On December 31, 1964 it was created Law No. 4595, which rules the monetary, banks and financial institutions and their politics, and it is better known as the "Banking Reform Law", as well as Law No. 4728 of July 17, 1965, which regulates the Capital Market, and it is better known as the "Capital Market Law".
Law No. 4595/64 created the National Financial System, actually composed by the National Monetary Council (CMN), the highest regulatory entity within the National Financial System, the Central Bank of Brazil (BACEN), the Brazilian Development Bank (BNDES), the Securities and Exchange Commission (CVM) and other public and private financial institutions.
The CMN and the BACEN were both created by Law No. 4595/64.
Law No. 4728/65 improved the Brazilian Capital Market by providing administrative, financial and patrimonial autonomy to the Stock Exchanges, which operate under the supervision of the CVM, as well as important provisions related to the modernization of the country's Capital Market.
The CMN is a policy-making body responsible for currency and credit policies, including issues related to foreign exchange, interest rate and the regulation of the operations of financial institutions in general. The CMN is administered by the Finance Minister as Chairman, the Planning, Budget and Coordination Minister and the President of the BACEN.
The BACEN is a governmental agency administered by a Board of Directors with four Directors and a President, all appointed by the CMN. The role of the BACEN is to implement the currency and credit policies laid down by the CMN, to control all aspects of the public and private financial institution, all credit and open market transactions and to formulate, implement and monitor the exchange and international financial transactions policy. Regarding the international area, the BACEN ensures the regular functioning of the foreign exchange market by monitoring capital flows and securing loans and placing bonds abroad, as agent of the Federal Government.
BNDES is the chief federal agency for long-term funding. Created in 1952, BNDES operates in every sector of the economy and its strategy focuses on industrial restructuring, infrastructure expansion and revamping, managing the Brazilian Privatization Program, supporting foreign trade, protecting environment, accomplishing and improving competitiveness of agriculture and services. It is a public company, fully-owned by the Federal Government, and it is Brazil's most important source for long-term financing.The CVM is a governmental agency which function is to regulate and control the Brazilian Capital Market and to regulate the securities and stock markets. It inspects the investors, the Stock Exchanges and the corporations' operations. As well as the BACEN, CVM executes and implements the currency and credit policies laid down by the CMN. CVM was created by Law No. 6385/76, of December 7, 1976, that regulates the Brazilian Capital Market. By inspecting the securities markets, CVM has the duty of cohibiting irregularities. It has the legal attribution of installing the administrative proceeding for the judgement of the infringers, and imposing due penalties. Besides, CVM develops researches that contribute to the politics of development of the market. CVM itself may seize measures to promote the development or suggest them to the CMN as well.
II. Legal Sources
The Brazilian Capital Market is ruled by a "mixed system", where the Federal Government enables, by means of the Federal Constitution and Federal Laws, some governmental entities such as the CMN, BACEN and CVM, to regulate and fiscalie the market operations and the financial institutions.
These governmental entities have autonomy to issue rules for the Capital Market. The rules, in a hierarchy order, are: Resolutions from CMN, Instructions, Deliberations and Resolutions in general.
The Securities Market is regulated by Law No. 6.385/76 and Law No. 6.404/76 (Corporation Law) and by Regulatory Acts issued by CMN and by governmental agencies, such as BACEN and CVM.
The most important Laws and Regulations to the Brazilian Capital Market, as well as to the Brazilian Securities Market are the following:
- Law No. 4.595 of 12/31/1964 – The "Banking Reform Law". It created the National Financial System and its main regulatory entities: the CMN and the BACEN;
- Law No. 4.728 of 07/17/1965 and respective alterations – Disciplines the Capital Market and establishes a guideline for its activities;
- Law No. 6.385 of 12/7/1976 and respective alterations – Rules the Brazilian Securities Market and created the CVM, the most important regulatory entity for the Securities Market. It is better known as the "Securities Law";
- Law No. 6.404 of 12/15/1976, altered by Law No. 9457 of 05/05/97, and respective alterations – Known as the "Corporations Law", regulates the constitution, organization and operation of the Joint Stock Companies and disciplines the securities of the Business Corporations;
- Resolution CMN No. 1.190 of 9/17/1986 – Rules the Commodity Exchanges transactions, submitting its fiscalization to the BACEN and CVM;
- Resolution CMN No. 1.289 of 3/20/1987 and respective alterations– regulates the constitution and the operation of the investment corporations domiciled abroad, which involves the investment of foreign capital, securities and securities portfolio;
- Resolution CMN No. 1.645 of 10/6/1989 – establishes rules for the fiscalization of Commodity Exchanges;
- Resolution CMN No. 1.655 of 10/26/1989 and respective alterations – rules the constitution, organization and operation of the securities and stock brokers;
- Resolution CMN No. 1.656 of 10/26/1989 and respective alterations – rules the constitution, organization and operation of the Stock Exchanges;
- Resolution CMN No. 1.927 of 5/18/1992 – Approved the regulation of Annex V to Resolution CMN 1289, which regulates foreign investment through Depositary Receipts;
- Resolution CMN No. 2.099 of 8/17/1994 and respective alterations – Establishes conditions to banks and other financial institutions to be part in the National Financial System (Basileia Commission);
- Resolution CMN No. 2.689 of 1/26/2000 and respective alterations – Registration of Foreign Investors (please also refer to CVM Instruction 325);
- CVM Instruction No. 8 – Price Manipulation;
- CVM Instruction No. 31 – Material Information;
- CVM Instruction No. 168 and respective alterations – Special Procedures on Stock Trading;
- CVM Instruction No. 202 and respective alterations – Requirements for companies going public and information provided to the CVM;
- CVM Instruction No. 299 and respective alterations – Disclosure of information on the selling of control and changes in stockholdings;
- CVM Instruction No. 325 – Registration of Foreign Investors (please also refer to Resolution 2689); and
- CVM Instruction No. 332 – Brazilian Depositary Receipts.
The most important law for the Brazilian Securities Market is Law No. 6.385/76. It is a Federal Law issued by the Federal Government, which created the CVM.
The securities comprised in this law are the shares, debentures, beneficiaries, subscription bonus, securities deposits certificates and every other bond created or issued by the Business Corporation at the discretion of the CMN.1
The different types of offerings on the Brazilian Securities Market are: (i) stocks, (ii) subscription warrants, (iii) Brazilian depositary receipts, (iv) electricity forward certificates, (v) domestic depositary receipts, (vi) motion picture investment certificates, (vii) collective investment partnership contracts, (viii) corporate bonds/convertibles, (ix) depositary receipts of Brazilian companies listed abroad, (x) commercial papers, (xi) shares of real estate funds, and (xii) secondary offerings and other warrants.
The commercial paper was included among the securities comprised in Law No. 6.385/76 through Resolution CMN No. 1.723 of June 27, 1990.
The representative table of the portfolio of shares and the options of purchase and sale of securities were included among the securities regulated by Law 6385/76 and by Decree Law No. 2.286, of September 23, 1986.
III. Regulatory Procedures
Organs such as CVM and BACEN have extensive regulatory powers by law. They exert permanent inspection over the institutions and people submitted to their control, due to the risks involved in the financial system operations, in order to protect the investors and the national financial-economic politics.
The CVM has the authority to take action and impose sanctions in connection with the enforcement of the Securities Law. According to Articles 8 and 9 of the Securities Law, the CVM's jurisdiction is restrained to the acts committed in the securities market, and it must establish the administrative inquiry for the illegal or non-equitable acts practiced by administrators or shareholders of public companies, by financial brokers or by any other participants of the securities markets.
Upon the administrative proceeding, the CVM judges the unlawful acts committed in the stock market, imposing to the infractors the penalties foreseen in the law. This proceeding is based on the due process of law, assuring the accused party the plain right of defense. The administrative proceeding is not only based on the due process of law, but also on the constitutional principle of legality, according to which the imposition of penalties may only occur if the violation is preceded by the law.
The Public Administration, in the administrative proceeding, operates as pleader and judge, in a bilateral legal relationship. For this reason the principles of the due process of law must be rigorously observed.
In addition, the CVM issues: (i) Deliberations (Deliberação) summarizing the decisions taken by its Board; (ii) Instructions (Instrução) regulating certain subjects established by Law No. 6.385 and Law No. 6.404; (iii) Opinions (Parecer) which are divided into (a) Advisory Opinions (Parecer de Orientação) addressed to all members of the distribution system conveying unsolicited opinions with respect to securities matters, and (b) Opinions (Parecer) responding to individual requests; (iv) Explanatory Notes (Nota Explicativa) to publish the reasons why the CVM proposes certain measures to the CMN; (v) Administrative Rules (Portaria) dealing exclusively with the internal management and controls of the CVM; and (vi) Declaratory Acts (Ato Declaratório) formally issuing permissions, approvals, concessions, etc.
Basically, the CVM has five functions: fiscalizatory, regulatory, registration, consulting and developing.
The fiscalizatory function aims not only to avoid abuses and frauds but also to provide correct information to the investors.
The regulatory function occurs when the CVM issues Instructions in order to regulate the subjects involving the securities market.
The registration function is formed by two kinds of registry: the corporate registry and the issuance registry. The former registry is done either for the stock exchange negotiation or for the over-the-counter market negotiation. After this registration, the company is considered an open capital company. The latter one will occur in the cases of issuance of securities.
The consulting function can be verified by means of the opinions prepared by the CVM. This opinion may only analyze the questions regarding the CVM itself.
The CVM also has the development function as it must stimulate and promote the securities market development, by means of campaigns, seminaries, studies and publications.
It is also determined that the CVM will actuate throughout the Brazilian territory and may examine accountant registers, books or documents of natural persons and legal entities involving the shares issuance.
Both the CVM and the CMN shall perform the duties provided for under the law in order to:
- stimulate the creation of savings and their investment in securities;
- promote the expansion, regular and efficient operation of the stock market, and stimulate permanent investments in the capital stock of public companies controlled by private Brazilian capital;
- guarantee the efficient and correct operation of stock markets and over-the-counter markets;
- protect securities holders and market investors against:
- (a). the irregular issue of securities;
(b). illegal acts of officers and controlling shareholders of publicly held companies, or managers of securities portfolios;
- avoid or prevent any kind of fraud or manipulation intended to create artificial conditions of supply, demand or price of the securities traded on the market;
- guarantee public access to information on the securities traded and the companies issuing them;
- guarantee the observance of equitable business practice on the securities market; and
- guarantee compliance with the conditions established by the CMN regarding use of credit.
In Brazil, the securities negotiation can occur either on the Stock Exchange Markets or on The-Over-The-Counter Markets.
The Stock Exchanges are private entities, which are constituted as an association of broker companies.2
In Brazil, the Stock Exchange Market is a secondary market (mercado secundário). This means that it is not possible to negotiate new securities in this market, but only those owned by shareholders, already in circulation.
The Brazilian stock distribution and intermediation system is compound by stock broker companies, distributors, investment and development banks and custody and operation registry companies.
According to the Brazilian Law, all the negotiations involving stock markets are made by stock-broker companies. This means that any institution which will be operating in these markets must be assessored by a stock-broker company.
The São Paulo Stock Exchange (BOVESPA) was founded in 1890 and is totally automated and has an integrated liquidation and custody system and a real time operations registry and information system. Operations can be performed both in the floor or by the Megabolsa trading system. By means of Megabolsa system, it is possible to stock-broker companies all over Brazil to participate of this market. The operations made in the floor or in the Megabolsa involve sight, future and options markets.
All Brazilian Markets are linked to each other by the BOVESPA's Megabolsa trading system.
The Board of Directors of the stock exchanges are composed of at least seven and no more than thirteen directors. The By-Laws of the stock exchanges must dispose about rules related to the composition of this board. One of the members of the Board of Directors must be a representative of the investors non-qualified as institutional investors and another one must be a representative of the publicly-held companies whose securities are admitted in negotiation.
The main functions of the exchange markets are to (i) maintain a place or appropriate system for the continuation of securities operations as a free and open market, organized and supervised by the exchange itself, by member firms and competent authorities; (ii) provide a permanent place or system with the necessary means for the prompt and efficient execution and disclosure of transactions; (iii) create trading systems which provide continuous price quotation and liquidity to the securities market; (iv) register transactions; (v) maintain high ethical standards of trading, establishing for this purpose rules of behavior for member firms and listed companies; (vi) disclose executed transactions broadly in a timely and detailed manner; and (vii) exercise any other activity expressly authorized by the CVM.
Any securities negotiation operated out of the Stock Exchange Market, but by means of the intermediate distribution system, is considered to be performed in the over-the-counter market.
These agents are (i) the financial institutions and societies which have as main object the acquisition or the distribution of securities, and also (ii) the independent agents and societies which intermediate in the negotiation of the securities.
The former distribution (colocação primária) must occur in the over-the-counter market. However this market is not only a former market. It is also possible to negotiate, by means of it, securities which had already been distributed in the market.
The-over-the-counter-market represents, in Brazil, a small portion of shares negotiation.
In March, 1996, the CVM regulated the over-the-counter market for titles and securities in order to enable small corporations to be part of this market. It was created the Operation Society of Access' Market (Sociedade Operadora do Mercado de Acesso - SOMA), which is conducted through the services net of Rio de Janeiro Stock Exchange (BVRJ). This service makes that the operations involving over-the-counter markets be agile.
The over-the-counter market involving public debts and derived agreements is more representative.
Stocks which are traded on a stock exchange cannot be traded over-the-counter when they are distributed pursuant to a public offering.
The liquidation, compensation and custody of titles normally are made by companies created exclusively for this objective.
Since November 16, 1998, the liquidation, compensation and custody of titles and securities in Brazil are made by the clearing house Companhia Brasileira de Liquidação e Custódia – CBLC (Brazilian Company of Liquidation and Custody).
The CBLC is a result of a two year reorganization process occurred in the BOVESPA initiated on February 19, 1998, in which the BOVESPA invested part of its assets to create an exclusive and independent company to execute the custody of securities, liquidation of operations and risk control. CBLC's corporate capital is in the approximate amount of 203 million reais, which is approximately US$ 105 million.
The CBLC is responsible for the liquidation of operations of all the Brazilian securities market, holding 100% of the titles in the national market. It is the depositary of shares of publicly held companies as well as other assets such as debentures, investment certificates, motion picture investment certificates, shares of real state funds and privatization certificates.
The custody system is completely automated. The transactions' physic liquidation in the sight market occurs in the first business day after the finalization and the financial liquidation occurs in the third business day.
However, the CBLC is not responsible for the operations on the commodities exchange (Bolsa de Mercadorias e Futuros – BM&F). The BM&F has its own and independent clearing system.
The negotiations made in the Brazilian Stock Exchanges are supervised by their market attendance departments.
CVM supervises on-line and off-line the operations made in the stock markets and in the-over-the-counter markets. The on-line supervision occurs during the negotiating sections. The off-line supervision takes place at night, after the operations' finalization.
The guaranties administrated by the compensation chambers analyses the following issues:
- the borders and guaranties deposited by the customers;
- the guaranties of the compensation agent;
- the guaranty fund of the chamber of compensation; and
- the patrimony of the chamber of compensation.
The compensation chambers determine the operational limits for the compensation agents who works within its boundaries.
This article is divided into two parts. The second part consists of the following items: Securities; Regular Disclosure; Registration with the CVM; Non-resident Investors; Depositary Receipt Programs; Brazilian Depositary Receipts; Trading Rules and Approaches to Jurisdictional Conflicts.
Walter Douglas Stuber and Adriana Göbel Stuber are, respectively, Founder Partner and Associate Lawyer of Amaro, Stuber e Advogados Associados, where they act in the corporate law area specially international and financial law.
1The Securities Law regulates the overall operation of the securities markets, the public offering of securities, the listing of securities on exchanges, disclosure requirements, activities of brokers and intermediaries, types of securities traded and the types of companies which can be listed on the securities markets, as follows below, as a free translation of its Articles 1 and 2:
"Article 1 - The following activities shall be governed by and controlled in accordance with this law:
- issuing and distribution of securities on the market;
- trading and intermediation on the securities market;
- organization, functioning of and transactions on stock exchanges;
- portfolio management and custody of securities;
- auditing of publicly held companies;
- securities analysis and consulting.
Article 2 - The following securities shall be subject to the provisions of this law:
- corporate shares, founders’ stock, debentures, their respective coupons, and subscription warrants;
- securities deposit certificates;
- any other securities created or issued by corporations, at the discretion of the National Monetary Council.
Sole Paragraph - The following are excluded from the provisions of this law:
- federal, state, or municipal government bonds;
- bills of exchange guaranteed by a financial institution, with the exception of debentures."
2In Brazil there are 9 (nine) stock exchanges. They are:
- São Paulo Stock Exchange (BOVESPA);
- Rio de Janeiro Stock Exchange (BVRJ);
- South Stock Exchange (BVES);
- Bahia-Sergipe-Alagoas Stock Exchange (BVBSA);
- Minas Gerais-Espírito Santo-Brasília Stock Exchange (BOVMESB);
- Paraná Stock Exchange – BVPR;
- Pernambuco-Paraíba Stock Exchange (BVPP);
- Regional Stock Exchange (BVRg); and
- Santos Stock Exchange (BVSt).
However, an Integration Agreement of April, 2000, linked all the Brazilian Markets. BOVESPA now concentrates all the shares and fixed income securities (debentures, commercial paper) negotiations nationwide. This Integration Agreement established that, by the period of 5 years from the execution of the agreement, the BVRJ will concentrate only negotiations with public titles as well as that it will hold Public Auction until the end of the year 2000.
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.