Mutual Funds and the Investment Company Act of the Philippines

In general, all Securities Businesses in the Philippines are governed by the following Laws in the country:

• Revised Securities Act
• Investment Houses Law
• Financing Company Act
• Investment Company Act

Let’s take a closer look at the Investment Company Act (ICA) since it is the enabling Law that governs the creation, regulation, licensing and monitoring of Mutual Fund Industry in the Philippines.

Mutual Funds may appear to be a recent investment phenomenon to hit this country, but in reality the law that governs them has been with us since 1960. Enacted in June 18, 1960, The Philippine Investment Company Act of 1960 otherwise known as RA 2629 borrows much of its provisions from the US ICA of 1940.

As a matter of fact both Laws from two different countries define an investment company as “any issuer which is, or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, re-investing, or trading in securities.”

Word-for-word, our local Law Makers simply copied that part from Uncle Sam’s.

If you’re still wondering what a Mutual Fund is, please take a look at this video.

From here, let’s dissect our version of ICA and highlight important provisions of that law such as the following:

1. Classification of Investment Companies in the Philippines (ICA Sec 5)

• Open-end company means an investment company which is offering for sale or has outstanding any redeemable security of which it is the issuer.
• Closed-end company means any investment company other than an open-end company.

Author’s Notes:

• Mutual Funds are considered as open-end companies. They can issue an unlimited number of shares to anyone who wishes to invest in the fund.
• This classification excludes “face-amount certificate companies” and “unit investment trust” that are found in the US version.

2. Registration of Investment Companies (ICA Sec 7)

Investment companies must register to operate as such with the Securities and Exchange Commission by filing a registration statement in the form prescribed by the SEC.

Section 24 of the Act likewise requires the securities to be issued by investment companies to be registered under the Securities Act (now known as the Revised Securities Act).

3. Investment Policy (ICA Section 12)

Unless authorized by the vote of a majority of its outstanding voting securities, investment companies may not do any of the following:

• borrow money
• issue senior securities
• underwrite securities issued by other companies
• purchase or sell real estate or commodities
• make loans to other people
• deviate from any fundamental policy or investment policy stated in its registration statement

4. No Investment Guarantees (ICA Sec 21)

“It shall be unlawful for investment companies to guarantee any obligation of whatever kind or nature.”

Short, but not so sweet.

If you are to invest in a Mutual Fund, or any form of investment for that matter, you need to keep this tattooed in your mind:

“The risks of investing is borne solely by the investor.”

It’s like going into business. No one guarantees that you’ll always have clients and customers.

5. Agents and Investment Solicitors (ICA Sec 40)

Selling shares of a Mutual Fund is highly regulated by the Philippine Government. Only agents and investment solicitors that have obtained a Certificate of Authority from the SEC may do so “after passing mental and moral test.” As a pre-requisite to the issuance of such certificate, the agent or investment solicitor must have taken and passed the Investment Company Representative Certification Program (ICRCP) Exam given by the SEC.

( See also: Contact an SEC-Licensed Certified Investment Solicitor to inquire about investing in a Mutual Fund. )

Implementing Rules and Regulation of RA 2629

Here is a funny thing, though the ICA has been with us since 1960, its implementing rules and regulations were promulgated only on October 31, 1989. These rules were known under the title of Rules and Regulations Governing Investment Companies Under Republic Act 2629.

And after 10 years, it was subsequently amended in April 1998 and became effective on May 12 1998.

The new rules are now known as The Investment Company Rule or ICA Rule 35-1.

Highlights of The ICA Rule 35-1

1. Organization and Capitalization Requirements (Sec b)

• Investment companies must be organized in the form of a stock corporation
• The minimum paid-in capital is P 50M.
• All members of the Board of Directors must be Filipino Citizens
• All shares of the capital stock of investment companies must be common and voting
• The Articles of Incorporation of open-end companies must provide for the waiver of pre-emptive right of shareholders.

(See also: How to make money when companies raise their Capital Requirement. )

2. Sale of Securities (Sec c)

• The minimum investment by any single investor in mutual fund is P 5,000, paid in spot cash only.
• All proceeds from the sale of shares of an investment company must be held by a custodian, which is a duly authorized local commercial bank of a good repute.
• The original proponents of an investment company may not sell, transfer, or otherwise dispose of their shares within 12 months from the registration of such company

3. Investment of the Fund (Sec d)

• Investment company may not change its investment objective without prior approval of the majority of its shareholders. Such investment objective must be stated in its prospectus.
• The maximum investment of an investment company in any single enterprise must not exceed an amount equivalent to 10% of its net asset value except obligations of the Philippine Government and its instrumentalities. (For example, a Fund cannot invest 10% of net asset in Ayala Corporation alone.)
• An investment company is not allowed to invest more than 10% of the outstanding securities of any one investee company.
• To make sure that mutual funds have sufficient liquid assets to cover possible redemptions by their shareholders, at least 10% of an open-end company’s net assets must be invested in liquid or semi-liquid assets; examples: T-Bills and short-term government securities, Time Deposits, Special Deposit Account.
• Investment companies are not allowed to sell securities short or invest in any of the following:
  1. Margin purchases of securities;
  2. Commodity futures contracts;
  3. Precious metals; and
  4. Unlimited liability investments
• The total operating expenses of an investment company must not exceed 10% of its total investment fund or total net worth as shown in its previous year’s audited financial statements. This is to prevent affiliated persons of investment companies from charging excessive fees.
• Investment companies are allowed to borrow or incur debt provided that there is at all times a 300% asset coverage for all its borrowings. In the event that the asset coverage falls below 300%, the fund has 3 days within which to reduce its debt to bring the coverage back to at least 300%.
• Investment companies are not allowed to participate in an underwriting or selling group in connection with the public distribution of securities, except its own capital stock.
• An investment company is not allowed to purchase from or sell to any of its officers or directors, or the officers and directors of its investment adviser, manager or distributor, or firms of which any of them are members, any securities other than the capital stock of the investment company.

(Read a two-part series of articles on the Building Blocks of a Mutual Fund: Part 1 and Part 2)

4. Redemption of Securities (Sec e)

• Investment companies are required to compute their Net Asset Value Per Share (NAVPS) on a daily basis.
• The daily NAVPS must be published in at least two (2) newspapers of general circulation and posted in a conspicuous place at the principal office of the fund and all its branches and redemption centers. (These days of course, they are placing them on their corporate websites.)
• Redemption amount will be based on that NAVPS.
• 12:00 noon is the cut-off time set for redeeming shares from the fund.
• Any request for redemption after that time is considered as request for the next day and therefore its Net Asset Value Per Share (NAVPS) will be based on that date.
• Payment for shares redeemed must be effected within seven (7) banking days from receipt of the request for redemption.

( Investing in a Mutual Fund: Learn how to subscribe and how to redeem your shares. )

5. Investment Company Manager (Sec g:)

Any person who intends to act as an investment adviser or manager for an investment company must register with the SEC. At the very least, he must have an unimpaired net worth of at least P 10 million exclusive of revaluation surplus.

6. Reportorial Requirement (Sec i)

Investment companies are required to submit a monthly report to the SEC showing the following:

• the total amount received from the sale of shares
• the total amount of redemption
• the total number of shares outstanding at the beginning of the month
• the number of shares sold during the month
• the number of shares redeemed during the month
• the number of shares outstanding at the end of the month; and
• the percentage of the outstanding shares owned by the Filipinos

As in other countries where Securities Investments (particularly Mutual Funds) are open to its people, ours is not an entirely perfect industry. There will continue to be abuses and deceits, but luckily here in the Philippines, the Securities and Exchange Commission has been very active in dealing with such irregularities.

Every investor should remain vigilant and participate in the improvement of the Investment Industry. Knowing about these Laws and Regulations is a good first step in becoming a smart investor.