The main legal framework governing the offering and trading of securities is:

• Securities Market Law;
• General regulations applicable to issuers of securities and other participants of Exchange Markets issued by the CNBV (CNBV Regulations);
• Mexican Stock Exchange Internal Regulations (Mexican Stock Exchange Regulations); and
• General regulations applicable to broker-dealers, issued by the CNBV (Broker-Dealers Regulations).

Like all federal laws, the Securities Market Law may only be adopted and amended by Mexican Congress. In general terms, only Senators, House Representatives, State Governments and the President of Mexico may propose new laws or amendments to existing laws.

Both the CNBV Regulations and the Broker-Dealers Regulations are proposed, adopted and amended by the National Banking and Securities Commission (CNBV). Likewise, the Mexican Stock Exchange Regulations are proposed, adopted and amended by the Mexican Stock Exchange (BMV).

One of the main objectives of the legal framework governing the offering and trading of securities is investor protection. Providing investor protection is essential for an organised capital market that intends to promote fairness, competition and minimises systemic risk.

Therefore, such legal framework must include issuer’s corporate governance and financial stability rules, as well as rules to (i) regulate the information needs of investors, (ii) minimise issuer’s inadequate incentives to disclose, and (iii) promote fair allocation of prices, among others.

The CNBV is the main regulator of the BMV, the only securities exchange currently operating in Mexico.

The Securities Market Law expressly provides that any person that participates in a capital markets transaction, either directly or indirectly, must refrain from performing acts that may manipulate the market. Market manipulation is defined as all acts performed by one or more individuals in which an interference in the free interaction between offer and demand occurs, having as a result an artificial variation in the volume or price of securities, with the objective to obtain a personal benefit or a benefit for a third party.

Market manipulation may be sanctioned as follows:

• between two and six years’ imprisonment when the amount of the profit obtained, or the loss avoided, is up to approximately US$428,800 at the moment of the transaction.
• between four and 12 years’ imprisonment when the amount of the profit obtained, or the loss avoided, exceeds approximately US$428,800 at the moment of the transaction.
• a fine equal to the amount resulting from multiplying either one or two times the amount of the benefit obtained, plus a rate that is obtained from applying to that benefit a rate equal to the arithmetic average of the revenues generated by the 10 investment companies in debt instruments with higher profitability during the last six months as of the occurrence of the transaction. A fine between 10 and 50 per cent of the amount of the transaction may be applied when there is no benefit obtained.

Compensatory damages and loss of future earnings.

The CNBV regularly imposes fines and sanctions to issuers, broker dealers and banks in connection with failure to comply with continuing disclosure obligations. However, actions by investors are not standard practice.

No whistle-blower provisions are available.

Securities are defined as shares, equity quotas, debentures, bonds, warrants, debt certificates, promissory notes, letters of exchange and other negotiable instruments, which may be registered in the National Registry of Securities (Registro Nacional de Valores) (RNV) or not, susceptible to be traded in securities markets, issued in series or in bulk, and which represent a participation in the capital of an entity or a part of a collective loan or any credit right, in accordance with applicable Mexican or foreign laws.

Most commonly traded securities are bonds (especially Mexican government treasury bonds), shares, development trust certificates  and real estate trust certificates.

Only authorised broker dealers established in Mexico (and with certain limitations, Mexican banks) can publicly offer and sell securities in Mexico. Broker dealers in Mexico are supervised entities. Authorisation from the CNBV is required in order to incorporate and operate as a broker dealer in Mexico.

Public offerings of securities in Mexico require registration before the RNV. In order to register such securities with the RNV, approval must be granted by the CNBV. Filing for approval by the CNBV includes producing, among other things, a prospectus, legal and financial information of the issuer prepared in accordance with Mexican or international accounting principles and a credit rating from a recognised credit rating agency.

A prospectus must include:

• financial, legal, accounting and business information of the issuer;
• a description of the transaction (that is, executive summary, business plan and historic information of the issuer);
• risk factors;
• management discussion and analysis; and
• applicable regulation including tax treatment and corporate governance information.

In general terms, issuers of public offerings have the following disclosure obligations:

• Reports. Issuers must provide annual reports. This information updates the prospectus and includes the company's annual audited financial statements. The annual reports also provide information about the issuer's:
•    capital structure;
•    board members that are holders of 1 per cent or more of the issuer's capital;
•    investors that hold 5 per cent or more of the company's capital; and
•    10 principal stockholders.

Issuers must also provide quarterly reports. This information is filed pursuant to certain forms provided by the CNBV. These reports include the issuer's pro forma quarterly financial statements.

• Current events. Issuers have an obligation to inform investors, within specific time frames, about:
• any shareholders' meetings;
• corporate restructures;
• mergers; and
• any notices addressed to their shareholders.
   
• Relevant events. Issuers must reveal to the general public any information that may affect the price or value of the securities (relevant events). Relevant events can include transactions such as those with related entities or individuals, the marketing of new products, the takeover of new businesses or the divestiture of assets. To determine if a specific event is relevant to investors, the issuer must consider if the event:
• is equivalent in value to 5 per cent or more of the company's assets, liabilities or consolidated capital; and
• amounts to 3 per cent or more of the previous year's total sales.

If the above considerations are impossible to determine, the issuer must consider if the event constitutes relevant information for investors to make an investment decision, so as to understand the real situation of the issuer or what may affect the value of the securities.

Private placements do not require any specific information.

Private offerings do not require registration or authorisation by a government authority.

Pursuant to the Securities Market Law, an offering of securities in Mexico can be private provided:

• the offer is made exclusively to institutional or qualified investors;
• the offer is carried out under programmes applicable to employees or groups of employees of the entity offering the securities ​​or its controlling or controlled companies;
• the offer is made to less than 100 companies and/or individuals; or
• the offer is made to shareholders or partners of companies whose corporate purpose is exclusively or mainly the same as the corporate purpose of the entity offering the securities.

All other offers of securities are considered public offerings.

The Securities Market Law defines institutional investors as any entity which, under federal law, is deemed as such or is a financial entity (that is, Mexican and foreign banks, broker dealers, insurance companies, investment funds, private pension funds, among others), including fiduciary divisions. Likewise, qualified investors are defined as any person holding investments in securities during the prior year, in average of approximately US$475,500, or that has obtained, during the two previous years, an annual net income equal to or exceeding approximately US$158,500.

The generally accepted accounting standards in Mexico are the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. All financial statements must be audited by an independent auditor in accordance with the International Standards on Auditing issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. These standards are also applicable to financial statements of issuer companies where subsidiaries perform activities subject to the supervision of Mexican regulators.

The financial statements of non-Mexican issuer companies that are submitted to Mexican regulators must be prepared according to one of the following standards:

• IFRS issued by the International Accounting Standards Board.
• US Generally Accepted Accounting Principles (GAAP), including a complementary note explaining the differences between these principles and the IFRS.
• Accounting standards applicable in the country of the issuer company, including a complementary note explaining the differences between these standards and the IFRS.

Please refer to question 12 above.

Yes. Transfers of shares and certain other equity instruments carried out in the Mexican Stock Exchange (or other authorised exchange) by Mexican resident individuals and by non-residents (both individuals and entities) are subject to a reduced 10 per cent withholding tax rate, subject to the fulfilment of the applicable requirements. Moreover, in the case of non-residents who reside in a country with a valid tax treaty with Mexico, the aforementioned sales will be exempt from Mexican withholding tax subject to the compliance with the relevant requirements.

In addition to the above, Mexican resident individuals and non-residents (both individuals and entities) are exempt from Mexican tax on the gains arising from the disposition of the certificates issued by Fibras (see question 34 for Fibra definition), as well as on the gains arising from the disposition of the certificates issued by Fibra E or energy and infrastructure trusts (similar to the US MLPs), provided that such disposition takes place in an authorised exchange.

The disposition by non-residents of shares issued by a Mexican resident company will typically give rise to Mexican source income, which would in principle give rise to Mexican withholding taxes. The general rule is that a non-resident will be subject to a 25 per cent tax on the gross proceeds derived from such transfer; if the buyer is a Mexican resident or a non-resident with a permanent establishment in Mexico, said buyer shall withhold the tax and remit it to the government. Alternatively, a qualifying non-resident may elect to be subject to a 35 per cent tax on the gain realised on the transfer (as opposed to be taxed on the gross proceeds) subject to the fulfilment of the relevant requirements, which include the appointment of a Mexican resident tax agent and the filing of a report issued by a certified public accountant.

In the case of sales of shares carried out through the Mexican Stock Exchange or other authorised exchange, as previously described the non-residents will in principle be subject to a reduced 10 per cent withholding tax applicable on the gain realised; however, if said non-resident resides in a country with which Mexico has a tax treaty in force, the gain will be exempt from Mexican taxation subject to the compliance with the relevant requirements.

In any case, it should be noted that Mexico has an extensive tax treaty network and said conventions typically include benefits applicable to the sale of shares that represent a stake lower than 25 per cent in the capital of the Mexican resident issuer (and provided that the assets of the Mexican entity are not mainly comprised of real estate located in Mexico). By way of example, under the Mexico–United States tax treaty, a holder who is eligible to claim the benefits under such treaty may be exempt from Mexican taxes on gains realised from a sale or other disposition of Mexican shares, to the extent such a holder does not own, directly or indirectly, 25 per cent or more of the outstanding capital stock during the 12-month period preceding the relevant sale, provided that certain formal requirements set forth by the Mexican Income Tax Law are also complied with.

As for debt-related securities that are placed through an authorised exchange, the applicable withholding tax rate will typically be reduced to 4.9 per cent provided that all relevant requirements are duly complied with, which include providing notices to the tax authorities and submitting information on the placement on a periodic basis. This will avoid the need to identify the beneficial owner of the interest on an individual basis, and then apply the withholding tax applicable to said owner based on his or her nature and country of residence.

The only securities exchange currently operating in Mexico is the BMV. Only authorised financial intermediaries are allowed to trade securities on the BMV. However, on 29 August 2017, the Ministry of Finance and Public Credit (SHCP) granted a new concession to Bolsa Institucional de Valores, SA de CV (BIVA) to operate as a securities exchange. BIVA has stated it will begin operations in March 2018. 

Securities in Mexico are cleared through SD Indeval, Institución para el Depósito de Valores, SA de CV (Indeval), a central securities depository. Indeval serves as both a securities depository and as a provider of securities settlement services. All eligible securities are immobilised and transfers are carried out using a book entry system.

Yes, securities denominated in foreign currency can clear through Indeval.

The securities settlement system of Indeval is named DALI which is an electronic book entry account system. DALI was implemented in 2008 and is able to manage different models for settlement on a delivery v payment system, including real-time gross settlement systems or RTGS.

Pursuant to most recent public information available that reflects the 2016 year end:

• the equity market in Mexico has a market capitalisation of approximately US$195.714 million, with 146 public companies (139 local and 7 foreign) and 83.320 thousand shares traded.   
• in 2016, there were 782 short-term debt issuances representing a total value of US$16.170 million, and 110 long-term debt issuances representing a total value of US$8.427 million.

Derivatives in Mexico are traded OTC through MexDer. MexDer uses Asigna as a clearing house. Both MexDer and Asigna are self-regulated entities that operate under the supervision of the Ministry of Finance and Public Credit (SHCP), the Mexican Central Bank and the CNBV. The main agreements traded in MexDer are foreign-exchange currencies, stock portfolios and inflationary risks.

Mortgage-backed securitisations significantly decreased in Mexico as of 2010 and now are mainly issued by governmental housing institutions Infonavit and Fovissste. However, other types of securitisations have developed in Mexico using underlying assets such as collection rights of toll roads, auto loans and leases and credit cards.

A pending item in the legislative agenda is the regulation of covered bonds.

Institutional investors are heavily regulated and subject to the supervision of regulatory authorities including the CNBV and the Mexican Central Bank. Generally, institutional investors can only invest in assets that are explicitly permitted by applicable regulations.

For the definition of institutional investors please refer to question 11.

Only local authorised broker dealers may offer and sell securities.

Regarding private placements, any foreign broker dealer or other foreign entity may perform offerings, provided it complies with certain statutory provisions applicable to foreign investments in Mexico.

Any information in whole or in part that is not public and has, or may have, an impact on the value of specific listed stocks is deemed as “privileged information”.

Any person or persons that have access to privileged information as a result of their position in the issuer, or as an adviser to the issuer, is bound to maintain confidentiality over that privileged information until that information becomes public. The following actions are deemed to constitute insider trading/dealing under the Mexican Securities Law:

• Performing or instructing operations, directly or through another person, on any type of listed securities, where the price of those securities may be influenced by that privileged information.
• Transmitting privileged information to any other persons, unless those other persons are entitled to that privileged information as a result of their position with the issuer, or with an adviser of the issuer.
• Issuing recommendations on listed securities that may be influenced by that privileged information.

There are no recent insider trading/dealing cases available.

Foreign issuers making a public offering are subject to the same provisions as local issuers, therefore, governmental roles and jurisdiction apply the same to local and foreign issuers. 

The BMV has executed several agreements with other stock exchanges such as Bolsa Nacional de Valores, SA (Costa Rica), Bolsa de Valores de la República Dominicana Inc, Bolsa de Valores de El Salvador, SA de CV, Bolsa de Comercio de Santiago, Bolsa de Valores de Colombia, SA and Bolsa de Valores de Lima SA. The agreements executed with the above-mentioned stock exchanges range in subject matters, but mainly provide for technical assistance, information exchange and/or integration.

Likewise, the BMV is a member of the Federación Iberoamericana de Bolsas and the World Federation of Exchanges.

Board members, the CEO and other high-level officers of the company have diligence and loyalty duties to the company, as well as discretionary and confidential duties.

The Securities Market Law provides that board members, the CEO and other high-level officers of the company must perform their duties diligently and adopting reasonable decisions, with the objective of generating value for the benefit of the company and without prioritising a certain shareholder or group of shareholders. Furthermore, the Securities Market Law provides that in order to act diligently, a board member or director must act in good faith and in the best interest of the company.

Board members and directors statutory diligence rule is breached when such individual’s action causes a loss of value of the company by (i) not assisting to board meetings which absence results in a lack of celebration of such meeting, (ii) not disclosing relevant information necessary for adequate decision making, and (iii) breach of duties provided in the applicable regulations or the charter and by-laws of the company.

Board members and directors statutory loyalty rule is breached when, without justified cause, such individuals obtain an economic benefit by (i) voting in a board meeting with a conflict of interest, (ii) not disclosing to the board any conflicts of interest, (iii) favouring a shareholder or group of shareholders in detriment of another shareholder or group of shareholders, (iv) approving transactions with related parties without complying with applicable requirements and statutes, (v) using assets of the company for personal benefit in violation with internal policies, (vi) improperly using privileged information, and (vii) exploiting for personal benefit business opportunities that correspond to the company.

Public companies must have a board of directors and a chief executive officer.

The board of directors has the following functions:

• Provide business strategies.
• Supervise the performance of the issuer and its subsidiaries.
• Approve policies and guidelines for the use of the company’s assets by related parties, and related parties transactions.
• Approve material transactions of the company.
• Appointment of the CEO and high-level officers.
• Approve policies regarding loans to related parties.
• Approve waivers of board members, the CEO or high-level officers to pursue business opportunities that may compete with the company.
• Approve accounting policies and guidelines.
• Approve the audited financial statements of the company, as well as appointing the independent consultant that will provide such auditing services.
• Present to the shareholders meeting the reports prepared by the board’s committees and the CEO, including an opinion of the board regarding such reports.
• Follow up on the main risks involving the company.
• Approve information and communication policies with shareholders and the market.
• Establish actions to be taken to offset irregularities.
• Provide the terms and conditions the CEO of the issuer may exercise its authority to sell assets of the issuer.
• Order the CEO to publish relevant events of the issuer.
• Any other functions provided to the board in the charter and by-laws.

The CEO of the company is in charge of the management and execution of the company’s business, subject to the guidelines and policies approved by the board of directors.

No.

The CNBV has discretionary authority regarding matters not expressly provided for in the securities laws and regulations. In practice, the CNBV tends to be quite receptive of issuers comments and feedback involving this matter.

Companies listed on the Mexican Stock Exchange can be:

• incorporated as a limited liability corporation (SAB). This is the most common form for listed companies;
• incorporated as a more flexible limited liability corporation created to support new business and ventures (SAPIB). SAPIBs are used to support new businesses and to raise capital for new ventures and have more flexible listing requirements. SAPIBs must be converted into SABs within 10 years of listing their shares.

Trusts are also able to make public offerings. 

Banking, finance and insurance, agriculture, infrastructure, oil and telecommunications.

The Mexican Stock Exchange is the only securities exchange currently operating in Mexico. Please refer to questions 19 and 20.

Both the emergence of Fibras and CKDs (capital development certificates) are arguably the most significant change in structured financing that has occurred in Mexico since 2000. The use of Fibra and CKD structures has become increasingly popular in recent years given that they provide financing alternatives that may be highly structured and allow sponsors to create tailor-made solutions for their capital needs. The Mexican government also amended the investment regime of Pension Funds allowing them to invest in CKDs and Fibras.    

Since the first Fibra issuance in March 2011, 12 Fibras currently trade on the BMV with a market capitalisation of 165,000 million pesos.    

As for CKDs, 76 securities have been issued by 47 managers with a market capitalisation of 150,000 million pesos.    

In 2015 the Mexican Internal Revenue Service published tax rules applicable to Mexican MLPs or Fibras Es aiming to promote long-term investment in vehicles that will invest in Mexican qualified energy, electricity and infrastructure assets and the management thereof. As of the publication of the Fibra E tax rules, only one Fibra E currently trades in the BMV.     

In December 2015, the CNBV, in coordination with the SHCP, issued rules to regulate a new security called Certificado de Proyectos de Inversion (CERPI). The CERPI is intended for sophisticated investors only, unlike CKDs or Fibras. The CERPIs are issued in restricted offerings for qualified investors and must focus on a specific project rather than a pool of assets or portfolio companies. Only one CERPI currently trades in the BMV.

The main obstacles a company may confront are the highly regulated information requirements and the continuing disclosure obligations. Non-public companies are not used to rigorous policies regarding preparation of financial information and the heavy burden of continuous reporting obligations.

Also, the Mexican capital markets would benefit from boosting the retail investor culture.

The authors would like to thank Mr Adalberto Valadez for his contribution regarding tax matters.