I. INTRODUCTION
One of the main features needed to achieve greater economic development in any country is the existence of a complete, efficient and transparent market. To that end it is necessary to count on an adequate regulatory framework to regulate the activities of the participants in the stock markets, its interrelations and business.
In view of the above, Stock Market Law No.19-00 (hereinafter, the "Law 19- 00" or the "Stock Market Law", indistinctly) was promulgated in the Dominican Republic on May 8th, 2000. The implementation of this Law together with other bills presently being considered by the National Congress and the Executive Branch itself is intended to revolutionize the Dominican financial sector, increasing competitiveness among its actors, adapting it to market needs and as a consequence accelerating the development of our economy.
As is stated in the whereas clauses of Law 19-00 itself, "to adequately promote the stock market it is necessary to have a generic framework to regulate public supply, issuance and issuers of negotiable instruments in order to promote development of an organized, efficient and transparent market". In that sense, this is the core of the legal framework applicable to the stock market and its products in the Dominican Republic (hereinafter, the "DR").
To that effect, in the definition of its scope of application, the Law 19-00 states that it encompasses public offering of securities, both in local as well as foreign currency, its issuers, commodity exchange, as well as every individual or corporation, local or foreign, that participates in the stock market. For the purposes of this Law, the stock market includes the supply and demand of securities representatives of capital, credit, debt, and commodities. Likewise it includes associated instruments, whether related to securities or commodities.
Regarding the structure of Law 19-00 it comprises seven titles, as it follows: (i) General Provisions; (ii) Superintendence of Securities; (iii) Securities Market Participants; (iv) Violations and Sanctions; (v) Fiscal Treatment; (vi) Temporary Provisions; and (vii) Regulations, Modifications and Repeals.
This executive summary is intended mainly, to provide the reader with a synthesis of Law 19-00 provisions.
II. BACKGROUND
Before promulgation of Law 19-00, there was no law in our country related to stock exchange transactions as such. The first law which somehow referred to the Dominican stock market was Organic Law of the National Stock Exchange No. 3553 dated May 15, 1953. securities.
The main institution created by the old Law No. 3553 was the Bolsa Nacional de Valores (hereinafter, the "BNDV") or in English known as the National Stock Exchange, whose main role was to gather all types of legal business for trading of bearer securities and national and imported products. Another achievement of said law was the creation of the Comisión Nacional de Valores, or in English known as National Securities Commission, which was to be responsible for management of the BNDV.
Another important precedent for the Stock Market Law was the Law No. 550 regarding the Companies or Entities which Offer Stock, Bonds or Instruments for Public Sale, dated December 23rd, 1964. Its purpose was to protect investors, who at the time of its promulgation were victims of deceitful actions committed by a group of companies dedicated to trading of illegal or false securities. As a consequence of the above, the legislator was required to subject public offering of stock to prior approval by the Superintendence of Banks. Although it is true that Law No. 550 solved the protection needs of the time, due to the protecting nature itself, the law was perceived by Dominican companies as a limitation to the development of a public stock market.
Despite the existence of Laws Nos. 3553 and 550, the stock market of the DR has been incipient at all times. It was not until the end of the decade of the 1980s that the interest of the economic agents began, when through the Decree No. 554-89 dated February 20th, 1989 the Stock Market of the DR was created as a non-profit organization, operating as a self-regulating institution since 1991.
To this date, most of the companies in need of capital have had to satisfy their financing needs through bank loans, issuance of active bonds, fixed interest securities, such as commercial papers, and on very rare occasions through the incursion in foreign stock markets. Similar limitations are faced by investors, who have limited investments in fixed assets bonds and in some cases to investment in securities issued and placed by foreign companies in foreign markets.
Laws Nos. 3353 and 550 of, 1953 and 1964, respectively, were revoked by Law 19-00.
III. MAIN DEFINITIONS INCLUDED IN THE LAW
The Stock Market Law defines, throughout its text, the terms essential to its adequate interpretation. Following are some of the most important ones:
Value: According to Article 2 of the Stock Market Law, value is the right or the set of rights of essentially an economic content, negotiable in the stock market, including stock, bonds, certificates, debentures, bills, instruments representative of commodities or resulting from securitization operations. It also includes futures and purchase-sales options on securities and commodities, and other bearer bonds of any nature.
Spot Market: Within the purview of this law, spot market will refer to those operations involving initial placement of stock issue, through which the issuers obtain financing for their activities, according to the Article 3 of the Law 19-00.
Secondary Market: According to the Article 3 of the Law 19-00, operations which involve the transfer of securities which were previously placed through the Spot Market, with the objective of facilitating liquidity to bondholders.
Public Stock Offer: Is one addressed to the public in general or to specific sectors of it, through any mass media communication mean so that they may acquire, alienate or negotiate instruments of any nature in the stock market. In this respect it envisages that those offers which do not conform to this definition will be private in nature and will not be subject to the provisions of the Stock Market, according to the Article 4 of the referred law.
Privileged Information: According to the 10th Article of the Stock Market Law, is the knowledge of actions, deed or events capable of influencing the prices of the stock object of a Public Offering, will be understood as privileged, for as long as such information is not made public.
IV. PARTICIPANTS IN THE STOCK MARKET
In general terms, the Dominican stock market will be comprised of institutional investors, private investors, issuers, stock and commodities exchanges, regulatory agencies, and other market support institutions. Following are the features and authorities of the most important ones.
A) STOCK EXCHANGE
Are institutions that have as main object, the lending to exchange posts duly registered, all necessary services so that they may perform in an efficient manner all transactions related to securities, as well as brokerage activities.
The Law restricts the expression "exchange" to those companies authorized by the Superintendence of Securities to provide its members with all necessary services so they may carry out securities transactions.
According to Law 19-00, main activities and competence of the stock exchange include:
a) Establishing the facilities and equipment to facilitate the interaction of supply and demand within the stock market;
b) Requesting information from issuers;
c) Providing information regarding securities listed in it;
d) Dealing with requests to form new exchange posts;
e) Authorizing exchange posts representatives to perform as exchange brokers;
f) Authorizing registration of securities issue which had previously been approved by the Superintendence of Securities;
g) Requesting guarantees from the exchange posts, among others.
In addition, the Law 19-00 foresees that the subscribed and paid-in capital of a stock exchange can only be invested in the following assets:
a) In cash and deposits;
b) In the building and other facilities owned by the exchange;
c) In the furniture necessary for its operation;
d) In expenses for the installation, organization and operation;
e) In securities of well-known liquidity listed in the exchange, as long as the investment does not exceed 30% of its subscribed and paid-in capital, nor 10% of the subscribed and paid-in capital of the issuing company; and,
f) In a general manner, in any other related or complementary activity authorized by the Superintendence of Securities.
The Law establishes that the shares registered in the stock market registry and registered in a stock exchange can only be traded by the exchange posts in the stock exchange where they are members.
B) COMMODITY EXCHANGE
In accordance with the terms of the Stock Market Law, Commodity Exchanges are institutions whose main objective is to provide its members the services necessary to efficiently carry out trading activities of products originating or destined to agriculture and livestock, agro- industrial, and mining sectors including inputs required by them, as well as bonds representatives of commodities, futures contracts and byproducts of commodities, favoring free competition and market transparency.
The Commodity exchanges will have the following roles and authority, namely:
a) Keeping the operation of a commodity exchange that provides the general public with enough security and information regarding the products traded, its producers, the brokers and exchange operations, including trading;
b) Promote trading of corresponding products, fostering uniformity in the custom and usage of product trading, as well as the establishment of facilities and mechanisms to facilitate interaction of supply and demand of products;
c) Establish an adequate regime for its operations;
d) Issue certificates on trading of commodities, bonds and contracts subscribed and negotiated in the exchange; and,
e) Deal with requests to become an exchange post, among others.
In general, commodity exchanges will have the same powers and limitations established by the law for stock exchanges, which have been stated above.
It is important to point out that the stock exchange and commodity exchange are the only participants in the market to which Law 19-00 recognizes the capacity of self-regulation.
C) STOCK BROKERS
Are individuals or companies (local or foreign), who in a customary way, practice brokerage activities which are the object of public offerings. Subject to the market in which they are operating, the Law 19-00 distinguishes between two types of brokers, that is, exchange posts and dealers. The first operate both in the stock market as well as over the counter, whereas the second are limited to operate over the counter.
According to the provisions of Law 19-00 the exchange posts and dealers will be responsible for the actions of the persons they hire; of the authenticity and physical integrity of the securities traded; of the registration of their last holder in the registry of the issuer; and the authenticity of the last endorsement when appropriate. In addition, the exchange posts and dealers who act in security trading will be under the obligation to pay the purchase price or deliver the securities sold. Finally, among the most relevant provisions adopted by the Law regarding stock brokers is the obligation to provide a guarantee of immediate availability in order to ensure compliance of their obligations before present and future creditors.
Regarding restrictions applicable to the above-mentioned stock brokers, the Law also applies to them those applicable to the stock and commodity exchanges.
Finally, it must be pointed out that Law 19-00 limits the use of the terms "exchange posts", "dealers", "brokers" to those persons duly authorized by the Superintendence of Securities.
D) CLEARING HOUSES
Clearing Houses will be for the exclusive purpose of being a counterpart of all purchases and sales of futures, of stock options, as well as other similar securities or obligations authorized by the Superintendence of Securities. Likewise, they will manage, control and liquidate the operations, unrestricted positions, current accounts, available margins and balances performed and maintained by customers and brokers of the stock market.
Among its main responsibilities are the following:
a) Issue and register futures and options contract, being their counterpart;
b) Receive from brokers the corresponding money and securities and credit same to their respective accounts;
c) On a daily basis update the customers' positions, adjusting the margins and price variations, as well as charge and credit their accounts the corresponding earnings and losses; and,
d) Provide information to brokers regarding the lack or excess of margins, among others.
E) CENTRALIZED SECURITIES DEPOSIT
The stock exchange and other companies authorized by the National Securities Council may act as centralized securities deposit. The centralized securities deposit is the set of services provided to market participants, for the purpose of safe-keeping, transferring, compensating and liquidating securities traded in cash. For the purpose of every operation with securities deposited for safe-keeping, the owners of same will be whoever appears registered as such in the corresponding deposit. Said securities will be transferred with the signature of its owner or representative duly authorized (the Law assumes that the securities deposited are registered).
The securities depositor will be responsible for the authenticity and existence of the bonds, as well as its existence and the rights and obligations they entail. Whereas the institutions that provide warehousing services must verify the physical condition of the securities they receive, being responsible for their deposit and proper safe-keeping of same.
In all cases in which the Law demands the presentation of the security in custody, the certification provided by the company providing the centralized securities deposit will suffice. It must be pointed out that the law does
not establish the characteristics or specifications of said custody certification.
F) RISK QUALIFIER
Risk qualifiers will be the companies responsible for evaluating and rating the risk of the securities object of public offering.
To perform their role the risk qualifiers must base their opinions on the financial stability of the issuer, the liquidity and characteristics of the bond and the likelihood of non payment, among other criteria. With regards to the general securities evaluation and assessment methodology to be used, this must be determined by the Superintendence of Securities, in accordance with the terms of Law 19-00 and its implementation regulation to be enacted in the future.
All information received by the risk qualifiers must be treated as strictly confidential.
G) COLLECTIVE INVESTMENT INSTITUTIONS
There were no collective investment institutions in the Dominican market therefore, until promulgation of the Law 19-00 there was no regulation of such. However, the Stock Market Law creates the figures of the Mutual or Open Fund or Closed Investment Fund, both managed by fund administrative societies or administrators.
Mutual or open funds are described in the Article 90 of the Stock Market Law as "variable equity constituted by contributions of individuals and companies to be invested in securities of public offerings, managed by a fund administrative company for the account and risk of the contributors, subject to a contract signed by the parties".
The contributions referred to under mutual open funds are called fund quotas, these being callable and redeemable at any time.
The operations are to be carried out by the administrative company, being the fund the holder of the investments, while the one in charge of safe- keeping of the bonds is a centralized securities deposit. Funds will be diversified and invested in accordance with the guidelines established. The fund's quotas will be appraised daily and the benefit obtained will be the gain that is obtained in the value of the quotas.
Similar to mutual open funds, is the closed investment fund which is equity integrated by contributions from third parties. However, said contributions have a maturity date and are not redeemable prior to that date.
H) FUND ADMINISTRATORS
The Law 19-00 describes Fund Administrators as the companies, duly authorized by the National Securities Council, whose exclusive role will be the administration of funds. Among its main duties are the following:
a) Periodically inform contributors to the funds managed;
b) Add to each fund all profits obtained during its management, discounting the expenses and compensations agreed upon;
c) Implement, for the benefit of the contributors to the funds managed, all the rights granted by the law to the securities owners.
d) Regarding limitations to the Fund Administrators, the law provides the following:
e) They cannot acquire, transfer, or merge the assets of one fund with those of another or with their own;
f) Guarantee results, yield, rate or specific return;
g) Lend money to the funds managed; and,
h) Borrow money from the funds managed, among others.
I) SECURITIZATION INSTITUTIONS
Securitization is the process through which equity is constituted for the exclusive purpose of providing backing for the payment of the rights granted to holders of securities issued charged to said equity, as well as the transfer of assets to said equity and issuance of the corresponding securities.
The securitization process may be carried out by institutions authorized by law to carry out said functions, as well as by stock companies whose exclusive objective is the acquisition of assets for purposes of securitization.
The law provides that the equity constituted for this process must be independent of the equity of the securitization institution.
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