impact credibility. It shall disclose the name of the analyst in its rating rationale, along with a declaration of any interests (such as shareholding) that the analyst may have in the rated entity. 39.1.5.4.2.3.7. Formal rating committees shall decide ratings. The existence of the rating committee as the final decision-making body shall be considered by a CRA as one of most important safeguards for the independence of rating decisions. All rating decisions shall be made by a duly constituted committee(s). The rating committee must comprise of members who have the professional competence to assess credits and have no interest in the entities being rated. The Chairman and Senior Members of the committee shall have extensive experience in relevant areas in the domestic financial markets; global exposure will also help. The other members of the committee are expected to have sufficient background on said areas. The rating committee may also include outside experts provided they fully adhere to a CRA's code of ethical conduct and sign a confidentiality agreement. The name and personal credentials of the permanent rating committee members shall be published on the CRA's website. The rating committee shall be responsible in taking final decision on assignment of ratings to ensure objectivity. Such decision shall be the result of a collective thinking of a group of experts analyzing the risks pertaining to the particular entity. Analysts shall prepare a written credit analysis report for the deliberation of the rating committee. A credit rating shall be valid for a period decided by the rating committee. The proceedings of the rating committee shall be minuted and maintained for future reference. Although voting rights in rating committee decisions shall be limited only to members of the committee and the analytical team, discussions during the committee shall be open to all CRA analytical personnel to ensure knowledge and committee insights are widely disseminated within the organization and rating decisions are transparent. To keep the rating independent of any issuer influence, members with business development responsibilities shall not have voting rights in the rating committee. To avoid any bias from rating committee members and enhance rating committee integrity and credibility, the rating decision shall be based on voting by a minimum of three members. 39.1.5.4.2.3.8. A credit rating announcement shall be accompanied by a report giving the principal reasons for the rating. A credit rating shall be an informed opinion resulting from in-depth analysis of various credit rating factors. The opinion shall take into account information obtained from the issuer and secondary sources and CRA's in-house experts, which should be assessed within clearly spelled out rating criteria. Each rating therefore has to be accompanied by a rating report that details the above. A credit rating report shall discuss the basis of a CRAs rating decision. With every rating action accompanied by such a report, it shall also reflect the quality and consistency of analysis. The report shall highlight the key factors affecting the rating and provide forward-looking opinions on these factors. Because such a report is the only public document available to the investor, it shall represent the highest standards of quality in content, accuracy, and timeliness. cEaSHC Each CRA shall create and maintain a website for investors, issuers, and other stakeholders, and make credit rating reports available there, either free of charge or at a nominal fee. A credit rating and the rating report shall be current and updated to reflect credit quality at any given point of time. 39.1.5.4.2.3.9. The rating committee's decisions shall be subject to a clearly described review or appeal process. In the event that the issuer disagrees with the initial rating, and has additional information that it believes can make a material difference to its rating, the issuer shall have recourse to an appeal process. A CRA shall clearly articulate this process in public and include it in the written rating agreement between the rated entity and the CRA. Upon receiving valid information, the rating committee shall discuss the merits of the case and may or may not decide to modify the rating. Each CRA shall have a clearly-articulated and well-defined appeal process because appeals may bring about new or fresh perspectives with bearing on the rating. This shall ensure that rating committee decisions are robust, accurate, and fair. While an appeal process is critical for the initial rating, a CRA shall ensure that such an appeal process is not misused by the issuer to delay a rating action in the case of rating reviews, especially rating downgrades. The committee that decides the appeal shall have at least one member who did not participate in the original rating to bring in a fresh perspective. 39.1.5.4.2.3.10. All rating actions shall be announced promptly, and a list of outstanding ratings made freely available on a CRA's website. After the issuer accepts the rating, its dissemination shall not be delayed. Acceptance from the issuer may be needed when the rating is assigned the first time; but no further acceptance is needed for subsequent rating actions. A CRA shall formulate a time-to-release procedure to be followed after the initial rating acceptance. Similarly, a time-to-release procedure has to be put in place for revisions of ratings that are already public. There shall be strict timelines for communicating the rating to the issuer, receiving acceptance, and preparing the media release and release of the rating. This assumes particular significance when bond markets become more liquid and rating information may affect trading prices. A 5-day time frame shall be adopted for the entire cycle. A CRA shall have a well-defined internal policy for public dissemination of rating information. When ratings are changed, delay by the issuer in responding shall not hinder a CRA from publicizing the revised rating. 39.1.5.4.2.3.11. Every rating shall be kept under surveillance until it is withdrawn. A credit rating on an instrument must reflect credit quality throughout the period when the rating is outstanding. It is a CRA's responsibility to ensure this objective is met. To this end, after the initial rating has been assigned, the issuer's performance and economic environment must be constantly monitored by the CRA. Steps in the rating surveillance process shall include: * Communicating with the entity at regular intervals to understand developments and trends in performance to help analysts compare company performance against their own and the company's expectations, as well as against peers; * Checking the status of issues that may affect the entity's credit quality (such as an initial public offering), exploring the probability of such issues arising in the near future, and assessing the management's perspective on such issues; * Discussing financial performance with the entity on the declaration of interim financial results; and * Understanding strategic plans or new initiatives that could have rating implications. Surveillance shall also enable analysts to stay abreast of current developments, to discuss potential problem areas, be apprised of any changes in the issuer's plans, and to distinguish between realistic and over-optimistic management expectations. 39.1.5.4.2.3.12. A CRA shall conduct formal reviews involving meetings with issuers. A CRA shall adopt a formal policy of conducting continuous and periodic reviews. It shall keep all rated credits under continuous surveillance until withdrawal of ratings. However, a CRA can also choose to conduct periodic surveillance. Such a policy shall ensure that every rated credit is tracked at least annually and the rating on such a credit continues to reflect the inherent credit quality. For such a review to be effective, it shall include meetings with the management. Such review meetings shall focus on critical developments over the period since the last meeting and the outlook for the coming year. In between such annual reviews, a CRA shall also assess an entity's interim financial performance. The broad outline of these reviews could involve: * Tracing the effects of various developments in the business; * Addressing any concerns on governance; and * Analyzing the impact of any change in management policy or stance. In addition, immediate rating reviews shall be undertaken whenever any event or development takes place (such as an acquisition or merger) that may affect the credit quality of the rated entity or instrument. Such immediate reviews may be mostly event-driven and be performed as the need arises. Possible causes for such a review include: * Significant changes in top management; * Significant corporate action such as merger, acquisition, equity offering, or buyback; * Significant differences between actual and projected performance; * New developments in the industry; and * Changes in applicable criteria. At times, the issuer may not provide sufficient information for surveillance. If so, the CRA wherever possible, shall conduct surveillance on a best-effort basis and all rating communications shall prominently disclose this fact. But if a CRA feels constrained in its rating view, even on a best-effort basis, it can suspend the rating until such time that the issuer furnishes information. This suspension shall be made public. CTIEac The requirement of ensuring periodic surveillance until the rating withdrawal and the publication of surveillance reports signals to the market that the rating is current and accurate, and can be relied upon for investment decisions. 39.1.5.4.2.3.13. If a rating is assigned to a related entity this shall be adequately disclosed in all rating communication. If a rating is assigned to an entity in which any member of a CRA's board or senior management has a direct or indirect interest or involvement, such a person shall be excluded from voting on the rating, even if he or she is part of the rating committee. The relevant details about the involvement shall also be adequately disclosed in every rating communication. This is to avoid any possible influences or biases and to signal that the rating has been arrived at through an unbiased process. 39.1.5.4.2.3.14. Maintenance of records. A CRA shall maintain all records pertaining to a rating exercise for a reasonable period of time, or as warranted by regulations. Such records have to be maintained for all ratings, including unaccepted ones. Maintenance of records of the rating assignments and the related working papers shall be visible proof that the CRA exercised abundant caution and requisite due diligence. 39.1.5.4.2.3.15. Rating disclaimers. A CRA shall provide sufficient explanation to users of ratings that these are forward-looking assessments and provide a broad sense of an issuer's expected performance, and therefore, shall not be used as an absolute indicator. A CRA must make the users aware that ratings are not the last word on a company's track record or its future performance. A CRA shall accompany its ratings with sufficient description of the meaning and limitations of ratings. Such descriptions, by way of disclaimers, shall specifically refer to what factors ratings do not address and the proper perspective for looking at ratings. 39.1.5.4.2.3.16. A CRA shall have separate functional groups, each having specific responsibilities in the rating process. Separate functional groups shall be formed within a CRA to ensure that the execution and follow-through of the rating assignment is smooth and efficient. The following groups shall be established: Business development group. Responsible for obtaining mandates from prospective entities, this group shall handle all business communication and finalize the commercial terms of the rating assignment. A CRA's business development group shall be separated from its analytical group. Analytical group. This group handles all analytical responsibilities for a rating assignment and for assessing credit risk for the relevant entity. It shall not be involved in any commercial discussions with the entity. This group shall be responsible for the rating process from receipt of written consent for a rating until the time the rating is made public. It shall also be responsible for surveillance and review of ratings. Rating administration. The existence of a separate functional group for the administration of the rating process will ensure it is followed, and that timelines are strictly respected. This group shall look after the progress of a rating assignment from the initiation stage until the dissemination of the final rating to the public. This group shall also maintain a list of all outstanding ratings and proper documentation to support credit opinions, and shall handle external dissemination of ratings and rating reports. Criteria group. This group shall be responsible for formulating, maintaining, and refining the criteria framework under which the various types of issuance will be rated. This group will ensure, before implementation that any new criteria proposed are thoroughly discussed from both an analytical and market impact perspective. These functional groups, although separate, shall be collectively responsible for the successful implementation of the rating process. They should help a CRA build up a substantial base of information on its ratings, present a transparent approach to the financial markets, and help the CRA if it is subjected to regulatory inspection. If the setting up of functional groups is not practicable due to the size and structure of the CRA, sufficient alternative procedures shall be established to ensure that the execution and follow-through of the rating assignment is smooth and efficient. These procedures shall be clearly provided in the CRA's manual of operation. 39.1.5.4.2.4. Confidentiality Requirements 39.1.5.4.2.4.1. All information submitted by a related entity or an issuer in connection with a credit rating assignment shall be presumed confidential and shall be kept so at all times. The information provided by the company may be highly sensitive and confidential and may be provided by the issuer to a CRA only for the purpose of arriving at the ratings. Every CRA must maintain such information in strict confidence and cannot use it for any purpose other than rating. When the assigned rating is made public, the CRA shall ensure that the rating report accompanying the rating and the other information about the entity present in the report shall not breach this confidentiality. Contact with bankers, auditors, and others — if made as part of rating process — shall be with the ratee's consent. Every CRA must have a confidentiality policy to ensure that the confidential information shared by the issuer is not disclosed outside of the ratings business. The fact that an issuer has sought a rating is in itself confidential information, and is to be made public only when an accepted initial rating is released. In case the initial rating is not accepted, the assignment shall remain confidential and shall be disclosed only to regulatory or government organizations (if required). However, in all such cases, the ratee shall be informed in advance about the disclosure. 39.1.5.4.2.4.2. The confidentiality requirement must be binding on all company officers and employees who have or may have access to such confidential information, and acknowledged in writing. Confidentiality of information is of paramount importance to a CRA, and relevant measures and processes must be in place in the organizational structure to maintain confidentiality of such information at all points in time. All employees who may have access to such confidential information must, without exception, acknowledge compliance with the code of confidentiality in writing. Such an affirmation by way of self-certification shall be obtained from the employees on a periodic basis as a legally binding undertaking, and shall be enforced even after termination of employment or association with the CRA. SaCIDT 39.1.5.4.2.4.3. Members of the board of directors shall not have access to confidential information submitted by the rated entity unless a director is a member of the rating committee. To ensure that confidentiality is not breached, there shall be a policy in a CRA that even members of the CRA board of directors will not have privileged access to a ratee's confidential information, unless they are part of the rating committee. 39.1.5.4.2.4.4. Confidentiality of information is a contractual obligation and shall be formally documented in the agreement to perform credit rating services. Confidentiality of information shall be part of the contractual obligations of a CRA and documented in rating agreements. 39.1.5.4.2.5. Independence and Avoidance of Conflicts of Interest To manage conflicts of interest and communicate proactively to the market, a CRA must have a clearly articulated policy and a public stance on the conflicts of interest that it may face and the efforts that the management will take to control them. This policy should cover the following: 39.1.5.4.2.5.1. A CRA shall not refrain from taking a rating action because of the potential effect of the action on the CRA, an issuer, an investor, or other market participant. 39.1.5.4.2.5.2. The determination of a credit rating shall be influenced only by factors relevant to the credit assessment. 39.1.5.4.2.5.3. A CRA shall adopt a definition of what constitutes a conflict of interest, publish it, and all company officers and employees shall avoid such conflicts. Clarity on conflicts of interest will help ensure rating decisions are without bias and personal influence. 39.1.5.4.2.5.4. CRA disclosures of actual and potential conflicts of interest shall be complete, clear, and prominent. 39.1.5.4.2.5.5. Rules for avoiding conflicts of interest shall be applied to all employees who participate directly or indirectly in the credit rating process, particularly to analyst and rating committee members. The board of directors, upon election, shall affirm its adherence to the CRA's code of conduct. 39.1.5.4.2.5.6. Any potential conflicts of interest from any member of the rating team must be declared before participating in a credit rating engagement. Where a conflict of interest exists as defined by company policy and rules, the employee concerned shall refrain from participating in the rating assignment and rating committee proceedings. 39.1.5.4.2.5.7. In order to maintain analysts' neutrality and to prevent employees from making gain through misuse of confidential information, a CRA shall adopt a trading and investment declaration policy. This could categorize possible investment avenues into classes: acceptable, acceptable with prior permission, and unacceptable. The securities that fall into each of these categories shall be based on an articulated policy that is well disseminated within the organization. 39.1.5.4.2.5.8. Ratings assigned by a CRA to an issuer or issue shall not be affected by the existence of, or potential for, a business relationship between the CRA and the issuer (or its affiliates) or any other party, or the absence of such a relationship. 39.1.5.4.2.5.9. In instances where rated entities (for example, governments) have, or are simultaneously pursuing oversight functions related to a CRA, the CRA shall deploy different employees (than those involved in oversight issues) to conduct its rating exercise. 39.1.5.4.2.5.10. No CRA employee shall participate in or otherwise influence the determination of a rating of any particular entity or obligation if the employee: * Has had recent employment or another significant business relationship with the rated entity that may cause or be perceived as causing a conflict of interest; * Has an immediate relation (such as a spouse, partner, parent, child, or sibling) currently working for the rated entity; or * Has or had, any other relationship with the rated entity or any related entity thereof that may cause or may be perceived as causing a conflict of interest. 39.1.5.4.2.5.11. All CRA employees shall be prohibited from soliciting money, gifts, or favors from anyone with whom the CRA does business and shall be prohibited from accepting gifts in cash or gifts exceeding minimal monetary value as specified by the CRA. 39.1.5.4.2.5.12. A CRA shall periodically and publicly disclose its ownership pattern, including the details of promoters and other shareholders along with the extent of their shareholding. A CRA shall also clearly and unequivocally disclose affiliations and technical partnerships it has with any international rating agency. 39.1.5.4.2.5.13. A CRA analyst who becomes involved in a personal relationship, creating the potential for real or apparent conflict of interest, shall be required to disclose that relationship to the appropriate manager or officer of the CRA, as determined by CRA compliance policies. 39.1.5.4.2.5.14. CRA employees shall take all reasonable measures to protect all property and records belonging to or in possession of the CRA from fraud, theft, or misuse. 39.1.5.4.2.5.15. A CRA or its employees shall not selectively disclose non-public information about its rating opinions or possible future rating actions, except to the issuer or its designated agents. 39.1.5.4.2.5.16. CRA employees shall not share confidential information entrusted to the CRA with employees of affiliated entities. 39.1.5.4.2.5.17. A CRA shall ensure that compensation for analytical personnel is not linked to revenues earned from the ratings that are executed by the analyst's concerned. This will nurture a neutral analytical atmosphere which revenues earned on the assignment will not influence ratings. 39.1.5.4.2.5.18. A CRA shall disclose whether any issuer, originator, arranger, subscriber, or other client and its affiliates make up more than 10% of total CRA revenue. 39.1.5.4.2.5.19. Each CRA shall adopt a formal policy of disclosure when it rates securities issued by its promoter. The policy in such cases shall ensure that adequate disclosure of the shareholding is made in all rating communications so the market is aware of the potential conflict of interest. 39.1.5.4.2.5.20. A CRA shall establish policies and procedures for reviewing the past work of analysts that leave the employ of the CRA and join an issuer. 39.1.5.4.2.5.21. A CRA shall periodically review analyst remuneration policies to ensure they do not compromise the objectivity of the rating process. 39.1.5.4.2.5.22. A CRA shall define what is considered ancillary business and reasons for the same. 39.1.5.4.2.6. Policies for Private, Unsolicited, and Unaccepted Ratings 39.1.5.4.2.6.1. Private ratings. A CRA may be requested, either by issuers or by third parties, to assign private ratings. In such cases, the CRA shall not publicly disclose the ratings. To formalize this, and to ensure that the facility is not misused, a CRA shall adopt a specific policy of complete confidentiality in such cases. The policy shall clearly articulate the non-publication and non-dissemination of the private rating. At the same time, because the rating is private, no specific public debt may be raised using the private rating because the CRA will not be able to disclose any subsequent change in credit quality through public release. 39.1.5.4.2.6.2. Unsolicited ratings. Unsolicited ratings are those that the rated entity does not consent to or participate in. Wherever a CRA assigns unsolicited ratings, it shall distinguish them — using some sort of notation — from interactive ratings. A clear distinguishing prefix or suffix (such as "pi" to denote public information rating) will help the user make an informed judgment about using the rating. A CRA that assigns unsolicited ratings that are not directly revenue generating shall have adequate justification for doing so. More specifically, a CRA shall not resort to conservative unsolicited ratings as a way of coercing issuers to obtain higher interactive ratings for which they will need to pay. A minimum of 2 years between initiating coverage through an unsolicited rating and the first interactive rating of the same issuer shall be observed. 39.1.5.4.2.6.3. Unaccepted ratings. Initially, in an interactive rating, the issuer will normally be given the choice of accepting or not accepting the rating. In such cases, it is prohibited to disclose the rating without obtaining written consent. But once the rating is accepted for the first time, a CRA shall not seek acceptance before publicizing changes in the rating. A CRA shall have a published policy regarding the non-disclosure of unaccepted ratings. Where the rating is interactive and the rated entity has not accepted the initially assigned rating, the information pertaining to the entity shall be held in the strictest confidence and shall not be disclosed in CRA rating lists. Such unaccepted ratings may only be shared with regulators or a court of law, upon specific request to provide such information. 39.1.5.4.2.7. General Code of Conduct 39.1.5.4.2.7.1. A CRA shall adopt its own code of ethical conduct applicable to all employees and board members. A CRA shall adopt a code of conduct, drafted and modified as per CRA requirements and scope of operations. This code, with assurance of rigorous compliance, shall be published on the CRA's website. 39.1.5.4.2.7.2. A CRA shall formally adopt the IOSCO Code of Conduct and the prescribed code of conduct. To the extent that current legislation, policy, regulatory arrangements, or prevalent market practices may impede adherence to these principles, a CRA shall strive to make appropriate changes. There is often no single correct approach to such changes, and they shall reflect local market conditions and historical development. Wherever these principles cannot be adopted in verbatim due to specific market conditions or existing practices, a CRA shall highlight the extent of non-adoption along with specific reasons for such deviation. 39.1.5.4.2.7.3. The chief executive officer or president and all other employees of the company will be required to affirm in writing their compliance with the company's code of ethical conduct. An affirmation must be obtained from all employees, legally binding them to the company's code of ethical conduct. All CRA employees must ensure strict adherence. CRAs shall also undertake outreach initiatives such as discussion forums for investors, conference calls after major rating actions to provide additional clarity to investors, periodic publication of criteria, frequently asked questions, analytical opinion pieces, and research articles. These measures can enhance CRA credibility among investors, issuers, and regulators. 39.1.5.4.2.8. Compliance with Policies and Processes 39.1.5.4.2.8.1. Process audit. Each CRA shall set up rigorous audit checkpoints to ensure adopted best practices, policies, and procedures are carried out. Such checkpoints must be manned by independent professionals with extensive knowledge and experience in credit ratings. Such an audit group must be headed by a senior professional who reports directly to the chief rating officer or to an equivalent position. The audit group shall provide feedback to operating groups such that any corrective action can be taken on a periodic basis. If the setting up of an internal audit group is not practicable due to the size and structure of the CRA, sufficient alternative mechanism shall be established to determine whether adopted best practices, policies, and procedures are carried out. These procedures shall be clearly provided in the CRA's manual of operation. 39.1.5.4.2.8.2. Compliance officer. A CRA must have an officer to ensure compliance with all code of conduct provisions. The compliance officer shall report to the CRA board or chief executive officer or president. This officer shall continuously monitor for violations of the code by any employee and be expected to prepare and submit regular status reports on compliance with CRA regulations and the code of ethical conduct. 39.1.5.4.2.8.3. Whistle-blower policy. A CRA must have detailed whistle-blower policies encouraging all employees to report (with complete confidentiality) any unethical practice or grave misconduct to a designated authority. All reported events shall be taken seriously and investigated promptly. The investigation report shall be submitted within a stipulated time frame (as specified by the CRA) from the receipt of the complaint. There shall be provisions to prevent discrimination, retaliation, or harassment against any whistle-blower or participant in the investigation process. 39.1.5.4.2.9. Education Campaign A CRA shall publish articulate reports on matters of industry-wide importance with the broad objective of educating and enhancing the depth of the markets in which it operates. Ratings consistency studies, financial comparative studies such as median analysis, and other data-mining studies can be pursued and possibly made into regular featured publications. 39.1.5.4.2.10. Reportorial Obligations 39.1.5.4.2.10.1. A copy of the Credit Rating Report (CRR) shall be furnished to the Commission through the Office of the General Accountant, simultaneous to its submission to the issuer-ratee. A CRR shall be in two (2) formats, notice form and long-form report. 39.1.5.4.2.10.1.1. The notice form of CRR shall be used for public announcement of the rating and it shall indicate the highlight of the factors considered for the rating. 39.1.5.4.2.10.1.2. The long-form CRR shall provide a discussion of all the basis underlying the factors considered including the source documents relied upon. It shall likewise contain the information prescribed under SRC Rule 39.1.5.4 of these Guidelines. 39.1.5.4.2.10.1.3. Both forms shall be signed by an authorized officer of the CRA who shall likewise indicate his consent on the use of such report for evaluation and documentation as part of the registration statement of the issuer-ratee. 39.1.5.4.2.10.2. In addition to the annual financial statements and general information sheet, a credit rating agency accredited by the Commission must submit the following documents within ninety (90) days from the end of its fiscal year: 39.1.5.4.2.10.2.1. A report on the rating activities conducted during the most recently completed fiscal year. It shall include the name of the rates, issue, ratings given, and other relevant information; 39.1.5.4.2.10.2.2. A duly accomplished scorecard indicating its compliance with each of the best practices required under SRC Rule 39.1.5.4 of this Rule. 39.1.5.4.2.10.3. In relation to the requirements under SRC Rule 39.1.5.4.2.3.12, a change in credit rating as a result of a review by the CRA or a failure to access information from the issuer shall trigger the mandatory submission to the Commission by the CRA of a report disclosing the matter within five (5) business days from the date of change or from the date of denial by the issuer to provide sufficient information. aTHCSE 39.1.6. Fees and Charges of SROs and other Securities Related Organizations Unless the rates of fees and charges are provided by law, the Commission shall have the authority to review approve or discontinue fees imposed by SROs and other securities-related organizations on their clients and investors. SROs and other securities-related organizations shall disclose to their prospective clients and investors their schedule of fees and charges as approved by the Commission.

Rule 40

4 Commission Directions Regarding Rulemaking 40.4.1. The Commission may direct that the SRO effect on its own behalf specified changes in its rules and practices which are necessary or appropriate for the protection of investors, to ensure fair dealing in securities traded on the SRO, ensure fair administration of the SRO, conform and harmonize SRO rules to the requirements set forth in the securities law, or to otherwise further the purposes of the securities law on such matters as: 40.4.1.1. Safeguards in respect of the financial responsibility of members and adequate provision against the evasion of financial responsibility through the use of corporate forms or special partnerships; 40.4.1.2. Supervision of trading practices; 40.4.1.3. Listing or delisting any security; 40.4.1.4. Hours of trading; 40.4.1.5. Manner, method and place of soliciting business; 40.4.1.6. Fictitious accounts; 40.4.1.7. Time and method of making settlements, payments and deliveries and of closing accounts; 40.4.1.8. Transparency of securities transactions and prices; 40.4.1.9. Fixing of reasonable rates of fees, interest, listing and other charges but not rates of commission; 40.4.1.10. Minimum units of trading; 40.4.1.11. Odd-lot purchases and sales; 40.4.1.12. Minimum deposits on margin accounts; and 40.4.1.13. Supervision, auditing and disciplining of members or participants. 40.4.2. If after making such instructions in writing to the SRO, and after due notice of the reasons and effects of the proposed changes and opportunity for a hearing, the Commission determines that the SRO has not made the changes so requested, the Commission may alter, abrogate, or supplement the SRO's rules, with such changes to be made effective immediately upon adoption by the Commission.

Rule 40

7 Procedures on the Actions of Self-Regulatory Organizations A self-regulatory organization shall promptly notify the Commission of any disciplinary sanction on any member thereof or participant therein, any denial of membership or participation in such organization, or the imposition of any disciplinary sanction on a person associated with a member or a bar of such person from becoming so associated. Within thirty (30) days after such notice, any aggrieved person may appeal to the Commission from, or the Commission on its own motion within such period, may institute review of, the decision of the self-regulatory organization, at the conclusion of which, after due notice and hearing (which may consist solely of review of the record before the self-regulatory organization), the Commission shall affirm, modify or set aside the sanction. In such proceeding the Commission shall determine whether the aggrieved person has engaged or omitted to engage in the acts and practices as found by the self-regulatory organization, whether such acts and practices constitute willful violations of this Code, any other law administered by the Commission, the rules or regulations thereunder, or the rules of the self-regulatory organization as specified by such organization, whether such provisions were applied in a manner consistent with the purposes of the Code, and whether, with due regard for the public interest and the protection of investors the sanction is excessive or oppressive.

Rule 40

3 Commission Review Procedures 40.3.1. An SRO shall submit to the Commission for prior approval any proposed rule or amendment thereto (hereinafter collectively referred to as "proposal"), together with a concise statement of the reason and effect of the proposal. If the Commission believes that such proposal is of major significance, at least thirty (30) days before approving such proposal, the Commission shall direct the SRO to publish the text of the proposal and a statement of the reasons and effect in a newspaper of general circulation and/or by some other means to guarantee the public circulation thereof, and shall afford interested persons an opportunity to submit written data, views and arguments; Provided that, the comment period shall not exceed a period of twenty (20) days. The SRO shall file with the Commission a written summary of the comments received, along with responses thereto, no later than thirty (30) days after the end of the comment period. Where the comments cause the SRO proposal to be changed in a material manner, a new review period shall be triggered. 40.3.2. Except as provided in SRC Rule 40.3.3, within sixty (60) days after submission of the proposal or summary of comments required to be filed with the Commission pursuant to SRC Rule 40.3.1, the Commission shall, by order, approve the proposal, or institute proceedings to determine whether the proposal should be disapproved. If the Commission does not institute proceedings to disapprove the proposal within such period, the proposal may be declared effective by the SRO. If a proceeding is instituted, the Commission shall provide notice to the SRO of the proposed grounds for disapproval, and an opportunity for hearing, at the conclusion of which the Commission shall grant or deny approval of the proposal. The Commission shall approve a proposal where it finds that the proposal is consistent with the requirements of the securities law. If the proceeding is not concluded within ninety (90) days following its commencement, the proposal shall be made effective by the SRO. 40.3.3. Notwithstanding SRC Rule 40.3.2, a proposed course of action that concerns purely administrative matters or such other matters authorized by the Commission, may take effect within ten (10) business days after submission to the Commission, unless the Commission, within ten (10) day period, provides written notice to the SRO of its determination to review such a proposal for prior approval pursuant to SRC Rules 40.3.1 and 40.3.2 above. 40.3.4. Notwithstanding any other provision of this section, in an emergency requiring action for the protection of investors, the maintenance of fair and orderly markets, or the safeguarding of securities and funds, the SRO may summarily put into effect a proposal; Provided, however, that the proposal made effective shall be promptly submitted to the Commission pursuant to SRC Rule 40.3.1, which case, the Commission, may upon proper finding, affirm, amend, disallow or order the discontinuance of the SRO's proposal.

Rule 40

1 Approval of Registration of Self-Regulatory Organizations Upon the filing of an application for registration as an Exchange under Section 33, a registered securities association under Section 39 of the Code, a registered clearing agency under Section 42 of the Code, or other self-regulatory organization under this Section, the Commission shall have ninety (90) days within which to either grant registration or institute a proceeding to determine whether registration should be denied. In the event proceedings are instituted, the Commission shall have two hundred seventy (270) days within which to conclude such proceedings at which time it shall, by order, grant or deny such registration.

Rule 40

6 Powers of Self-Regulatory Organization over its Members 40.6.1. A self-regulatory organization is authorized to discipline a member of or participant in such self-regulatory organization, or any person associated with a member, including the suspension or expulsion of such member or participant, and the suspension or bar from being associated with a member, if such person has engaged in acts or practices inconsistent with just and equitable principles of fair trade or in willful violation of any provision of the Code, any other law administered by the Commission, the rules or regulations thereunder, or the rules of the self-regulatory organization. In any disciplinary proceeding by a self-regulatory organization (other than a summary proceeding pursuant to SRC Rule 40.6.2) the self-regulatory organization shall bring specific charges, provide notice to the person charged, afford the person charged with an opportunity to defend against the charges, and keep a record of the proceedings. A determination to impose a disciplinary sanction shall be supported by a written statement of the offense, a summary of the evidence presented and a statement of the sanction imposed. 40.6.2. A self-regulatory organization may summarily: (i) Suspend a member, participant or person associated with a member who has been or is expelled or suspended from any other self-regulatory organization; or (ii) Suspend a member who the self-regulatory organization finds to be in such financial or operating difficulty that the member or participant cannot be permitted to continue to do business as a member with safety to investors, creditors, other members, participants or the self-regulatory organization: Provided, That the self-regulatory organization immediately notifies the Commission of the action taken. Any person aggrieved by a summary action pursuant to this SRC Rule shall be promptly afforded an opportunity for a hearing by the association in accordance with the provisions of paragraph a) of this subsection. The Commission, by order, may stay a summary action on its own motion or upon application by any person aggrieved thereby, if the Commission determines summarily or after due notice and hearing (which hearing may consist solely of the submission of affidavits or presentation of oral arguments) that a stay is consistent with the public interest and the protection of investors. cAaDHT

Rule 40

8 Extent of Powers of the Commission The powers of the Commission under this section shall apply to organized exchanges and registered clearing agencies. It shall be unlawful for any broker, dealer, salesman, associated person of a broker or dealer, or clearing agency, directly or indirectly, to make use of any facility of a clearing agency in the Philippines to make deliveries in connection with transactions in securities or to reduce the number of settlements of securities transactions or to allocate securities settlement responsibilities or to provide for the central handling of securities so that transfers, loans and pledges and similar transactions can be made by bookkeeping entry or otherwise to facilitate the settlement of securities transactions without physical delivery of securities certificates, unless such clearing agency is registered as such under Section 42 of the Code or is exempted from such registration upon application by the clearing agency because, in the opinion of the Commission, by reason of the limited volume of transactions which are settled using the clearing agency, it is not practicable and not necessary or appropriate in the public interest or for the protection of investors to require such registration. 42.1. Registration 42.1.1. An application for registration as a clearing agency and/or securities depository or any amendment thereto shall be filed with the Commission on SEC Form 42-CA in accordance with the instructions contained therein along with the prescribed registration fee; Provided, however, that an applicant for registration as clearing agency and/or securities depository may also, at the same time, apply for registration as an SRO pursuant to SRC Rule 39.1.2 on SEC Form 42-SRO; Provided, further, that any registered clearing agency and/or securities depository existing prior to the effectivity of these Rules shall, within 45 days from effectivity of these Rules, comply with all the requirements provided under this Rule, which were not provided for in its original registration. The following exhibits shall accompany the duly accomplished SEC Form 42-CA/SEC Form 42-SD/SEC Form 42-SRO: 42.1.1.1. Board resolution attesting to particulars in the application; 42.1.1.2. Copies of identity cards/passports of directors and persons who control more than ten percent 10% of the applicant; 42.1.1.3. A copy of the Articles of Incorporation indicating that the purpose of the applicant is to engage in the business of a clearing agency and/or securities depository and copy of the By-Laws; 42.1.1.4. A copy of proposed SRO rules shall be submitted to the Commission for approval pursuant to procedures set forth in the Code and IRR; 42.1.1.5. A copy of the Articles of Incorporation with all amendments thereto, and existing by-laws or rules or instruments corresponding thereto of each affiliate and subsidiary listed in answer to Item 9 of the Statement; 42.1.1.6. Original signed copy of the audited balance sheet and statement of income and expenses of the applicant, and all notes and schedules thereto as of the end of the last fiscal year; 42.1.1.7. Projected balance sheet and statement of income and expenses for the first five (5) years, including assumptions, in its capacity as (i.) clearing and settlement agent only, (ii.) depository only; and (iii.) both depository and clearing agency; 42.1.1.8. Detailed narrative and graphical description of the proposed business and/or operational model and procedures (e.g., lodgment and upliftment processes, corporate action processes, dividend distribution, proxy issuance, pledge, etc.), recording of ownership and movements of share ownership. 42.1.1.9. Detailed plan of operation and economic justification for operating a clearing agency/securities depository. The plan should describe and analyze the industry and the market area from which the clearing agency/securities depository expects to draw majority of its business and establish a strategy for its ongoing operation. It should also describe how the business will be organized and controlled internally. It should disclose the plan's target security instrument/s, e.g., equities listed in an Exchange, etc. and target participants. e.g., broker dealer, custodian, etc. 42.1.1.10. Target security instrument/s (e.g., equities listed in an Exchange, etc.) 42.1.1.11. Target participants (e.g., broker dealer, custodian, etc.) 42.1.1.12. Copies of proposed participation agreement/s; 42.1.1.13. Concise statement of the reason for said business proposal and effect of the proposal on the current clearing and settlement environment; 42.1.1.14. Statement on whether the business and/or operational model of the applicant would require, directly or indirectly, all companies listed in an Exchange to exclusively engage the services of the applicant; IDSEAH 42.1.1.15. Organization Chart, indicating filled and unfilled positions and the identity of persons presently occupying the title or position. The Chart should be accompanied by the list of qualifications/requirements and Statement of Duties and Responsibilities for each position/item; 42.1.1.16. List of the names of participants and of current applications to become participants; 42.1.1.17. Written undertaking to comply and enforce compliance by its participants with relevant provisions of the Code and any amendments thereto, and the implementing rules and regulations and the clearing agency/securities depository rules, as well as with any terms and conditions imposed by the Commission in connection with the registration of the applicant; 42.1.1.18. Copies of all clearing agency/securities depository rules indicating the date/s approved by the Commission or, where not so approved, an indication to this effect. Such rules should include rules which are required under Section 42.2 (d) and (f) of the Code; Provided, however, that drafts of new rules should be provided to the Commission for approval before becoming effective. All rules should reflect new requirements under the Code and rules and regulations adopted thereunder. 42.1.1.19. Identification and description of any qualifications or criteria that have the effect of denying or limiting access or use by any person, including broker dealer and custodian participant or their clients, of the clearing/securities depository system. If such qualifications or criteria are in the rules and procedures already, quote the specific provisions; 42.1.1.20. Identification and description of fair procedures for disciplining clearing/securities depository participants and the penal and/or schedule of sanctions, including suspension and expulsion of participants, quoting the specific provisions of the rules and procedures; 42.1.1.21. Identification and description of procedures and systems to be used, if any, to prevent and/or detect fraudulent and manipulative acts and practices. If these are in the rules and procedures already, quote the specific provisions; 42.1.1.22. Statement of Readiness and Undertaking to link the proposed system with other capital market participants, within and outside of the Philippines; 42.1.1.23. Comprehensive Information Technology Plan, to include among others, a list and brief description of the following: 42.1.1.23.1. Software and hardware to be primarily used in its clearing/depository function and their location; 42.1.1.23.2. Back-up system or subsystem and their location; 42.1.1.23.3. Security system and procedures to be employed; 42.1.1.23.4. Procedures to check sufficiency of system's capacity and expansion program, if necessary; and 42.1.1.23.5. IT system maintenance schedule. 42.1.1.24. Business Continuity and Disaster Recovery Plan; 42.1.1.25. Risk Management Manual and Internal Control Procedures; 42.1.1.26. Insurance plan to cover any operational risks and other risks, specifying the type, total amount and risk area; 42.1.1.27. Copies of service contracts/proposed contract of any activities or services that will be outsourced, if any; 42.1.1.28. List and brief justification of proposed schedule of dues, fees and charges for clearing, settlement and/or depository activities; 42.1.1.29. Study made as to comparative fees and charges imposed by other clearing agencies/depositories, if any; 42.1.1.30. Business plan setting forth future plans to ensure prompt and accurate clearance and settlement of securities trading on an Exchange/efficient and accurate securities depository system; and, 42.1.1.31. Brief description as to any material pending legal proceeding affecting the applicant directly or to which any of its properties or assets, directors, or officers is part of the case. 42.1.1.32. Undertaking to subject the information technology, business continuity and disaster recovery, and risk management systems to regular review and audit by independent firm at least once every three (3) years and such other frequency that the Commission may deem necessary. The results of said review and audit shall be submitted to the Commission within thirty (30) days from completion of the audit. The clearing agency and/or securities depository shall pay an annual fee in an amount prescribed or ordered by the Commission. Any change in information filed under the registration shall be reported to the Commission within seven (7) days from occurrence of such change. 42.1.2. After reviewing an application for registration as a clearing agency and/or securities depository, or an amendment thereto, the Commission shall: 42.1.2.1. Grant registration or approve the amendment; 42.1.2.2. Require a change in the Articles of Incorporation, By-laws, contracts, rules or procedures (hereinafter "rules") to ensure their fair administration or to make them conform to the requirements of the Code and rules and regulations adopted under it; HCaDIS 42.1.2.3. Deny registration or the amendment if: 42.1.2.3.1. The clearing agency and/or securities depository does not have the capacity and resources to enforce compliance with its rules as proposed or amended; or 42.1.2.3.2. The rules or any amendment thereto would be inconsistent with provisions of the Code, or rules and regulations adopted under it or with the development and operation of a prompt and accurate clearance and settlement system and the safeguarding of money and securities in its custody, within its control or for which it is responsible; or 42.1.2.3.3. The application for registration or an amendment thereto is incomplete, inaccurate or misleading; or 42.1.2.3.4. Exempt from registration due to the limited volume of transactions and based on findings that it is not practicable and necessary or appropriate in the public interest or for the protection of investors to require such registration. 42.1.3. If any of the information reported on SEC Form 42-CA/SEC Form 42-SD becomes inaccurate, misleading or incomplete or requires updating for any reason, including changes to rules and the list of directors and officers, the Issuer shall correct the information by filing an amendment within seven (7) days after the date on which the information contained in the application became inaccurate, misleading or incomplete. Amendments to SEC Form 42-CA/SEC Form 42-SD which update the Issuer's list of directors, officers, partners or shareholders shall be deemed to satisfy Section 26 of the Corporation Code of the Philippines. 42.1.4. For registered Clearing Agency/Securities Depository whose fiscal year ends on December 31, SEC Form 42-AR shall be filed with the Commission depending on the last numerical digit of its registration number as prescribed by the Commission. Clearing Agency/Securities Depository whose fiscal year ends on a date other than December 31 shall file SEC Form 42-AR 110 calendar days after the close of such fiscal year. 42.1.5. Nothing in this Rule shall be construed as precluding the Commission from requiring an applicant for registration or a registered clearing agency/securities depository to submit other requirements it may deem reasonably necessary to effectively regulate and supervise the clearing agency/securities depository and/or to protect the interest of the investing public. 42.2. Reports from Clearing Agencies/Securities Depository If a registered clearing agency/securities depository at any time becomes aware of any development relating to a participant that leads such clearing agency/securities depository to believe that (1) such participant has breached, is in breach, or is about to breach the clearing agency's/securities depository's rules; or (2) the participant has experienced, is experiencing, or is about to experience material operational or financial difficulties, which breach or difficulties may adversely affect such participant, such registered clearing agency/securities depository shall immediately notify the Commission and provide any documentation or evidence leading the clearing agency/securities depository to such determination. 42.3. Registration and Annual Fees In addition to the prescribed registration fee prescribed above and for the privilege of doing business for the preceding calendar year or any part thereof, every clearing agency/securities depository shall pay to the Commission not later than the fifteenth (15th) day following the end of its fiscal year, an annual fee based on value turnover. 43.1. All corporations covered by Section 43 of the Code may issue uncertificated ("scripless") securities: 43.1.1. The board of directors motu proprio, with the consent of the concerned shareholder, investor or securities intermediary or upon written request of a shareholder, investor or securities intermediary to the Corporate Secretary of the relevant corporation, may adopt a resolution to issue scripless securities to such shareholder, investor or securities intermediary, without prejudice to the right of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name. 43.1.2. The corporation shall, prior to the adoption of a resolution on scripless securities, ensure that all cash and stock dividends due and payable to shareholders have been paid. The Corporate Secretary shall within five (5) days from the adoption of the resolution, certify under oath the corporation's compliance with these requirements. 43.2. All corporations covered by Section 43 of the Code shall, within one (1) year from the effectivity of this Rule, adopt an electronic system to allow for the issuance of uncertificated securities, which system must be submitted to and approved by the Commission prior to its implementation. Such system shall include an electronic registry whereby ownership of securities and transfers thereof, including any other transaction affecting the uncertificated securities such as pledge, shall be recorded and registered. Subject to the approval of the Commission, such electronic registry shall have the same legal status as a stock and transfer book of the corporation insofar as uncertificated shares are concerned. 44.1. All transactions between a clearing agency and its participants must be recorded by book entries. 44.2. The corporate secretary's or the stock transfer agent's receipt of the report of such transactions from a clearing agency shall be deemed a recording by the corporate secretary or the transfer agent of the transactions in the books of the corporation. However, the ultimate beneficial owner of the securities may prove his rights, title and entitlement to the relevant securities as against the participant so recorded as owner of the securities. 45.1. If an uncertificated security is pledged, the pledgor shall submit the corresponding pledge agreement over the shares to the corporate secretary, stock transfer agent or the securities intermediary maintaining the electronic registry of shares pledged. 45.2. Within three (3) calendar days from receipt of the pledge agreement over the shares, the corporate secretary, stock transfer agent or the securities intermediary, as the case may be, shall indicate by book entry that a pledge has been created over the pledged securities. 45.3. The clearing agency that recorded the agreement shall within three (3) calendar days after such recording notify the corporate secretary or stock transfer agent of the pledge either by mail, email, facsimile or such other manner as the Commission may prescribe from time to time. The receipt by the corporate secretary or stock transfer agent of the report from the clearing agency shall be deemed a recording of the pledge in the books of the corporation. An instruction by a registered clearing agency for registration of a transfer of a security shall be acted upon by the corporation or its transfer agent within five (5) business days from receipt of instruction. Within the said period, the corporation or transfer agent shall: (a) confirm the registration of the transfer and immediately issue the security in the name of the transferee; or (b) notify by mail, email, facsimile or such other means as the Commission may prescribe, the clearing agency, the registered owner and the adverse claimant, if any, of a discrepancy in the records of the corporation. In case of such discrepancy, the corporation or transfer agent shall maintain the status quo until the discrepancy is settled. The Commission is authorized, having due regard to the public interest and the protection of investors, to promulgate rules and regulations which: 47.1. Validate the transfer of securities by book-entries rather than the delivery of physical certificates; 47.2. Establish when a person acquires a security or an interest therein and when delivery of a security to a purchaser occurs; 47.3. Establish which records constitute the best evidence of a person's interests in a security and the effect of any errors in electronic records of ownership; 47.4. Codify the rights of investors who choose to hold their securities indirectly through a registered clearing agency and/or other securities intermediaries; 47.5. Codify the duties of securities intermediaries (including clearing agencies) who hold securities on behalf of investors; and 47.6. Give first priority to any claims of a registered clearing agency against a participant arising from a failure by the participant to meet its obligations under the clearing agency's rules in respect of the clearing and settlement of transactions in securities, in a dissolution of the participant, and any such rules and regulations shall bind the issuers of the securities, investors in the securities, any third parties with interests in the securities, and the creditors of a participant of a registered clearing agency.

Rule 40

2 Compliance of Self-Regulatory Organizations with the Code Every self-regulatory organization shall comply with the provisions of the Code, the rules and regulations thereunder, and its own rules, and enforce compliance therewith, notwithstanding any provision of the Corporation Code to the contrary, by its members, persons associated with its members or its participants.

Rule 40

5 Commission Powers over Exchanges, Clearing Agencies and Self-Regulatory Organizations 40.5.1. Subject to SRC Rules 40.5.2 through 40.5.6, the Commission may, when it is satisfied that it is in the interest of the investing public, or is appropriate to do so for the protection of investors, and after due notice and a hearing: 40.5.1.1. Suspend registration of an Exchange, clearing agency and/or self-regulatory organization (hereinafter collectively "Exchange") upon findings that such Exchange has willfully violated or is unable to comply with any provision of the Code, or the rules and regulations hereunder, or its own rules, or has failed to enforce compliance therewith by a member of, person associated therewith, or a participant in such Exchange; or 40.5.1.2. Suspend any or all officers of said Exchange and appoint an independent administrator knowledgeable in capital market operations to take over the management of the Exchange, and/or suspend any and all member/s of the board of directors and appoint new director/s to serve during the suspension period, upon findings that such officer/s and/or director/s have willfully violated any provision of the Code, any other law administered by the Commission, the rules or regulations thereunder, or the rules of such Exchange, or abused his authority, or without reasonable justification or excuse has failed to enforce compliance with any of such provisions. 40.5.2. Upon discovery of any of the above-mentioned violations or failures, the Commission shall notify the Exchange, officer/s and/or director/s thereof and set a period of time in which such violation or failure shall be rectified, which period shall be no less than ten (10) days nor more than ninety (90) days. 40.5.3. In the event that an Exchange fails to rectify such violation or failure within the stated period, which the Commission may extend the rectification period only once based on its finding that such extension is in the public interest or for the protection of investors, the Commission, after due notice and a hearing, may undertake the necessary remedies to correct the same. 40.5.4. For as long as an order suspending any officer/s and/or director/s is in effect under this rule, none of the functions to which the order relates shall be performed, by said suspended officer or director. 40.5.5. Where an independent administrator is appointed under this rule, such administrator shall immediately prepare a workplan which shall be submitted to the Commission for approval and/or amendment, to address the underlying reason for the suspension. Such workplan shall include a timetable for compliance with the Code which shall not be later than the period of suspension. 40.5.6. At the end of the suspension period, or upon expiration of the period set forth in the workplan approved by the Commission, the Commission may: (a) lift the suspension order and reinstate the Exchange's registration; (b) revoke such registration pursuant to the Code; (c) reinstate the Exchange's officer/s and/or board member/s; and/or (d) issue an order prohibiting officers and/or members of the board who have been suspended from serving in such capacity for a stated period. 40.5.7. Immediately after the issuance of a decision to revoke registration, no new transactions shall be effected, except as necessary to protect investors.