The Securities and Exchange Commission (SEC), recognizing the financial sophistication of trust funds, released on April 20, the proposed rules and regulations on determining whether a trust fund is a qualified buyer (Proposed Rules).
To put things into context, under the Securities Regulation Code (SRC), any sale of securities to a qualified buyer is an exempt transaction, i.e., the sale or offer for sale need not be registered with the SEC prior to the sale. The reason for such exemption is the presumption that these qualified buyers know the risks of investing in the securities market by reason of their financial sophistication, net worth, knowledge and experience in financial and business matters, or amount of assets under their management.
For this reason, the Proposed Rules consider as qualified buyers Unit Investment Trust Funds (UITFs), other funds established under a trust arrangement, and funds established through an Investment Management Account (IMA) under a discretionary arrangement subject to the satisfaction of the trustor or beneficial owner/s of the qualifications for qualified individual or institutional buyers under the 2015 Implementing Rules and Regulations of the SRC. This means that sale of securities to UITFs or other trust funds subject to above qualifications and are managed by persons authorized by the BSP to engage in trust functions will be considered exempt transactions.
As to UITFs, it is understandable for the SEC to consider it as a qualified buyer considering that a UITF is managed by the trust department of a bank or a duly registered trust corporation, both of which are regulated by the Bangko Sentral ng Pilipinas (BSP) and are presumed to have the financial sophistication expected of a qualified buyer.
However, unlike the UITF which is per se considered as a qualified buyer, the other funds established through a trust agreement or a discretionary IMA and are managed by persons authorized by the BSP must satisfy an additional requirement to be considered as a qualified buyer. The SEC has deemed it best to require the trustors or beneficial owners of the funds to satisfy the qualifications for qualified individual or institutional buyers before the fund itself can be considered as qualified buyer. This means that the SEC will look at the trustor or beneficial owner’s annual gross income or gross asset, the total portfolio investment in securities registered with the SEC or the financial instruments issued by the government, or their personal net worth.
Considering the rationale for exempting qualified buyers, the SEC may consider making a distinction between a fund under a non-discretionary investment arrangement and one that is under a discretionary arrangement.
For trust funds under a non-discretionary arrangement, it is the trustor or beneficial owner who ultimately decides the investments thus it is understandable that they should themselves possess the qualifications for qualified individual and institutional buyers. However, the same is not true with trust funds under a discretionary investment arrangement where the investment manager, a person or entity regulated by the BSP and thus, presumed to have financial sophistication, is given discretion by the trustor or beneficial owner over investment decisions.
In any case, the SEC remained true to its mandate of protecting the investing public by putting forth these requirements to ensure that the sale or offer for sale of securities directly to an investor may only be done if such investor has the sophistication to fully digest the undertaking. Now, we just have to put our trust with the SEC in coming up with the final rules on the matter.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.
Norlegen L. Bayona is an Associate of the Corporate and Special Projects Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).