Sun Life Asset and Management Company Re: Issuance of Securities of a Mutual Fund Company apart from its Authorized Capital Stock

SEC BuildingEDSAGreenhillsMandaluyong City Securities and Exchange Commission Republic of the Philippines Department of Finance

16 April 2015

Re:Issuance of Securities of a Mutual Fund Company Apart From Its Authorized Capital Stock

Chief Operating Officer VALERIE N.PAMA SUN LIFE ASSET AND MANAGEMENT COMPANY SUN LIFE OF CANADA PHILIPPINESINC 15th Floor, Tower 2 6766 Ayala Avenue cor.Paseo de Roxas Makati City The Enterprise Center

Dear Ms.Pama

that will allow Sun Life Asset and Management Company (SLAMCbeing a mutual Investment Company Act of 1960 ICA, vis-a-vis the Implementing Rules and fund, to sell securities other than shares of its own authorized capital stock pursuant to the Regulations of the said iaw (ICA Rule 35-1,as amended This refers to your letter dated 14 October 2011 requesting for a favorable action

partake of the nature of a request for an opinion. Finance Department (CFD) of the Commission informed SLAMC that the Commission En Banc in its meeting on 14 July 2011 resolved to deny such request.3 Thereafter, the undersigned and the representatives of SLAMC, including yourself, attended a meeting at the office of the undersigned in which the issue as to whether a mutual fund can sell other securities was discussed.On 17 October 2011, the undersigned received your request letter dated 14 October 2011 and the Commission noted that the issues raised therein allowed to invest in off-shore domiciled mutual funds. However, the Corporation To recall, SLAMC requested,in its Letter dated 14 December 2009,that it be

companies, mutual fund holders, victims of investment companies, other related The Commission conducted public consultations and requested mutual fund

Now known as the Corporate Governance and Finance Department (CGFD 3 Letter of the CGFD addressed to SLAMC dated 21 July 2011 Republic Act No.2629 4Meeting held on 12 October 2011.

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G Page 2 of 12 Company Apart From Its Authorized Capital Stock ReIssuance of Securities of a Mutual Fund

stakeholders and the general public to submit their comments.However, only SLAMC submitted its position paper.

shares of stock. permits a mutual fund to sell securities other than its shares of stock, contrary to the more restrictive interpretation of the Commission, i.e., that a mutual fund can only issue its In short, you are of the view that the ICAthe law governing mutual funds

rules relative to the sale of securitiesof a mutual fund other than their own shares of addressed: 1 the usc of the term securities under the ICA and the Securities Regulation Code (SRC and 2 the over-all intent of the ICA and its implementing stock. Thus, in order to properly address your queries, the following issues shall be

Plain meaning of "Securities" under the ICA and SRC.

itself out as being engaged primarily,or proposes to engage primarily,in the business of investing,reinvesting, or trading in securitiesParticularly, an Openend company or commonly also known as a Mutual Fund is an investment company which is offering for sale or has outstanding any redeemable security of which it is the issuer; An Investment Company is defined by the ICA as any issuer which is or holds

stock are just a specific form of securities. Republic Act No.8799,the Securities Regulation Code (SRCprovides a similar definition in Section 3.1 thereof,to wit The ICA's definition of securities essentially a word-by-word definition under the old Securities Law of 1936, encompasses different kinds of securities,of which shares of A plain reading of the aforesaid provisions of the ICA uses the term securities

3.1.Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument whether written or electronic in character. It includes:

5 Position Paper received on 20 October 2014. 9 Section 3bb,Id."any note,stock, treasury stock,bond, debenture,evidence of indebtedness, certificate Section 5 Id Republic Act No.8799 Section4,Republic Act No.2629 purchase,any of the foregoing.(Emphasis ours) of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization interest or instrument commonly known as a 'security or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of. or warrant or right to subscribe to or certificate or subscription transferable share, investment contract, voting-trust certificate, certificate of deposit for a security,fractional undivided interest in oil, gas, or other mineral rights, or,in general,any

Page 3 of 12 Company Apart From Its Authorized Capital Re: Issuanc Stock ce of Securities of a Mutual Fund

a Shares of stock, bonds, debentures,notes, evidences of indebtedness, asset-backed securities;

in a profit sharing agreement, certificates of deposit for a future b) Investment contracts, certificates of interest or participation subscription xxx

regard, no such distinction can be made by means of interpretation or application. Ubi lex non distinguit, nec nos distinguere debemus.1 Hence, the use of the term security cannot be confined to shares of stock alone but must likewise refer to other kinds and forms of securities pursuant to the ICA in relation to the SRC, considering that it has used the term a broad scope, i.e. aside from shares of stock,there are other forms of securities. In this "securities"rather than shares of stock"which is only a specie of the former. Again, it would appear that the term securities as used in the SRC encompasses

ICA and ICA Rule 35-1 Issuance of securities other than its own shares is supported and recognized by the

ICA permits a mutual fund company to issuc securities other than its shares of stock. An exhaustive analysis of the ICA would reveal such intent by the law,thus Using the plain mcaning of the term securities it would now appear that the

l) The definition of an open-end fund refers to its nature: its offering for sale or has outstanding any redeemable security of which it is the issuer: 2 Section 7 (b4) requires in the investment company's Registration Statement to register under the Securities Act all securities (other than short-term the information and documents which would be required to be filed in order paper which the registrant has outstanding or proposes to issue

3 Section 16 (f on the safe custody of securities and investments:Every exchange as defined in the Securities Act, subject to such rules and protection of investors; or 3 such registered company, but only in accordance with such rules and regulations or orders as the Commission may registered investment company shall place and maintain its securities and similar investments in the custody of (1) a duly organized local commercial regulations as the Commission may from time to time prescribe for the bank of good repute; or 2 a company which is a member of a securities

1 SEC-OGC Opinion 12-19, October 11,2012,addressed to Romulo Mabanta Buenaventura Delos Angeles and Sayoc,citing Agpalo,Ruben E. Statutory Construction,6th Edition 2009, pp.289-290. (Citations omitted)

Re: Issuance of Securities of a Mutual Fund Company Apart From Its Authorized Capital Page 4 of 12 Stock

from time to time prescribe for the protection of investors. Rules, regulations. make appropriate provision with respect to such matters as the and orders of the Commission under this subsection, among other things, shall investments x x x earmarking, segregation, and hypothecation of such securities and

(4) Section 22 on the distribution, redemption and repurchase of securities:

to the public by or through an underwriter, no principal underwriter of public offering price described in the prospectus: xxx a No registered investment company shall sell any redeemable security issued by it to any person except either to or through a principal in the prospectus,and,if such class of security is being currently offered except a dealer,a principal underwriter or the issuer,except at a current underwriter for distribution or at a current public offering price described such security and no dealer shall sell any such security to any person

XXX

(c No registered open-end company shall restrict the transferability registration statement nor in contravention of such rules and regulations as outstanding securities of such investment company. or negotiability of any security of which it is the issuer except in conformity with the statements with respect thereto contained in its the Commission may prescribe in the interests of the holders of all of the

reorganization. d No registered open-end company shall issue any of its securities (1) securities of which such registered company is the issuer, except as a dividend or distribution to its security holders or in connection with a for services; or (2 for property other than cash or securities including

5 Finally, Section 24 provides for procedures for the registration of securities in accordance with law (at present, complying with Registration Requirements under Section 17 of the SRC;

interpretation would defeat the purpose of a mutual fund - that it continually offers its defined by the ICA in relation to the SRC, used in the aforesaid provisions, would connote that IT MAY ISSUE other securities. Besides, an otherwise restrictive shares for sale to the public and redeems its own shares, so that an investor securities other than its shares. Taking into consideration the term securitiesas plainly Verily, the ICA recognizes the possibility that a mutual fund may issue its own

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from or to another investor. purchases its shares from, and resells them back to the mutual fund, rather than

or decrease its authorized capital stock without the approval of its board of directors and stockholders.As provided in Section 38 of the Corporation Code investments and active trading resulting from these being sold and resold to the mutual fund itself- is its susceptibility from the regular increase or decrease of its capital stock Relative thereto, an ordinary corporation cannot at its own instance immediately increase Apropos to the nature of a mutual fund - the continuous movement of its

No corporation shall increase or decrease its capital stock at a stockholder's meeting duly called for the purpose, two- thirds (2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock,or the incurring creating or increasing of any bonded indebtedness.x x x or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and

additional securities and papers in the furtherance of its business. related to voting and cpproval requirements in the increase/decrease of capital stock does not apply to an investment company.13 By placing such exemption,mutual funds Likewise, in allowing flexibility in the movement of the authorized capital stock, it follows that a mutual fund, in order to accommodate other investors, may now issue would be allowed to increase or decrease its authorized capital stock without need of undergoing tedious voting and approval procedures pursuant to the Corporation Code In order to address this, Section 22 e2 of the ICA provides that the rules

subject to voting procedures that would slow down its trade. By subscribing with the facilitate any increase or movement in the capital stock, as a mutual fund is expected to voting requirements of the Corporation Code as to the increase its authorized capital stock, it would be run against the fast-paced nature of the mutual fund. Instead of encouraging the free movement in the trade of its shares and securities, it would still be restrictive interpretation of limiting it to shares of stock, it will not in the first place If a mutual fund would undergo such normal procedure in complying with the

12(e The pertinent provisions of section seventeen of the Corporation Law (Act Numbered Fourteen 13 Section 17of the Corporation Law is now Section 38 of the Corporation Code. It must be T 45 Am Jur 2d 902 remain to be in legal force and effect. hundred and fifty-nine, as amended or any other provision of the said law in conflict with this section shall not apply to a regisiered open-end company. and/or decrease of capital stock which is also enunciated in the Corporation Code,such exception shall emphasized that Section 22 (e of the Investment Company Act was not expressly repealed by the Corporation Code. Considering that the specific provision refers to exception as to the rule on increase

U Company Apart From Its Authorized Capital Page 6 of 12 Re: Issua Stock e of Securities of a Mutual Fund

issue more shares and securities to prospective investors above its original authorized capital stock to generate improved market movement and eventual return of investments.

nothing in the said implementing rules would indicate any restriction in the sale of ICA Rule35-1 complements the ICA other securities.

35-1. Initially conceived in 19894 further revisions were made before it formally sale of securities other than its own shares,a high capital requirement (Php 50 Million paid-up capital) and minimum size of investment (Php5,000.00,no installments), made in became effective in 1998.The salient features of ICA Rule 35-1,include the limiting the order to protect investmcnt companies from the unforeseeable, as well as to prevent any attempt at fraud. The implementing rules and regulations of the ICA is encompassed in ICA Rule

between sharesand securitiesIn Section b2 of ICA Rule 35-1, the said the then Revised Securities Act (now Section 17 of RA 8799 implementing rules provide for the registration of mutual fund securities as provided by A reading of the ICA Rules would reveal that it acknowledges the difference

by the investment company shall be registered in accordance with the Revised Securities Act and rules adopted pursuant "Any securities proposed to be issued and distributed or sold thereto."

Likewise, in Section c of ICA Rule 35-1,referring to Sale of Securities

(c) Sale of Securities

minimum size of investment by any single investor in shall be on a cash basis. Installment sales are hereby expressly prohibited. shares/securities issued by an investment company shall be the amount P5.000.00. Securities sold by an investment company *1) Unless the Commission shall otherwise prescribethe

including the original subscription/pavments at the time of incorporation constituting the original paid-in capital of the (2) investmert company shall be held by a custodian bank as required in paragraph (h) hereof. All proceeds from the sale of shares/securities

14 As published in the January 1990 SEC Bulletin, p. 117.

Company Apart From Its Authorized Capital Page 7 of 12 Stock Re: Issua e of Securities of a Mutual Fund

have subscribed and paid for the original capital of the investment company, shall not be allowed to sell, transfer, said investment company. shares/securities within twelve(12 months from registration of 3 convey,encumber The original proponents of the investment company who or otherwisedispose of their

4In case of open-end investment funds,the investment company may establish a network of redemption centers acceptable to the Commission."

an or distinction. In particular is number 2 of the same Section, which states emphasized that original subscriptionrefers toshares,while paymentrefers Securities" and provides for rules and limitations to shares/securities" which connotes subscription/pavments at the time of incorporation constituting the original paid-in capital of the investment company shall be held by a custodian bankIt must be to securities. procecdsfromthcsaleofshares/securities It must be emphasized that Section c itself provides for the title Sale of includingthe original

Rule 35-1 concerning reportorial requirements of the mutual fund. Section 10.3 of the before the Commission, thus: 1989 version of ICA Rules provided for the reportorial requirements of a mutual fund The closest perception of restriction can be found in the provisions of the ICA

the Commission." 10.3Within thirty 30 days from effectivity of the Order company shall submit to the Commission a report under oath executed on its behalf by its Treasurer or any other officer approving the registration of the investment company, and within the first 5 days of every month thereafter, the investment showing the total amount received from the sale of its shares/securities and the percentage of such shares/securities owned by Filipino investors and non-Filipino investors it being understood, that if no shares/securities had been sold during the period, a letter of advice to that effect shall be submitted to

shares of stock or its sold securities,as the case may be. showing that there is a distinction as to the reporting of the mutual fund of either its sold Note that the foregoing used the term sales/securities in the 1989 version

and only retained"shares" for reporting by the mutual fund before the Commission: abovementioned provision was slightly modified that it removed the term "securities However, in Section i 2 the ICA Rule 35-1 issued in 1998, the

0 Re:Issuarrce of Securities of a Mutual Fund Company Apart From Its Authorized Capital Page 8 of 12 Stock

investment company shall submit to the Commission a report under oath executed on its behalf by its Treasurer or any other declaring effective the registration of the investment company and within the first ten (10 days of every month thereafter, the officer, showing the following information *(2) Within thirty 30 days from effectivity of the Order

*A) B) C) E) Filipinos. the month: D) F month; and "G) the percentage of the outstanding shares owned by the number of shares sold during the month; the total amount of redemptions; the number of shares outstanding at the beginning of the number of shares redeemed during the month the number of shares outstanding at the end of the thie total amount received from sale of shares

intent on restricting mutual funds to only selling its own shares, for indeed what is being asked for reporting is the shares,not any other type of securities. The 1998 revisions of ICA Rule 35-1 would seem to show the Commission's

1960 as a result of the collapse of mutual funds companies in the 1950s, thus when it was passed into law, if made it a point in its declaration of policy that the ICA is primarily passed to protect national public interest and the interest of investors. can be traced to the history of mutual funds in the Philippines. The ICA was enacted in The policy of the Commission to be stringent in the regulation of mutual funds

15 SECTION 2.Declaration of policy.It is hereby declared that the policy and purposes of this Act in inequitable methods of control, or is inequitably distributed, or when investment companies are managed by irresponsible persons; feasible, to climinate the following conditions which adversely affect the national public interest information fairly presented concerning the character of such securities and the circumstances, policies, and financial responsibility of such companies and their management (b When investment companies are organized, operated, managed, or their portfolio securities are thereof, in the interest of underwriters, brokers, or dealers, in the interest of special classes of their security holders, or in the interest of other investment companies or persons engaged in other lines of business, rather than in thie interest of all classes of such companies' security holders provisions, or fail to protect the preferences and privileges of the holders of their outstanding accordance with which the provisions of this Act shall be interpreted are to mitigate and, so far as is and the interest of investors: sell, or surrender securitics issued by investment companies without adequate, accurate, and explicit selected, in the interest of directors, officers, investment advisers, depositors, or other affiliated persons (c securities (d (a) When the control of investment companies is unduly concentrated through pyramiding or When investment companies issue securities containing inequitable or discriminatory When investors purchasepay for, exchangereceive dividends upon vote, refrain from voting

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break the stigma that tainted the names of its predecessors.1 However, that did not last long, as combined by unforeseen circumstances, such as the thin equity market and the political instability of the early 1970's, which led to the failure of mutual funds and the Commission banning the sale of mutual funds in 1973.17 In which case, the Commission funds since such regulation was due to above-stated experiences. Shares Inc. and Pacific Funds Inc.pioneered the first mutual funds in an attempt to to did not impose an arbitrary regulation in laying down stringent requirements on mutual It took nine (9 years from the passage of the ICA,or in 1969, before Trinity

companies.19 restrict under given circumstances - the affairs of the mutual funds, whether involving issuing securities or other concerns arising thereto. Generally, this is in keeping with the Commissions rule-making power under Section 5g of the SRC to formulate policies and recommendations on issues concerning the securities market.18 Moreover, Section 35 of the ICA authorizes the Commission to promulgate rules as to investment In fact, the Commission is empowered to reasonably regulate - either relax or

to be sold by a mutual company, the conflicting provision in Section (i) (2) of ICA Rule Considering the foregoing, and in line with the stance of allowing other securities

1 SECTION 35.Rules,regulations, and orders:general powers of Commission.aThe Commission 18 SECTION.5. Powers and Functions of the Commission x x x [T]he Commission shall have, among 6 The Rebirth of Mutual Funds,by the SEC-Examiners and Appraisals DivisionSEC BulletinVol. IV 7History jurisdiction and prescribe different requirements for different classes of persons, securities, or No.1,January 1970,pp.1-2 its rules or regulations the Commission may classify, persons, securities, and other matters within its eWhen investment companies, in keeping their accounts, in maintaining reserves, and in computing http://www.pifa.com.ph/philmutualfundhistory.html.Retrieved on July 24,2014,13:02 GMT+8 others, the following powers and functions:x x x (g Preparc,approve,amend or repeal rules,regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the powers conferred upon the Commission elsewhere in this Act, including rules and regulations defining accounting, technical, and trade terms used in this Act, and prescribing the form or forms in which information required in registration statements, applicants, and reports to the Commission shall be set forth. For the purposes of matters. business, or when the control or management thercof is transferred, without the consent of their senior securities increase unduly the speculative character of their junior securities; or their earnings and the asset value of their outstanding securities, employ unsound or misleading methods, or are not subjected to adequate independent scrutiny; fWhen investment companies are reorganized,become inactive, or change the character of their (h) regulation and orders: security holders (g .When investment companies operate without adequate assets or reserves. When investment companies by excessive borrowing and the issuance of excessive amounts of of Mutual Funds, Philippine Investment Funds Association.

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35-1 can be harmonized with the ICA and the other sections of ICA Rule 35-1 to construe that the reportorial requirements also holds true for othersecurities

harmonization is impossible that resort must be made to choosing which law to apply.20 only to be consistent with itself but also to harmonize with other laws on the same subject matter, as to form a complete, coherent and intelligible system. In other words, every effort must be made to harmonize seemingly conflicting laws. It is only when It is a principle in statutory construction that a statute should be construed not

as a separate item. Morcover, Section i2 of ICA Rule 35-1 merely refers to reporting prohibit other securities. to include "securities",for most of the salient portions of ICA Rules refers to "securities' of the sale, disposition and redemption of shares, which neither expressly nor out-rightly The omission of "securities" in Section i) (2 of ICA Rule 35-1 may be construed

accommodates the ability of a mutual fund to issue securities other than their own shares The said implementing rules appears to complement the ICA and is cognizant of treating "securities" as defined in the ICA. With these observations, it would appear that ICA Rule 35-1 recognizes and

The Commission's Position

as a request for a legal opinion. However, the Commission will no longer treat your letter as a request for a legal opinion since the above-stated observations are considered as far reaching and calls for a change in the Commission's policy. Thus the Commission deems it necessary to relax such regulatory requirements pursuant to its rule-making power under Section 5gof the SRCand will allow SLAMC and other mutual funds to sell securities other than its own shares. As earlier mentioned, the Commission treated your letter dated 14 October 2011

under management and the growing number of investors are proof of the growing regulation. The current strong macroeconomic fundamentals, which have been recognized by an upgrae in credit rating, coupled with optimistic growth forecasts, bode schemes (CIS have now been thriving in the country. The increasing amount of assets industry. However, as shown in the data of other Association of Southeast Asian Nations (ASEAN countries,there is much room for further growth of the mutual fund industry in the country. The importance of a supportive policy environment was development of the mutual fund market is needed to ensure stability and consistency of underscored in severa! studies. Commitment of the government to support the It must be noted that mutual funds and other forms of collective investment

2Dreawork Construction, Inc.y. Janiola,G.R.No.184861, June 30, 2009,591SCRA 466. 21 See Note 18.

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growing number of investors are proof of the growing industry.2 well for the prospects of the mutual fund market. With higher incomes, a corresponding increase in demand for investment products is expected. Improving the regulatory favorable regulatory framework where companies can operate to facilitate the flow of investments, and at the same time broaden investor participation, is necessary. CIS have environment for mutual funds and other form of CIS can help increase investor been thriving in the country. The increasing amount of assets under management and the confidence in the industry. To prepare for this growth opportunity, the establishment of a

cross-border offering of CIS. Malaysia, Singapore and Thailand are the initial participating countries. Under the framework, fund managers operating in a participating framework are managed based on industry best practices.2 investment skilled labor, including capital under the 2015 ASEAN Economic country are allowed to offer CIS constituted and authorized in that country, considered as authorization process. A common set of standards have been agreed to be adopted to govern the cross-border offering of ASEAN CIS to ensure that participating fund managers have the necessary expertise and experience, and schemes offered under the eventual transformation of ASEAN into a region with free movement of goods,services, Community. There is already an initiative called the ASEAN CIS Framework to launch ASEAN CISto retail investors in other member countries under a streamlined Further, the mutual fund industry in the Philippines has to be prepared for the

opportunities in foreign markets.2 important considerations for strengthening the regulatory framework of the mutual fund industry. This will prepare local investment companies to compete with their rcgional counterparts. In return,the exposure of local mutual funds to ASEAN markets will help develop the industry and will provide Filipino investors with wider investment The opportunities and risks for greater regional and global integration are

securities. These mutual fund companies also question the standing policy of the securitics of mutual fund companies apart from its shares of stock. While there is a pending bill in Congress relative to CIS25 these companies interposed their arguments queries by mutual fund companies, particularly SLAMC, concerning the issuance of own shares of stock,as the ICA will show that mutual funds could sell not just stocks but and contention with the Commission that mutual funds may issue securities other than its Lastly, it must be pointed out that the Commission is aware and mindful of the

25 House Bill No. 4036, 16th Congress, authored by Rep. Henry Cojuangco. 22 Congressional Policy and Budget Research Department (CPBRD) of the House of Representatives Policy 24 d 23 Id. 4%20Mutual%20Funds.pdf last accessed on 23 March 2015. BriefNo. http://www.congress.goV.ph/cpbo/images/PDF%20Attachments/CPBRD%20Policy%20Brief/PB2014- 2014 04 Promoting . theDevelopment of Mutual Funds'

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Commission in treating mutual funds strictly, that they are not allowed to sell other securities other than their shares.

own authorized capital stock. The corresponding guidelines to put this into effect will stringent policy of restricting mutual funds to only sell its own shares,and it is now the policy of the Commission to allow mutual funds to sell securities other than shares of its subsequently be issued. Thus, in view of the foregoing, the Commission deems it necessary to rclax its

By the authority of the Commission En Banc

A TERESITA J. HERBOSA Chairperson