Brazil: CVM Issues New Rules On Coercive Fines

After public consultation, on April 30, 2007 the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction 452, which revokes CVM Instruction 273/98 and establishes more detailed rules on the application of coercive fines by the Commission.

While the new rules do not change the cases in the CVM may impose coercive fines, they do clarify some of the controversial aspects of the earlier Instruction. Minor changes had been made to CVM Instruction 273/98 in 2004 and 2007, but those amendments were not sufficient to resolve the various controversies that arose during the time Instruction 273/98 was in force, and were resolved on a case-by-case basis by decisions issued by the full Commission.

Coercive fines are one of the means available to the CVM to ensure that those subject to its jurisdiction comply with their obligations under the legislation and regulations in a timely fashion. The fines are charged on a daily basis, and can reach R$ 5,000 per day of delay, limited to 60 consecutive days.

Coercive fines apply in cases where (i) market agents registered with the CVM fail to comply with reporting requirements; and (ii) any person fails to comply with cease-and-desist orders issued by the CVM. Amajor innovation introduced by CVM Instruction 452/07 is the division of coercive fines into two classes, "ordinary" fines for failure to comply with reporting requirements and "extraordinary" fines for non-compliance with cease-and-desist orders, with a specific regime for each class of fine.

CVM Instruction 452/07 also establishes clear rules regarding the possibility of imposing both coercive and punitive fines on the offender. Unlike coercive fines, punitive fines are not intended to induce prompt fulfillment of administrative orders or legal and regulatory obligations, but to punish non-compliance. Punitive fines may only be imposed after a proceeding to determine whether an offense has been committed, in which the accused party’s rights to due process and a full defense are respected.

In the past, the practice of the various branches of the CVM with respect to the imposition of both coercive and punitive fines was unclear, to the extent that no criteria from the commencement of an and it was impossible to extract consistent criteria for the CVM’s decision to bring a punitive administrative proceeding in addition to imposing coercive fines, which generated a significant degree of legal insecurity.

The CVM’s new Instruction limits the application of both coercive fines and punitive administrative proceedings to more serious cases.

Within the same spirit, the new rules provide that the application of ordinary fines will, in general, exclude the bringing of administrative proceedings against the offender. Only in cases where there is a risk of damage to the market or to investors can the superintendent of the branch responsible for imposing coercive fines decide to bring a punitive administrative proceeding rather than impose an ordinary fine. Furthermore, only when it appears that delay in fulfilling reporting requirements is part of a broader non-compliant conduct can the CVM impose coercive fines and bring a punitive administrative proceeding against the offender.

The rules for extraordinary fines are just the opposite: where extraordinary fines apply, the CVM will also bring a punitive extraordinary proceeding. Only exceptionally may the superintendent of the relevant branch of the CVM decide not to commence an administrative proceeding, if he or she concludes that the offender’s conduct did not result in real damage to the market or to investors.

Whether extraordinary or ordinary, fines begin to run only from the date on which the offender is formally notified of the fine.

This provision, in particular, addresses an old and recurring complaint concerning the CVM’s former practice of imposing fines prior to any contact with interested party, based on article 1 §2 of CVM Instruction 273, which provided that fines run from the day following the deadline for compliance, without need for notice. The legality of this procedure was challenged in the courts and, to avoid further disputes, it was changed by CVM Instruction 447/07.

As a result, ordinary fines can no longer be imposed if the obligation is fulfilled before notice is given to the interested party, even if compliance is late. This rule reflects the nature of coercive fines, which are intended not to punish but to induce compliance with legal obligations. Once the obligation is fulfilled, there is no longer any reason to impose a fine. Likewise, when a market agent’s registration with the CVM is suspended or cancelled, no fine can be imposed, even if the agent failed to comply with obligations while registered with the CVM.

Notice of fines (and other notices provided for in the Instruction), which formerly had to be sent by registered letter with proof of delivery, can now be sent by fax, e-mail, ordinary letter with proof of receipt signed by the addressee and even personal delivery by a CVM public servant, in urgent cases.

Lastly, CVM Instruction 452/07, like the former CVM Instruction 273/98, provides for an appeal to the Commission from decisions to apply coercive fines, within 10 days of receipt of the notice of fine. CVM Instruction 452/07, however, gives the superintendent of the branch that imposed the fine new powers to stay enforcement of the fine pending the appeal, at the request of the appealing party or ex officio.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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