Lectures &

News & Views

Law &



Trust Products
& Practice

About the Guru


Email Feedback

Guest Register











Is Confirmation of Participation a security?

(Article published in the July 26, 2006 issue of Manila Standard Today)

The Senate’s Technical Working Group (TWG) working on Senate Bill No. 211 filed by Senator Sergs Osmeña on the proposed Revised Investment Company Act (RICA) is reportedly debating the question of whether the document through which a trustor is informed of how many units his trust is acquiring in a Unit Investment Trust Fund (UITF) on a given day for its contribution in the UITF, known as a Confirmation of Participation (COP), is a security.  Under BSP Circular No. 447, series of 2004, this document is, together with the “Participating Trust Agreement”, required to be given to a trustor upon his trust’s acquisition of interest in the UITF. 

 Although the weight of opinion among the members of the TWG appears to lean on the affirmative, the Trust Officers Association of the Philippines shudders at the thought.  It would mean their having to register their COPs with the Securities and Exchange Commission and submit to its regulatory jurisdiction.  Only the healthy respect that the SEC and the Bangko Sentral have for each other, which to date have both adopted a cautious stance on the suggestion, prevents the an ugly tug of war between the two agencies undoubted certain to result in a no-one wins situation.

 It is not surprising that a difference of views among equally well-intentioned people at the TWG occurs.  A standard Amreican legal encyclopedia, the Corpus Juris Secundum, notes that “ the courts have frequently said that the words ‘security’ and ‘securities’ have no ‘exactly defined’ legal definition.  They are general terms, flexible in meaning, and of broad import and significance…”

           In our own law itself, the term has been defined three times in the three major pieces of legislation regulation the issuance and sale of securities and each time the definition is not the philosopher’s idea of how a term ought to be defined.  In all three laws, i.e. Commonwealth Act No. 83 or the Securities Act, Batas Pambansa Blg. 178, or the Revised Securities Act, and the current R.A. No. 8799 or The Securities Regulation Code (SRC), the definition is said to “include” certain enumerated items. 

 The word “include” in the field of statutory construction is a dead give-away of, surely not of legislative intellectual sloth (Woe unto him who says our lawmakers are in anyway lazy!), but intent to delegate the problem of determining whether a specific document is a security or not to some one else, invariably the courts or the SEC. 

 Nevertheless, given how statute and regulations stand presently, it is possible to determine to a certain extent whether a COP, of the nature required by BSP Circular No. 447, is a security or not.  If I may, though not a worthy to be a member of the TWG, weigh in on the debate, it is my view that such a COP, or the evidence of the interest of a trust in a UITF, is not a security within the meaning of the SRC.

 I first argue from an analysis of what the SRC, under Section 3.1, says a security is and how BSP Circular No. 447, under Section 1 adding a new section in the Manual of Regulations as Subsection UX410.1/U4410Q.1(a) describes a UITF.

 Section 3.1 of the SRC has two parts.  The first is a statement of what “securities” are, namely, “shares, participation or interests in a corporation or in a commercial enterprise profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character”.  The second is an enumeration of what the term “includes”.   A COP is not among those mentioned.  However, Sec. 3.1(g) authorizes the SEC to determine a document to be one.

 In the language of biologists who have mastered the art and science of classifying a variety of living creatures, the first part of Section 3.1 states the genus or class and the second part gives the name of the specie or the members of the class.  The genus determines who may be a specie.  Thus, while item, (g), in the enumeration in Section 3.1 of the SRC in broad language authorizes the SEC to make its determination.  Only those documents that belong to the same class described in the first part of the section, or only those that are ejusdem generis as those having the same nature as described in the first part, can considered by SEC as a security.

 For example:  A confirmation of participation issued by Archbishop Cruz evidencing contributions of his flock in the construction of parish churches within his diocese cannot be considered a security because building parishes is not “a commercial enterprise or profit-making venture”. 

 The question therefore is whether the COP in a UITF is within the genus specified in the first part of the definition of securities in Section 3.1 of the SRC.  It is thus necessary to examine what a COP is and for that we must consult Circular No. 447.

 It is significant that there is nothing in the law that speaks of a UITF.  So, whence come the authority of the BSP to issue Circular No. 447 regulating the UITF?

 Subsection UX410.1/U4410Q.1(a) of the Manual of Regulations as inserted by Circular No. 447 defines UITFs as “open-ended pooled trust funds denominated in pesos or any acceptable currency, which are operated and administered by a trust entity and made available by participation. The term Unit Investment Trust Funds is synonymous to common trust funds (CTFs). As an open-ended fund, participation or redemption is allowed as often as stated in its plan rules.”

The BSP thus considers the term “UITFs” as “synonymous to common trust funds (CTFs).”  And  Section 83.6 of the General Banking Law authorizes trust entities, licensed by the BSP, to “establish and manage common trust funds subject to such rules as regulations as may be prescribed by the Monetary Board”.

 The purpose of Circular No. 447 is thus not to change the character of the common trust fund but simply “to align the operation of pooled funds under management by trust entities with international best practices and to ensure differentiation from bank deposits and other direct liabilities of the financial institution. Sound operations of pooled funds will enhance their credibility with retail investors and will enable them to evolve as major institutional players that can support the deepening of the domestic capital market.”

 Circular No. 447 does not purport to regulate a new form of life that has sprung in the financial universe; it is intended to merely prune and propagate a plant that is already there.  In typical BSP fashion, such direction is achieved not by outlawing or uprooting the old form of the CTFs but by making it inconvenient and expensive for trust entities to maintain CTFs in the old form and providing incentives to the new variety, called the UITFs. Thus, Subsection UX410.14/U4410Q.14 of the Manual of Regulations make “the provisions on reserves, single borrower's limit and DOSRI ceilings under Subsection X405.5, and Sections X303, X330/4360Q and X331/4361Q, respectively, applicable to trust funds in general shall not be made applicable to UIT Funds.”  In typical respect of its constituency, BSP smartly prefers to use the carrot than the stick.

 From Section 83.6 of the GBL, it is clear what a “common trust fund” is.  It is no more than a facility established by a trust entity to collectively invest funds or parts of funds that it holds in its capacity as a fiduciary.  The standard forms of that capacity as fiduciary are as stated in the whole of Section 83 of the GBL.  Significantly, none of the functions of a trust entity under Section 83 has the character of running a “a commercial enterprise or profit-making venture” that is the distinguishing mark of a “security”.

 Consequently, to consider COPs in a UITF as securities and, perforce, submit their issuance by UITFs to SEC jurisdiction (whether in conjunction with or to the exclusion of the BSP) I submit, would be an error in policy.  Without in any way demeaning the role of those who make their living in the market place, the craft of the trustee ought to be distinguished from the ways of the merchant.

 The homo prudes marches to the tune of a drummer different from the siren song that titillates the homo mercatus. Different rules govern different genera and every genus has its equally rightful and just as noble place in our diverse economy.

 As stated in the U.S. by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency in a joint letter to the Securities and Exchange Commission, in a slightly different context, such a policy decision would require trust entities “to make substantial changes in the way they conduct well established and already highly regulated lines of banking business and would impose a new SEC-created regime of extraordinarily complex requirements and restrictions on long standing functions and relationships…”

 My second argument flows from the function of the COP. It is clear from Subsection UX410.7/U4410Q.7 of the Manual of Regulations that a COP serves no more than as a statement of the amount received by a UITF in any given day expressed in both currency and in number of units. It is required to contain no more information than (1) the net asset value per unit (NAVPU) of the fund on day of “purchase” (the better term is “acquisition”) of the unit; (2) the number of units purchased (acquired) and (3) the absolute peso or foreign currency received by the UITF.  There are no statement of rights, no promise or expectation of profit, not even a hint of transferability.  It is thus no more than a receipt for record purposes only of the investment made pursuant to the Participating Trust Agreement. 

 BSP Governor Say Tetangco and SEC Chairperson Fe Barin were thus on solid legal and practical grounds, i.e. the UITF is not “a commercial enterprise or profit-making venture” and that the COP is no more than a receipt of money with corresponding unit equivalent in the UITF, when they both expressed unwillingness to be stampeded into transferring the regulation of UITFs from the BSP to the SEC. The UITFs, says Tetangco, are parts of the functions of a trustee and that it is the BSP that provides a license to an entity to perform a trust function.  Barin for her part maintains that, while the SEC is prepared to do what the law requires, “that does not mean we will supervise trust companies because it is the BSP that has authority over them.”