Securities (Level 3, Unit 2)

Correct: SEC Memorandum Circular No. 14, Series of 2019, mandates that all crowdfunding intermediaries must register with the Securities and Exchange Commission (SEC). This ensures the platform follows specific disclosure rules and protects retail investors from fraud while facilitating capital for MSMEs. Registration is required regardless of whether the platform facilitates equity-based or lending-based crowdfunding.

Incorrect: The strategy of focusing only on BSP licensing for remittance fails because crowdfunding portals fall under the specific jurisdiction of the SEC rather than the central bank. Choosing to assume exemptions based on non-profit status is incorrect as the SEC regulates the activity of public fundraising regardless of the entity’s tax structure. Opting for registration with the Cooperative Development Authority is inappropriate because the CDA does not oversee public securities or crowdfunding intermediaries.

Takeaway: Crowdfunding portals in the Philippines must be SEC-registered to legally facilitate debt or equity-based fundraising for MSMEs.

Correct: A bond is a debt instrument, often described as an ‘I owe you,’ where the issuer borrows money and promises to pay it back with interest. Under Philippine financial regulations, companies use bonds to fund large-scale expansion without giving up any ownership or voting power. This distinguishes bonds from equity, where new shares would dilute the control of current owners.

Incorrect: The strategy of treating bonds as a permanent capital base without repayment fails to recognize the legal obligation to return the principal at maturity. Focusing only on granting investors a say in operations describes the characteristics of equity shares rather than debt instruments. Pursuing the idea that bonds reduce debt-to-equity ratios is incorrect because bonds actually increase the company’s total liabilities on the balance sheet.

Takeaway: Bonds are debt instruments that enable companies to raise capital for expansion while maintaining existing ownership structures and control.

Correct: Under the Securities Regulation Code, issuers must disclose material events that affect their ability to perform obligations to the SEC Philippines and the exchange. Reviewing the trust indenture is essential because it defines the legal rights of the bondholders and the specific procedures for handling a default. This approach ensures transparency and maintains the integrity of the Philippine capital markets while following the established legal framework for debt instruments.

Incorrect: The strategy of prioritizing dividend payments to shareholders over debt obligations violates the absolute priority rule where creditors must be satisfied before owners. Choosing to unilaterally extend maturity dates without consulting the trustee or bondholders constitutes a breach of the bond contract and Philippine civil law. Pursuing the issuance of new debt to pay existing obligations without disclosing a liquidity crisis fails to meet transparency requirements and may constitute securities fraud.

Takeaway: Bonds are legal debt contracts requiring strict adherence to disclosure rules and the priority of creditor claims over shareholder interests.

Correct: The Annual Effective Rate (AER) is the rate that accounts for the effects of compounding frequency over a one-year period. Under the Truth in Lending Act and Bangko Sentral ng Pilipinas (BSP) Circular No. 730, financial institutions must disclose the Effective Interest Rate (EIR) to ensure transparency. When interest is compounded more frequently than once a year, the AER will always be higher than the quoted nominal rate because interest is earned on previously credited interest. This provides a standardized metric for consumers to compare different financial products regardless of their specific compounding schedules.

Incorrect: The strategy of excluding compounding effects to allow for direct comparison is incorrect because the primary purpose of the effective rate is to capture those very compounding impacts. Focusing only on the deduction of administrative fees and reserve requirements describes a net return rather than the mathematical relationship between nominal and effective rates. Relying solely on the 360-day year convention to claim the rates are identical is a fundamental misunderstanding of interest theory, as compounding frequency creates a divergence between nominal and effective rates regardless of the day-count method used.

Takeaway: The annual effective rate reflects the true cost or return by incorporating compounding frequency, making it higher than the nominal rate.

Correct: Peer-to-peer finance operates on the principle of disintermediation, where an online platform connects lenders directly with borrowers. Under SEC Philippines Crowdfunding Rules, the platform facilitates the transaction and performs credit assessments. However, the lender retains the direct credit risk of the borrower. This differs from traditional banking where the bank takes the risk on its own balance sheet.

Incorrect: The strategy of assuming principal protection through the Bangko Sentral ng Pilipinas or PDIC is incorrect because P2P investments are not bank deposits. Relying on the idea that P2P is restricted only to institutional investors ignores SEC regulations that allow retail and qualified investors to participate. The method of treating P2P as a secondary market for existing bank loans describes securitization rather than the primary direct-lending model of P2P finance.

Takeaway: P2P finance involves direct lending between participants via a platform, with the lender bearing the individual borrower’s default risk.

Correct: Aligning internal definitions with SEC Philippines SRI guidelines ensures regulatory compliance and transparency for specialized products. This approach addresses investor complaints by providing verifiable standards for impact investing terms like gender lens and microfinance.

Incorrect: Relying solely on a manager’s professional judgment without formal alignment fails to meet the objective disclosure standards required for specialized investment products. The strategy of prioritizing financial performance documentation ignores the specific non-financial objectives promised in impact investing mandates. The method of reclassifying funds as general products to simplify reporting constitutes a regulatory breach and fails to address the underlying lack of clarity in product terms.

Takeaway: Impact investing requires precise alignment with regulatory definitions and transparent reporting to ensure investor protection and compliance with SRI standards.

Correct: The foreign exchange market is a fundamental component of the financial services industry that enables the conversion of one currency into another. This mechanism is essential for facilitating international trade and cross-border investment by allowing firms to settle obligations in foreign jurisdictions. In the Philippines, the Bangko Sentral ng Pilipinas oversees the market to ensure orderly conditions while allowing the market to provide necessary liquidity for these transactions.

Incorrect: Describing the market as a centralized physical exchange with fixed daily rates ignores the decentralized, over-the-counter nature of modern currency trading and the Philippines’ market-driven exchange rate system. Characterizing the foreign exchange market as a venue for issuing long-term debt instruments confuses currency conversion with the functions of the capital or bond markets. The strategy of viewing the market as a mandatory insurance pool misinterprets market risk, as the market provides tools for hedging but does not inherently guarantee protection against currency fluctuations.

Takeaway: The foreign exchange market facilitates international trade and investment by providing the necessary mechanism for currency conversion and liquidity.

Correct: Responsible investment integrates ESG factors into the investment process to better manage material risks and identify long-term growth opportunities. This approach aligns with the SEC Philippines Sustainability Reporting Guidelines, which emphasize that ESG issues are critical to a company’s long-term value creation. By considering these factors, investors can achieve better risk-adjusted returns while holding companies accountable for their impact on society and the environment.

Incorrect: Relying solely on philanthropic outcomes mischaracterizes responsible investment as a form of charity rather than a financial strategy aimed at competitive returns. The strategy of focusing only on negative screening or exclusions is too narrow, as modern responsible investment involves active engagement and ESG integration. Pursuing short-term regulatory compliance ignores the long-term strategic role of responsible investment in mitigating systemic risks and ensuring business resilience beyond mere legal minimums.

Takeaway: Responsible investment integrates ESG factors to manage material risks and enhance long-term financial performance for investors.

Correct: Non-life insurance in the Philippines includes property, casualty, and motor vehicle coverage to protect against physical loss and legal liabilities. Fire insurance with allied perils specifically protects the warehouse structure, while motor and liability policies address operational risks.

Incorrect: Relying solely on microinsurance for a large distribution hub is unsuitable because Philippine regulations restrict these products to low-value coverage for marginalized sectors. The strategy of using surety bonds for general operational risks is incorrect as bonds guarantee specific contractual obligations rather than providing broad asset protection. Focusing only on marine insurance for stationary warehouse contents misapplies the product, which is legally intended for goods in transit or maritime risks. Choosing to use life insurance as the primary protection for physical business assets fails to address the risk of property damage or third-party liability.

Takeaway: Non-life insurance provides essential protection for physical assets and legal liabilities through property, motor, and casualty coverage.

Correct: Analyzing the dividend yield alongside the payout ratio ensures the income is sustainable. A rising yield caused by a falling share price may signal underlying financial distress rather than an attractive opportunity. This approach aligns with the Securities Regulation Code’s emphasis on informed investment decision-making and risk disclosure.

Incorrect: Relying solely on the highest numerical yield often leads to yield traps where capital losses exceed dividend income. The strategy of using par value for calculations fails to reflect the actual market return an investor receives at current prices. Focusing only on low yields as a negative indicator ignores that growth-oriented firms often reinvest profits to increase long-term shareholder value.

Takeaway: Dividend yield must be analyzed alongside share price trends and payout ratios to distinguish sustainable income from potential value traps.

Correct: Futures are standardized, exchange-traded contracts that legally obligate both parties to fulfill the transaction at a predetermined price. Under the Securities Regulation Code, these instruments facilitate price discovery and risk transfer through daily marking-to-market and central clearinghouse guarantees.

Incorrect: Relying on customized, over-the-counter agreements describes forward contracts, which lack the standardization and exchange-clearing features of futures. The strategy of using contracts that provide a right but not an obligation refers to options, which involve premiums rather than mutual binding commitments. Focusing only on the exchange of cash flows over multiple dates describes swaps, which are distinct from the single-settlement structure of standard futures.

Takeaway: Futures are standardized, exchange-traded obligations used for hedging or speculation, characterized by daily marking-to-market and central clearing.

Correct: Increasing the frequency of interest payments to a quarterly schedule provides investors with more regular cash inflows. This enhances liquidity for retail clients who rely on investment income for living expenses. From a regulatory perspective in the Philippines, transparency regarding payment frequency is essential for fair dealing. It allows investors to utilize reinvestment strategies more effectively throughout the year. While the nominal rate remains the same, the timing of these cash flows is a distinct structural feature of the bond.

Incorrect: The strategy of suggesting that frequent payments eliminate reinvestment risk is inaccurate because more frequent coupons actually require the investor to make more frequent reinvestment decisions. Relying on the assumption that payment frequency changes the asset classification fails because a bond’s status is determined by its maturity date rather than its coupon schedule. The method of claiming that more frequent payments reduce the issuer’s total cost is incorrect as higher frequency often increases administrative burdens and the effective interest expense due to compounding effects.

Takeaway: Higher interest payment frequency improves investor liquidity and reinvestment timing but does not change the bond’s fundamental credit risk or maturity.

Correct: Credit cards are fundamentally unsecured revolving credit facilities regulated by the Bangko Sentral ng Pilipinas under Republic Act 10870. They allow borrowers to access funds repeatedly up to a limit. The primary financial risk involves high finance charges applied to any outstanding balance not settled within the interest-free grace period.

Incorrect: The strategy of classifying these as secured loans because of corporate guarantees ignores that the underlying contract remains an unsecured revolving facility. Focusing only on fixed-term installment structures misrepresents the flexible repayment nature of credit cards. Choosing to treat credit cards as debit instruments fails to account for the borrowing aspect and the resulting liability on the firm’s balance sheet.

Takeaway: Credit cards are unsecured revolving credit facilities where the main cost risk is high interest on unsettled monthly balances.

Correct: Insurance is a fundamental component of the financial services industry that provides essential risk mitigation and contributes to economic stability through capital mobilization. In the Philippines, this sector is regulated by the Insurance Commission to ensure the protection of policyholders and the integrity of the financial system.

Incorrect: Relying solely on the view that insurance is a supplementary sector for credit enhancement ignores its independent role in risk management. The strategy of defining insurance as a social welfare mechanism fails to recognize its status as a regulated financial service. Focusing only on its use as a tax-efficient wealth distribution vehicle overlooks the fundamental purpose of risk protection for the general public.

Takeaway: Insurance is a core pillar of the financial services industry providing risk transfer and capital formation under the Insurance Commission.

Correct: Commercial banking is specifically designed to handle the complex financial requirements of business entities, such as trade finance and large-scale payroll. Reclassifying the account ensures that the firm applies the appropriate institutional risk management frameworks required by the Bangko Sentral ng Pilipinas. This alignment is necessary because commercial banking involves higher transaction values and different legal obligations compared to individual retail accounts.

Incorrect: Relying solely on the owner’s personal history ignores the distinct legal personality and complex operational needs of a manufacturing corporation. The strategy of applying retail consumer protection protocols to a business entity is inappropriate because those frameworks are designed for individual natural persons. Choosing to move the account to private banking based only on volume fails to address the specific commercial utility and trade instruments the business requires. The method of treating retail and commercial products as identical overlooks the specialized regulatory reporting and credit risk models unique to corporate entities.

Takeaway: Commercial banking focuses on specialized services for businesses, while retail banking provides standardized financial products to individual consumers.

Correct: Diversifying within a PERA account utilizes tax incentives provided by Republic Act No. 9505 while mitigating market risks. Regular suitability reviews ensure compliance with the Securities Regulation Code and maintain alignment with the client’s goals.

Incorrect: Relying solely on state-managed pension schemes often leads to a shortfall because these benefits are not designed to replace full pre-retirement income. The strategy of focusing only on short-term government securities fails to provide the growth necessary to combat long-term inflation. Pursuing a single insurance-linked product lacks the necessary diversification and may involve higher costs that reduce the final retirement fund.

Takeaway: Successful retirement planning integrates tax-efficient vehicles like PERA with diversified assets to ensure long-term purchasing power and regulatory compliance.

Correct: An IPO allows a company to raise significant permanent capital while creating a liquid market for existing shareholders to exit or diversify their holdings. Under the Securities Regulation Code, a public listing also establishes a transparent market valuation. This provides the company with shares that can be used as currency for future strategic acquisitions and mergers.

Incorrect: The strategy of reducing reporting frequency is incorrect because the Securities Regulation Code mandates rigorous periodic disclosures for all publicly listed companies in the Philippines. Choosing to consolidate voting power to avoid independent directors is a misconception, as the SEC Code of Corporate Governance requires listed firms to appoint independent board members. The method of eliminating market volatility is fundamentally flawed, as listing on the Philippine Stock Exchange subjects the company’s valuation to daily market forces.

Takeaway: IPOs provide companies with access to public capital, shareholder liquidity, and a market-determined valuation for future strategic growth.

Correct: Under the Securities Regulation Code (SRC), it is vital to distinguish between sovereign and corporate borrowers. The National Government borrows through the Bureau of the Treasury to fund public infrastructure and social services. Conversely, corporations borrow to finance commercial expansion or operational needs. These entities have different credit risk profiles that must be disclosed to ensure the client understands the nature of their investment. Proper disclosure aligns with the fiduciary duty to provide accurate information regarding the issuer’s identity and purpose.

Incorrect: Focusing only on historical repayment records fails to address the fundamental structural differences between sovereign and corporate credit risks. The strategy of relying on deposit insurance is factually incorrect because the Philippine Deposit Insurance Corporation only covers bank deposits, not investment securities. The method of prioritizing secondary market liquidity ignores the underlying creditworthiness of the borrower. Simply treating government debt as a risk-free benchmark without explaining the borrower’s role prevents the client from understanding how public debt differs from private commercial obligations.

Takeaway: Advisers must clarify that both governments and companies borrow funds for specific purposes, each carrying distinct credit risks and regulatory characteristics.

Correct: A formal notarial will ensures that the distribution of assets complies with the Civil Code of the Philippines regarding legitime for compulsory heirs. Life insurance provides the necessary liquidity to pay the mandatory six percent estate tax under the TRAIN Law, preventing the Bureau of Internal Revenue from freezing the estate’s assets indefinitely.

Incorrect: Relying on holographic wills often leads to prolonged probate litigation because they are more easily contested in court regarding authenticity. The strategy of waiting for administrative tax relief is unreliable as tax amnesties are temporary and do not fulfill the legal requirement to file an estate tax return within one year. Focusing only on corporate restructuring can trigger significant donor’s taxes and documentary stamp taxes without resolving the underlying succession issues. Choosing joint accounts fails to bypass the law because the decedent’s portion remains subject to estate tax and requires a tax clearance for full release.

Takeaway: Estate planning in the Philippines must balance the Civil Code’s mandatory heirship rules with the Tax Code’s liquidity requirements for estate settlement.

Correct: The Philippine Stock Exchange Index (PSEi) is the primary benchmark for the local equity market. It tracks the performance of the 30 largest and most liquid companies listed on the Philippine Stock Exchange. This index provides the most accurate reflection of general investor sentiment and economic health within the Philippines’ regulatory framework.

Incorrect: Focusing only on the PSE Financials Index fails to capture the performance of other vital sectors like property or industrials. The strategy of using the MSCI Philippines Index is inappropriate because it is an offshore product designed for international investors rather than the local primary market. Opting for the PSE All Shares Index is less effective for benchmarking active portfolios as it includes many illiquid stocks that do not drive market sentiment.

Takeaway: The PSEi serves as the main barometer for the Philippine Stock Exchange, tracking the 30 most significant and liquid listed stocks.

Correct: Investment banks facilitate capital raising by acting as intermediaries between the issuing company and the investing public. Under the Securities Regulation Code, they structure and underwrite new securities to ensure the issuer receives funding.

Incorrect: Relying solely on extending credit from a deposit base describes the function of a commercial bank rather than an investment bank. The strategy of facilitating the sale of existing treasury shares on an exchange involves secondary market activities which do not generate new capital for the firm. Focusing only on providing insurance products relates to the insurance sector’s risk management functions rather than the core investment banking activity of capital formation.

Takeaway: Investment banks raise money for companies by structuring and selling new securities to investors in the primary market.

Correct: The Philippine Stock Exchange provides a transparent venue where supply and demand determine security prices. It ensures liquidity by allowing investors to exit positions easily. Under the Securities Regulation Code, the exchange enforces listing and disclosure rules. These standards protect the public by ensuring material information is available to all market participants.

Incorrect: The strategy of relying on the exchange to guarantee prices is incorrect as market forces determine valuations and investors bear the risk of loss. Simply conducting business as a private clearinghouse to avoid disclosure requirements contradicts the exchange’s role in promoting transparency. Focusing only on the exchange as a legal shield against the SEC is a misconception because the SEC maintains ultimate authority over all market participants.

Takeaway: Stock exchanges provide liquidity and price discovery while upholding market integrity through mandatory disclosure and standardized listing requirements.

Correct: Under the Revised Corporation Code of the Philippines, common shares inherently carry the right to vote on fundamental corporate changes and the election of directors. This right is formally exercised during the Annual Stockholders’ Meeting or Special Stockholders’ Meetings, where the corporation presents matters for shareholder approval.

Incorrect: Relying on participation in monthly Board of Directors meetings is incorrect because these sessions are reserved for elected directors, not general shareholders. The strategy of submitting votes directly to the SEC Philippines as the primary voting mechanism is inaccurate, as the SEC oversees compliance but does not host the actual voting process. Focusing only on shareholders with a 10% ownership threshold is a misconception, as the right to vote is a basic attribute of common shares regardless of the size of the holding.

Takeaway: Shareholders in the Philippines exercise their fundamental voting rights during annual or special stockholders’ meetings to influence corporate governance.

Correct: The correct approach aligns with the SEC Philippines Sustainability Reporting Guidelines for Publicly Listed Companies. Wastewater management is a clear Environmental factor focusing on natural resource conservation and pollution control. Community displacement is a Social factor as it pertains to the company’s relationship with stakeholders and human rights. Board independence is a Governance factor concerning the internal systems and leadership structures that ensure accountability.

Incorrect: Grouping community displacement and wastewater management together as Environmental factors fails to recognize that social impacts involve human rights and stakeholder relationships. Prioritizing board independence while treating environmental and social impacts as secondary philanthropy ignores the integrated nature of ESG as a core risk management framework. Classifying wastewater management as a Social factor because of health impacts incorrectly identifies the primary nature of the risk, which is environmental degradation and resource management.

Takeaway: ESG factors categorize non-financial risks into environmental stewardship, social responsibility, and robust corporate governance to ensure long-term sustainability.

Correct: The Bangko Sentral ng Pilipinas (BSP) serves as the official depository and fiscal agent of the Philippine government under the New Central Bank Act. This role involves maintaining the accounts of the Treasurer of the Philippines and managing the settlement of both domestic and foreign public debt. By centralizing these functions, the BSP ensures the efficient management of the National Government’s financial resources and liquidity.

Incorrect: Focusing only on open market operations describes the BSP’s monetary policy function aimed at price stability rather than its administrative banking services for the state. The strategy of exercising regulatory and supervisory authority pertains to the BSP’s mandate over the banking system to ensure financial stability. Relying solely on providing emergency liquidity assistance refers to the BSP’s role as the lender of last resort for private financial institutions. Simply conducting currency issuance and management relates to the BSP’s monopoly over the national currency rather than its fiscal agency for the Treasury.

Takeaway: As the government’s banker, the BSP acts as the official depository and fiscal agent responsible for managing the National Treasury’s accounts.

Correct: A stock exchange index serves as a standardized benchmark representing the performance of a specific market segment. It allows investors to compare their portfolio returns against an objective market measure. Under the Securities Regulation Code and Philippine Stock Exchange rules, indices provide transparency and a reference point for market sentiment. This helps institutional entities evaluate whether their investment strategies are outperforming or underperforming the broader market average.

Incorrect: The strategy of treating an index as a guaranteed predictor of future volatility fails because indices are lagging indicators reflecting historical and current price movements. The method of using an index as a mandatory regulatory tool for asset allocation is incorrect because indices are reference points, not legal requirements for portfolio weighting. Pursuing a view that an index must include every listed security ignores the selection criteria like liquidity and market capitalization used to ensure the index remains representative.

Takeaway: Stock exchange indices provide a standardized benchmark to measure the relative performance and sentiment of specific market segments.

Correct: Issuing shares provides the company with permanent capital that does not require mandatory interest payments or a fixed maturity date for repayment. This approach strengthens the balance sheet by increasing the equity base and improving the debt-to-equity ratio. Under the Securities Regulation Code, this allows the firm to fund long-term expansion without the immediate cash flow pressure associated with servicing debt obligations.

Incorrect: The strategy of assuming equity preserves control is flawed because issuing new shares to the public typically dilutes the voting power of existing shareholders. Relying on the idea that public offerings reduce regulatory burdens is incorrect as the Securities and Exchange Commission requires extensive disclosures for public companies. Focusing only on dividends as a cheaper alternative to interest ignores that equity investors demand higher risk premiums and dividends are not tax-deductible.

Takeaway: Companies issue shares to raise permanent capital and improve financial flexibility without the mandatory repayment obligations of debt financing.

Correct: Capital gains occur when the market price exceeds the purchase price, while dividends represent a share of profits. The Revised Corporation Code of the Philippines allows boards to declare dividends from unrestricted earnings.

Incorrect: Describing returns as fixed interest coupons and guaranteed principal repayment characterizes debt instruments rather than equity. Focusing only on management fees or a portion of gross revenue confuses the role of an owner with a creditor. Opting for a strategy based on mandatory redemptions ignores that common shares are perpetual and returns depend on market performance.

Takeaway: Total return on shares is the sum of capital appreciation and dividend yield, reflecting both market sentiment and corporate profitability.

Correct: Leverage allows a company to amplify returns for shareholders by using borrowed funds at a fixed cost lower than the return generated by those assets. Under the Securities Regulation Code, companies must disclose these risks because fixed interest obligations persist regardless of revenue fluctuations. This creates a magnifying effect on profits during growth but introduces significant insolvency risk if cash flows cannot cover debt servicing requirements.

Incorrect: The strategy of assuming leverage solely to improve credit ratings is flawed because high debt-to-equity ratios typically lead to credit downgrades due to increased default risk. Relying solely on the tax deductibility of interest ignores the fundamental danger that fixed costs pose to a firm’s liquidity during economic downturns. The method of using leverage to avoid SEC Philippines oversight is incorrect as public companies remain subject to strict disclosure and transparency requirements. Focusing only on avoiding equity dilution fails to account for how volatile earnings make debt servicing unsustainable and increase the likelihood of financial distress.

Takeaway: Leverage magnifies shareholder returns when successful but increases insolvency risk due to mandatory fixed interest payments regardless of company performance.

Correct: Under the Securities Regulation Code and associated Implementing Rules and Regulations, investment companies must strictly adhere to the investment objectives and restrictions disclosed in their SEC-registered prospectus. When automated screening tools fail to capture material information like a DENR fine, the firm must exercise professional judgment through a manual override to maintain the fund’s integrity. Implementing a secondary verification process for high-impact news ensures that the technological framework remains robust and compliant with fiduciary duties to investors.

Incorrect: Relying solely on third-party data updates fails to address the immediate breach of the fund’s ethical mandate and regulatory disclosures. The strategy of excluding an entire sector is an arbitrary response that could lead to unauthorized deviations from the fund’s broader investment strategy and diversification requirements. Choosing to wait for specific regulatory guidance before taking action neglects the firm’s immediate responsibility to manage the portfolio according to its established internal controls and investor agreements.

Takeaway: Automated screening tools must be supported by manual oversight and secondary verification to ensure continuous compliance with a fund’s registered mandate.