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Brazil

Published on Wednesday 16th March 2016

    • Brazil

      The offering and trading of securities are regulated by the National Monetary Council (CMN) and Brazilian Securities and Exchange Commission (CVM), through five main statutes:

      • Law 6385, of 7 December 1976, as amended (Securities Market Law), which rules the securities market and creates the Brazilian Securities Commission;
      • Law 6404, of 15 December 1976, as amended (Corporations Law) that regulates publicly held companies;
      • Law 4728, of 14 July  1965, as amended (Capital Markets Law) that created the National Monetary Council and established guidelines for the development of the securities market;
      • Instruction No. 400, enacted by the CVM on 29 December, as amended (CVM Instruction 400), which regulates securities offerings and their registration; and
      • Instruction No. 476, enacted by the CVM on 16 January  2009, as amended (CVM Instruction 476) that regulates public offerings of securities with restricted selling efforts.

      Broadly speaking, the legislative process for enacting federal laws is basically composed by an initiative, through filling a bill before the competent legislative entity, debates, voting by the Plenary, approval by the Congress, sanction or veto by the President, enactment and afterwards publication. It can be proposed by President, Supreme Court, Senate, deputies, General Attorney and citizens.

      Additionally, considering that the Securities Market Law attributed regulatory function to the CVM and therefore powers to regulate the matter set forth in such law and in the Corporations Law, the CVM has the authority to issue administrative rules concerning matters of the securities market and its participants. 

      Last verified on Friday 3rd March 2017

    • Brazil

      Brazilian capital markets and financial systems are overseen by CMN, the Brazilian Central Bank (BACEN) and the CVM, the main attributions of which are listed below:

      • CMN: issues general monetary and credit policies for the financial and capital markets, but does not have supervisory power. It comprises the finance minister, the planning and budget minister and BACEN president;
      • CVM:  is a federal agency responsible for overseeing the Brazilian securities market; and
      • BACEN: is a federal agency responsible for the implementation of monetary and credit policies enacted by CMN. It is responsible for regulating monetary policy, financial institutions and foreign exchange market.

      Alongside the regulation mentioned above, market associations, over-the-counter (OTC) organised markets and securities exchange have developed an import set of self-regulation policies that should be complied with by their members and participants, including BM&FBOVESPA SA (the only Brazilian operating securities exchange), CETIP – Mercados Organizados SA (CETIP) (the main administrator of OTC organised market), ANBIMA (the Brazilian Financial and Capital Markets Association), ABVCAP (Brazilian Association of Private Equity and Venture Capital) and APIMEC (Brazilian Association of Investment Analysts). 

      Last verified on Friday 3rd March 2017

    • Brazil

      The Securities Market Law establishes administrative liability that may be imposed by the CVM for practices against its provisions, against the Corporations Law and against the CVM’s regulations. The penalties may include: warning, payment of fines; suspension; (iv) prohibition from exercising corporate activities; and (v) cancelation of the authorisation to exercise activities in the Brazilian capital markets.

      The fines imposed by the CVM cannot exceed the highest of the following values: (i) 500 times the nominal value of a Brazilian Treasury bond; (ii) 500,000 reais; (iii) 30 per cent of the issued amount or of the irregular operation; or (iv) three times as much the amount of the illegal profits.

      Law No. 10,303/2001 of 31 October 2011 added to the Securities Market Law criminal liability of individuals for crimes against the capital markets, such as insider trading and market manipulation. The criminal penalties may range from one to eight years of imprisonment and from six months to two years of detention. Fines may also be imposed.

      On its turn, Law No. 9,613/1998, of 3 March 1998, which addresses money laundering crimes and creates the Council of Control of Financial Activities (COAF), establishes criminal penalties of imprisonment from three to ten years and the payment of fines.

      Law No. 7,492/1986, of 16 June 1986 establishes crimes against the National Financial System (white-collar crimes), such as inducing or misleading investors or authorities about an operation, either withholding material information or providing false data, or issuing and trading securities without the necessary register before the CVM, and establishes the criminal penalties of imprisonment from two up to 12 years and the payment of fines.

      Last verified on Friday 3rd March 2017

    • Brazil

      The CVM can bring administrative enforcement proceedings against the legal entities and individuals suspect of breaching the capital markets regulation. The proceeding is usually preceded by an investigation initiated by a technical area (Superintendency) of the CVM, results in a formal accusation against the suspects, grants the right of full defence to the suspects, is analysed by the Legal Division of the CVM, and is decided either by the Board of Commissioners or by the Superintendent who heads the technical area that initiated the investigation. Against the decision of the Superintendent, the convicted individual or entity can appeal to the Board of Commissioners. The decisions of the Board of Commissioners can be appealed to the National Financial System Appeals Council (CRSFN), a collegiate body uniting representatives of both public entities (the Ministry of Finance, the CVM and the BACEN) and private associations (such as the Brazilian Banking Federation or the Brazilian Association of Listed Corporations).

      Unfortunately, there is not a consolidated basis of enforcement actions or private actions in the capital markets up to date. Nevertheless, to give some examples, in 2014, the National CRSFN judged 569 appeals presented against the CVM’s decisions, related to administrative wrongdoings in the capital markets. From those 569 cases, the Council upheld CVM’s decision on 495 cases (339 dismissals, 11 warnings, 137 fines and eight temporary prohibitions from exercising corporate activities). On the other hand, it decided to dismiss 34 cases, to give warning penalties in four cases and fines in 11 cases.

      Last verified on Friday 3rd March 2017

    • Brazil

      While certain jurisdictions adopt a closed type of definition of securities, which is granted by a list of assets that are considered securities, and others choose an open type of definition of securities, in which investment arrangements that fall into certain characteristics are considered securities, Brazil follows a hybrid mechanism to define the instruments that can be defined as securities.

      Article 2 of the Securities Market Law defines the concept of securities, as follows:

      (i)  shares, debentures and warrants;

      (ii)  coupons, rights, subscription notes and share certificates related to the securities listed in item “i”;

      (iii)  depositary receipts;

      (iv)  debenture certificates;

      (v)  shares of investment funds or investment clubs;

      (vi)  commercial papers;

      (vii)  futures, options or other derivatives contracts which underlying assets are securities;

      (viii)  other derivatives contracts, regardless of the respective underlying asset;

      (ix)  whenever offered to the public, any other title or collective investment contract that grants equity, partnership or compensation, including rendering of services, which earnings result from the efforts of the entrepreneur or third parties.

      Items (i) to (viii) of article 2 of the Securities Market Law establish a list of instruments that are characterised as securities, while item (ix) brings a general concept through which any other titles or investment contracts can be tested in order to verify whether they would be considered and treated as securities for purposes of the law. 

      Last verified on Friday 3rd March 2017

    • Brazil

      Law 6385/76 establishes that no public offering of any kind of securities in the Brazilian capital markets may occur without prior registration with the CVM. The following activities characterise a public offering of securities under Law 6385/76:

      • use of sale or subscription lists or slips, leaflets, prospectuses or advertisements targeted at the public;
      • seeking securities subscribers or purchasers through employees, agents or brokers; and
      • trading conducted at shops, offices or facilities open to the public or through the use of public communication services.

      Further to such provisions of the Securities Market Law, the public offering of securities is also regulated by CVM Instruction 400, which provides for the regulation of securities offerings and their registration.

      Further, CVM Instruction 400 requires an offer registration request to be filed by both the issuer and the lead underwriter with the relevant offering documents, including a prospectus with minimum content, which is listed in such rule.

      With the submission of the offering registration request, together with the relevant documentation, the issuer may initiate efforts to collect order indications from investors with a preliminary prospectus. However, it has become common practice that only after the CVM issues a letter acknowledging the terms of the offer and indicating its final comments to the documents will the bookbuilding and roadshow presentations take place. By the end of the bookbuilding procedures, when the underwriter or underwriters reach the final pricing terms, the final documentation is submitted to the CVM and only then is the registration granted. After the registration of the offering is granted, an announcement is published in the newspaper and the sales can be completed.

      It is important to note that the CVM Board of Officers (Colegiado) can grant specific waivers of compliance with the requirements of CVM Instruction 400. The registration process with the CVM may take from 10 to 12 weeks to complete.

      Last verified on Friday 3rd March 2017

    • Brazil

      CVM Instruction 400 sets out the requirement of the disclosure of the prospectus for the distribution of public offerings. This document shall be elaborated by the issuer together with the underwriter and disclose complete, precise, truthful, current, clear, objective and necessary information, in understandable language, so that investors can form their investment decisions.

      Additionally, section 21 of CVM Instruction No. 480 of 7 December 2009, as amended (CVM Instruction 480), which regulates the registration of issuers of securities in the Brazilian markets regulated by the CVM, sets out the following periodical information documents that must be disclosed by the issuers through the CVM website:

      • registration form, to be updated annually;
      • reference form, which is one of the most important and complete documents regarding listed companies, to be updated annually;
      • financial statements;
      • standardised financial statement form (DFP);
      • quarterly information form (ITR); and
      • minutes of general meetings and notices of general meetings.

      In the case of public offerings with restricted selling efforts, the disclosure requirement consists of summarised information regarding the issuer and the offer. As for the private offerings, there are no disclosure requirements imposed by the Brazilian authorities. We shall also discuss the disclosure requirements of material information below.

      Last verified on Friday 3rd March 2017

    • Brazil

      CVM Instruction 400 provides that issuers of securities may request an exemption from registration or an exemption from the prospectus requirements. It is important to note that any exemptions need to be sought on a case-by-case basis.

      In addition, CVM Instruction No. 400 provides that the following public offer distributions shall be automatically exempted from registration:

      • those regarding the sale of shares of government-controlled entities;
      • a single and indivisible lot of securities;
      • securities issued by small businesses companies, as defined in the law.

      Also, offers under CVM Instruction 476 discussed above are also exempt from registration. Pursuant to this rule, the selling efforts are restricted of up to a maximum of 75 professional investors, of which up to 50 may effectively purchase securities.

      Last verified on Friday 3rd March 2017

    • Brazil

      Based on Brazilian law, any income or gains obtained by a foreign investor is subject to taxation by withholding income tax, levied at a rate of 15 per cent, except where the beneficiary resides in a tax haven jurisdiction, in which case a 25 per cent rate applies.

      In relation to financial investments, the foreign investors are, in general, subject to the same taxation applicable to Brazilian individuals, unless such foreign investors obtain the registration with the BACEN and the CVM as foreign investor in Brazilian financial and capital markets, the so-called 4,373 investor, as explained below.

      Then, based on special regime, the 4,373 investors will be subject to withholding income tax at the following rates depending on the nature of the investment:

      • 10 per cent, on income and gains arising from stock funds, swap transactions, futures on an organised OTC market;
      • 15 per cent in all other cases, including on income and gains arising from fixed yield investments and fixed yield investment funds.

      Additionally, 4,373 Investors are exempt from taxation on the capital gains earned: (i) on transactions carried out in Brazilian stocks, futures and commodities exchanges, except in relation to combined transactions that permit a fixed yield result; (ii) on transactions with gold on an OTC market; and (iii) transactions with bonds issued by the federal government.

      Last verified on Friday 3rd March 2017

    • Brazil

      Securities can be traded either publicly or privately, in securities exchanges or on organised and non-organised OTC markets.

      The only exchange currently operating in Brazil is BM&FBOVESPA, acting as exchange for equities, equity derivatives, derivatives, corporate bonds and other financial instruments. BM&FBOVESPA also acts as administrator of an organised OTC market. In addition, the main administrator of an organised OTC market is CETIP.

      Each of such institutions is duly authorised by the CVM to operate and, therefore, must observe all rules established by it. They also act as self-regulatory bodies that have their own internal rules concerning the criteria for approval, registration and trading of securities transactions.

      Last verified on Friday 3rd March 2017

    • Brazil

      Securities that are traded or registered in exchanges and organised OTC markets may be cleared within their systems in accordance with the rules applied by each administrator of such environments, since they also act as clearing and settlement system. There are, however, certain exceptions. For example, BM&FBOVESPA will only provide clearing services in those transactions where it also acts as central counterparty, in accordance with its manuals.

      In case of CETIP, all OTC transactions registered therein must be cleared within its systems, except for: (i) transactions entered into by an authorised participant of CETIP (clearing members, settlement banks, traders, brokers, custodians and registration agent) and its clients, and (ii) transactions governed by foreign law.

      Securities denominated in foreign currency cannot be cleared in Brazil, since the country impose controls in the inflow and outflow of foreign exchange. 

      Last verified on Friday 3rd March 2017

    • Brazil

      Brazilian corporate funding operations in the domestic and international markets totalled 124.8 billion reais in 2015, the lowest annual volume in the past seven years, 16.5 per cent of which derived from primary and secondary offerings of equity. Among those sectors that made the most use of the capital markets in 2015 were IT and telecommunications, which were responsible for 90 per cent of the year’s equity issues, even though these were directed exclusively at corporate acquisitions, followed by the steel and insurance segments.

      Similarly, the Brazilian debt market has seen a positive outcome in the long run, with debentures offerings totalling around 424,4 billion reais in the past six years. However, total debt offerings for the month of January 2016 came to just 2.8 billion reais, versus an average of 5.6 billion reais in the five preceding Januaries (2011–2015). Furthermore, in the debenture segment in 2015, the most active sectors were electricity, holding companies and transportation, which accounted for 17.7, 16.4 and 16 per cent of the offerings, respectively. International fixed income issues fell sharply in 2015 and the oil and gas sector was responsible for 33 per cent of the total.

      Last verified on Friday 3rd March 2017

    • Brazil

      Since 2000, structured finance has gained relevance in number of transactions and volumes, especially through two securitisation instruments: (i) through securitisation companies; and (ii) receivable funds (FIDCs).

      Securitisation companies, characterised as non-financial corporations with the corporate object of purchasing and securitising credits and issuing and offering negotiable instruments in the market, are regulated by CMN Resolution No. 2.686, of 26 January 2000. The most used instruments issued by securitisation companies are the Certificate of Receivables of Real Estate and Certificate of Receivables of Agribusiness. 

      FIDCs consist of mutual funds that acquire credit rights and are regulated by CVM Instruction No. 356, of 17 December 2001.

      Later, in 2010, Law No. 12.249, of 11 December  2010, created another instrument of relevance for structure finance transactions: the Certificate of Structured Transactions (COE), which is issued by financial institutions and represents transactions backed by derivatives instruments. 

      Last verified on Friday 3rd March 2017

    • Brazil

      On 30 September 2005, the Brazilian Securities Commission (CVM) issued Guidance Opinion 33 (Opinion 33/05), that deals with the intermediation of transactions and offerings of securities issued and admitted to trading in other jurisdictions and the procedures to advertise such securities to investors residing in Brazil.

      Pursuant to Opinion 33/05, only members of the Brazilian securities distribution system duly registered with CVM are authorised to (i) exercise the activity of intermediating transactions involving securities in Brazil and (ii) exercise an intermediation activity in Brazil. Therefore, only a member of the Brazilian securities distribution system registered with CVM may conduct activities in Brazil involving offering of securities issued and admitted to trading in other jurisdictions to investors residing in Brazil. For a discussion of a public offering of foreign securities in Brazil see question 25.

      Last verified on Friday 3rd March 2017

    • Brazil

      Under Brazilian law, insider trading refers to the illegal conduct in which an entity or individual trades securities in breach of a fiduciary duty with a securities issuer on the basis of material non-public information. In Brazil, the conduct was first considered an administrative violation by the Corporations Law.

      Until 1984, only corporate officers could be considered insiders. Nowadays, insider traders may be the company itself, direct and indirect controlling shareholders, directors, members of the board of directors and members of any corporate body with technical or advisory roles or any person who, owing to his or her position at either the company or at its controller, controlled company or subsidiaries, has knowledge of  non-public material information. It also establishes that any persons, while aware of non-public material information, may be considered insiders (tippee), especially those who have any commercial, professional or fiduciary relationship with the company, such as auditors, outside accountants, brokers, investment bankers, lawyers, etc (temporary insiders).

      Law No. 10,301/2001 amended the Corporations Law to prevent the use of non-public material information by any individual or entity with knowledge or access to it before its disclosure. Furthermore, such Law criminalised insider trading by adding article 27-D to the Securities Marker Law. This article determines that anyone who trades securities on the basis of non-public material information may be convicted for up to five years of imprisonment and for the payment of fines of up to three times the amount of the profits obtained with the illegal operation.

      The most remarkable criminal insider trading case in Brazil is related to a public offer of acquisition of shares of Perdigão S/A made by Sadia S/A. The Federal Prosecutors' Office investigated former Sadia’s executives and a former executive of a bank. The case was internationally known, as the former executives of Sadia, being aware of the material information, traded American Depositary Receipts of Perdigão at the New York Stock Exchange.

      Last verified on Friday 3rd March 2017

    • Brazil

      The intermediation of transactions involving securities issued and admitted for trading in other jurisdictions may not be considered as an irregular public offering in Brazil provided that (i) the activity of prospecting investors is performed solely overseas by foreign agents duly authorised to perform such activities overseas, and (ii) the offering is not characterised as a public offering in Brazil under Law 6385/76. The coexistence of the factors mentioned in items (i) and (ii) above may not be sufficient to disqualify as public an offering of securities in Brazil. CVM shall consider the characterisation of a certain offering of securities as an irregular public offering based on the analysis of each case.

      Last verified on Friday 3rd March 2017

    • Brazil

      The corporate governance principles in Brazil are based on the pillars of accountability, fairness, transparency and corporate responsibility. Concepts such as interest of the company, good faith, fiduciary duties, such as the duty of loyalty and duty of care, and conflicts of interest are provided for in the Civil Code (Law 10.406/02), the Corporations Law (Law 6.404/76) and regulations enacted by the CVM, in addition to the voluntary Code of Best Corporate Governance Practices, issued by the Brazilian Institute of Corporate Governance (IBGC), a highly reputable not-for-profit organisation aimed at improving corporate governance practices in Brazil. The principle of ‘business judgment rule’ is also recognised and applied by the CVM.

      Last verified on Friday 3rd March 2017

    • Brazil

      Brazilian public companies are managed by two or more executive officers, responsible for the legal representation and daily management of the businesses. Executive officers should be elected by the board of directors composed by at least three members. The board of directors is responsible for, among others, establishing the general strategy for the corporation's business and supervising the performance of the directors. Boards of directors of public companies that have adhered to special segments (Nivel 2 or Novo Mercado) within the BM&FBOVESPA shall have at least 20 per cent of independent directors. Public companies shall also have an audit committee with three to five members. 

      Last verified on Friday 3rd March 2017

    • Brazil

      As a general rule, in Brazil, all issuers of public securities need to be organised as corporations and registered as a public company with the CVM, according to section 21 of Law 6.385. Such registration is ruled by CVM Instruction 480. Companies registered in category A are allowed to negotiate any security in organised markets, while companies registered in category B are allowed to negotiate any security, except stocks or stocks deposit certificates, and any securities which allow their owner to acquire the mentioned securities. 

      Although subject to different rules, investment funds, which are constituted as condominiums and not as corporations, are also allowed to publicly offer their shares. Also, the CVM has allowed other types of entities to offer their interests to the public, such as real estate units of hotels that are sold as condominiums and limited liability companies that can issue promissory notes. Finally, foreign issuers can list depositary receipts in BM&FBOVESPA.

      Last verified on Friday 3rd March 2017

    • Brazil

      As to the recent initiatives, we could name the adoption of accounting principles in harmony with IFRS and regulations issued by the CVM, including CVM Instruction 480, that created new disclosure requirements with the reference form  (financial information, risk factors, related-party transactions and compensation), and CVM Instruction 481/09, on proxy voting and information to be disclosed prior to shareholders’ meetings. Instruction 561 issued in 2015 is also important since it deals with participation and voting at shareholders' meetings of listed companies by electronic means, which eases the access of investors to the meetings. As it regards regulation of investment funds and securitisation transactions there has been a relevant effort of the CVM in improving regulation to provide more protection to investors in general, mainly by strengthen the disclosure requirements mainly.

      Last verified on Friday 3rd March 2017

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