The Securities and Exchange Commission (“SEC”) has issued SEC Memorandum Circular No. 7 setting forth guidelines on the evaluation of foreign investments by mutual fund companies (“Guidelines”), with the objective of enabling mutual fund companies to diversify their investment portfolio, enhance return on investment and protect and promote the interests of investors. Among the salient features of the Guidelines is a schedule of credit ratings to assess the investment risk of foreign investments ranging from the smallest degree of investment risk to issues in default. The Guidelines also prescribe proper allocation of the investment portfolio of mutual fund companies according to a criteria of risk (high-risk, growth-oriented); tenor (short-term, medium term); area of focus of investment; and mode of investment.

Likewise, the Guidelines limit investments of mutual fund companies to the following instruments:

a) bonds and other evidence of indebtedness which are issued and unconditionally guaranteed by the government of any foreign country with a credit rating at least at par with the rating of the Republic of the Philippines' bonds; those registered and traded in an organized market in another country whose issue and issuer received a credit rating of Aaa or AAA; and those issued and unconditionally guaranteed by supranationals like the World Bank.

b) equity securities whose issuer has a track record of profitable operation for the preceding three consecutive years, meet the required return on equity (ROE) as prescribed by the Guidelines, and the issuer fully complies with its obligation of continuing disclosure and other requirements of securities law in its jurisdiction.

Finally, the Guidelines prescribe that the purchase and sale of foreign securities shall be made only through a distributor or underwriter duly authorized or licensed by the government of the issuer of such securities.