Opinion No. 14-03 RE: Minimum public ownership of REIT; trustee of a pre-need trust fund

Republic of the Philippines

Department of Finance Securities and Exchange Commission SEC Bldg., EDSA, Greenhills, Mandaluyong City

Office of the General Counsel

8 April 2014

SEC Opinion No. 14-03 Re: minimum public ownership of REIT; trustee of a pre-need trust fund

Loyola Plans Consolidated, Inc. Loyola Plans Bldg. 849 A. Arnaiz Avenue Makati City 1200 Philippines

Attention: Mr. Christopher P. Concepcion Ms. Jesusa P. Concepcion

Dear Ms. and Mr. Concepcion.

This refers to your Letter dated 28 February 2013 requesting confirmation that.

for the purposes of determining the minimum public ownership of a real estate investment trust (REIT), each of the planholders of a pre-need trust fund investing in the REIT would be regarded as shareholders thereof.

In your Letter, you stated that Loyola Plans Consolidated, Inc. (LPCI) is engaged

in the business of marketing and selling pension, education, memorial and life plans.

LPCI will establish a REIT in connection with its objective to provide better investment

outlets for its pre-need trust funds. In setting up the REIT, LPCI will transfer real

properties in exchange for REIT shares. Two (2) pre-need trust funds will invest on behalf of its planholders by purchasing the shares owned by LPCI during the REIT's

initial public offering.

You believe that the planholders of the pre-need trust funds should be regarded as

the shareholders of the REIT for purposes of determining the minimum public ownership of a REIT. You argue that the pre-need trusts funds are established for the benefit of the

planholders and that the planholders should be considered as the real owners of all the

properties and investments transacted through the pre-need trust funds.

In order to establish a REIT, it must comply with the minimum public ownership requirements. A REIT shall be a public company and to be considered as such, a REIT

shall: (a) maintain its status as a listed company; and (b) upon and after listing. have at

least one thousand (1000) Public shareholders each owning at least fifty (50) shares. and

shareholders of the latter SEC Opinion No. 14-03 Re: whether planholders of a pre-need investment Page 2 of 4 company which establishes a real estate trust are considered

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the REIT at the initial year; provided that the minimum ownership shall be increased to sixty seven percent (67%) within three (3) years from its listing. who, in the aggregate, own at least forty percent (40%) of the outstanding capital stock of

payable to planholders and other costs necessary to ensure the delivery of benefits or services to planholders as provided for in the contracts.3 A portion of the installment payment for the pre-need plan collected shall be deposited by the pre-need company in funds may invest in fixed income securities, equities and real estate which shall be planholders' payments to pay for the cost of benefits and services, termination values act as the trustee.s Lastly, to ensure the liquidity of the trust fund to guarantee the entrusted by the pre-need company to any reputable bank's trust department, trust company or any entity authorized to perform trust functions in the Philippines who will delivery of the benefits provided for under the plan contract and likewise to obtain sufficient capital growth to meet the growing actuarial reserve liabilities, the said trust subject to certain limitations. the trust fund.4 Under the Pre-Need Code,2 a trust fund refers to a fund set up from the The management and administration of the trust fund will then be

the property for the benefit of another person is known as the trustee, and the person for who sets up a trust is called a trustor, the one in whom confidence is reposed as regards whose benefit the trust has been created is called the beneficiary. In establishing a trust fund, a relationship called a trust is created where a person

trust functions in the Philippines is the trustee8 which is entrusted to manage and who will be the recipient of the benefits of the pre-need plan is the beneficiary of the pre- company or entity, an investment house or financial institution authorized to perform administer the trust fund,' and the planholder or the person designated by the planholder need trust funds. Here, the pre-need company is the trustor, the trust department of a bank, a trust

considered as shareholders of the REIT for the purpose of determining the minimum public ownership of the REIT. We opine that the planholders or beneficiaries of the trust funds are not

3 Section 4(j), Pre-Need Code. 4 Section 30, Id. 6 Section 34, Id. 9 Section 40, Id. 1: SEC Memorandum Circular No. 2, Series of 2011, amending Sec. 5.1 (a), Rule 4 of the Implementing Io Section 4c, Id. Section 4(bb), Implementing Rules and Regulations of the Pre-Need Code. Article 1440 of the Civil Code Republic Act No. 9829 (2009) Rules and Regulations of Republic Act No. 9856 or the REIT Act of 2009. Section 38, Id.

Re: whether planholders of a pre-need company which establishes a real estate shareholders of the latter Page 3 of 4 SEC Opinion No. 14-03 investment trust are considered

in order to satisfy the public ownership requirement under the REIT Act. expressly provide that the planholders of a pre-need plan, in whose favor a trust fund is set up, may be considered as individual stockholders in an investee company (i.e., REIT) It must be noted that neither the Pre-Need Code nor the REIT Act does not

holding corporate stock are regarded for all legal purposes as stockholders.1s by the trustee.12 "The law regards the trustees for all purposes as stockholders of the words, a hoider or stockholder includes a person holding stocks in trust14 and trustees they happen to own a majority of the stock, they control the corporation.13 In other which requires him to perform certain duties and exercise powers over it for the benefit of the beneficiary11, while the beneficiary or the cestui que trust, is the person who has an equitable interest in the property and enjoys the benefit of the administration of the trust corporation. They vote the stock and exercise all rights belonging to the stockholders. If In a trust arrangement, the trustee holds the legal title over the trust property

distinguished from an interest in a particular equity, in this case, the REIT shares. In short, the planholders have a mere inchoate interest or right to the REIT shares. The REIT. If the REIT performs well, the planholders will gain indirectly since the trust fund planholders will likewise be affected since the performance of the said REIT may affect the liquidity of the trust fund. will be more liquid, ensuring that the said planholders will receive its benefits under the planholders' interests in the REIT shares merely lie in the overall performance of the plan contract when it matures. On the other hand, if the REIT does not perform well, the Here, the planholders have an interest in the trust fund as a whole, as

change, transfer or otherwise change or dispose of the assets comprising the funds. or to dispose of or to direct the disposition, of such security. As a matter of fact, which you aptly pointed out, the trustee shall exercise due diligence for the protection of the under the SRC Rule 3(A).16 planholders guided by sound investment principles and shall have the exclusive management and control over the funds and the right at any time to sell, convert, invest. That being the case, the planholders cannot be considered as beneficial owners They do not have the power to vote or to direct the voting.

Is Id., p. 33, citing Bay State Distributing Corp. v. Doran. I6 Beneficial owner or beneficial ownership means any person who, directly or indirectly, through any 17 p. 4 of your Letter dated 28 February 2013. " See Hector S. de Leon and Hector M. de Leon, Jr. "Comments and Cases on Partnership, Agency and 13 Bay State Distributing Corp. v. Doran, 33 F2d 782. 14 11 Fletcher Cyc Corp (Perm Ed), section 5085 [1976] p. 30, citing Bay State Distributing Corp. v. Doran, 12 Ibid. includes the power to vote, or to direct the voting of such security; and/or investment returns or power. which includes the power to dispose of, or to direct the disposition of such security. Trust", 5th Edition (1999), pp. 652-655. contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which 33 F2d 782

Re: whether planholders of a pre-need company which establishes a real estate SEC Opinion No. 14-03 investment shareholders of the latter Page 4 of 4 trust are considered

Moreover, it appears that the planholders do not attend stockholders' meetings or elect the directors of the REIT.

courts or the Commission in other cases whether of similar or dissimilar circumstances. 18 facts you disclosed and described in the query and relevant solely to the particular issue raised therein, and shall not be used in the nature of a standing rule binding upon the If upon investigation, it is disclosed that the facts relied upon are different, this opinion shall be rendered void. It is understood though that the foregoing opinion is rendered based solely on the

By Authority of the Commission En Banc:

CAMHO S. K RREA

General Counsel

18 Par. 7, SEC Memorandum Circular No. 15, Series of 2003.