A few months after Law No. 13,506/2017 coming into force and a broad debate with various market participants, the Brazilian Securities and Exchange Commission (CVM) submitted for public hearing a draft new instruction that will regulate its sanctioning activity, therein adapting it to the new legislation. Comments can be presented until August 17, 2018.
The draft instruction provides more clarity about CVM’s sanction proceedings, and creates clear and objective criteria for measuring penalties provided for in Law No. 13,506.
The CVM will use the draft instruction in order to consolidate into a single norm the agency’s own scattered rules on the same topic. Upon consolidation, CVM Resolutions 390/2001, 538/2008, and 542/2008, as well as Instruction No. 491/2011, will be revoked.
Law No. 13,506 was published in November 2017 and provides for administrative sanction proceedings in the areas of activity of the Central Bank of Brazil (BCB) and the CVM. On the same date, the BCB published Circular No. 3,857, regulating the new law and setting forth procedures for administrative sanctions under purview of the BCB (see more details in this article).
Among the main innovations of Law No. 13,506, we highlight the increase in the ceiling of fines that can be imposed by the BCB and the CVM, the express provision for the possibility of substitution of the administrative sanction proceedings by other means of supervision, the introduction of the administrative settlement in a supervisory proceeding (also known as the leniency agreement), as well as rules on the procedure for the determination of infractions and procedural rules, judgments, and production of evidence, appeals, simplified proceedings, and consent orders. These improvements were considered reinforcement of the regulatory instruments that can be used by the BCB and the CVM in the exercise of their supervisory and sanctioning functions in the financial and securities markets.
Below, we highlight some of the main topics proposed in the draft CVM instruction.
Determination of administrative infractions. The proposal for the initiation of an administrative inquiry should be submitted by the superintendencies to the General Superintendency (SGE), which may formulate an indictment or propose the initiation of an administrative inquiry. The administrative inquiry will be conducted by the Sanction Proceedings Superintendency (SPS), together with the Specialized Federal Prosecutor's Office (PFE), within 180 days from the date of filing, subject to extensions. Thereafter, the SPS and PFE will file an indictment or propose to the General Superintendency that the inquiry be closed when there is insufficient evidence to formulate an indictment, there is no persuasion as to the commission of the infraction, or in the event that the statutes of limitations have run. As an alternative to the initiation of a sanction proceeding, the CVM shall have the option to apply a preventive and guiding proceeding, observing the following criteria proposed in the draft instruction, among others: (i) the degree of reprehensibility or repercussion of the conduct, (ii) the significance of amounts associated or related to the conduct, (iii) the significance of the harm, even if only potential, to investors and other market participants, (iv) the impact of the conduct on the credibility of the capital markets, (v) the prior history of the persons involved, (vi) the good faith of the persons involved.
Application and measurement of penalties. Among the changes mentioned above, we highlight the adoption of parameters and procedures for measuring penalties. Law No. 13,506 modified the limits of fines, which may not exceed: (i) R$ 50 million; (ii) twice the value of the offering or irregular transaction; (iii) three times the amount of the economic advantage obtained or the loss avoided as a result of the illegal act; or (iv) twice the loss caused to investors as a result of the unlawful act. Law No. 13,506 also establishes that the fine applicable by the CVM may be tripled in cases of recidivism or in the event of combination of penalties. In this sense, the CVM established in the draft instruction objective criteria and procedures that should be observed in the measurement of penalties: (i) setting the base penalty (which should take into account the seriousness of the conduct and the economic capacity of the offender); (ii) application of aggravating[1] and mitigating[2] circumstances, which may result in an increase or reduction of 10% to 20% of the base penalty for each circumstance found; and (iii) the application of a cause for reduction of a penalty, which may reduce it from one to two thirds if the financial damage to investors or minority shareholders is fully repaired before a judgment on the proceeding at the trial level. In an exhibit to the draft instruction, the CVM will divide the penalties into five groups according to severity, varying from R$300 thousand to R$20 million.
Consent order. The CVM may conclude a settlement to close the sanction proceeding, without confession as to the matter of fact or acknowledgment of the illegality of the conduct. The interested party must express its intent to conclude a settlement within the deadline for the presentation of a defense, therein undertaking to cease the practice of activities or acts considered illegal, if any, and to correct the irregularities alleged, including by paying compensation for the individualized damages or diffuse or collective interests within the securities market. The Consent Order Committee (whose composition and operation will be disciplined later) shall deliberate on the proposal for the consent order for a maximum period of 30 days, considering, among other elements, the opportunity and appropriateness of entering into the settlement, the nature and the seriousness of the offenses in question, the prior history of the accused or investigated or their good faith collaboration, and the actual possibility of punishment in the specific case. Unlike BCB Circular No. 3,857, which prohibited the BCB from entering into consent orders in cases of certain serious infractions, the draft instruction contains no express prohibition on consent orders according to the types of infraction.
Supervisory settlement. The supervisory settlement is a mechanism introduced by Law No. 13,506 in the scope of the CVM's administrative sanction proceedings, thereby reinforcing the regulatory mechanisms that can be used by the CVM in the supervision of the securities market. The supervisory settlement will have a similar function to leniency agreements, and does not affect the performance or legal prerogatives of the Public Prosecutor's Office or other public entities, such as the BCB and the Administrative Council for Economic Defense (Cade), within the scope of attributions or competencies of these agencies (with which the CVM will seek to establish coordinated action).
Supervisory settlements may be proposed at any time up to the judgment at the trial level and kept confidential until all the accused are tried. It will be the responsibility of the Supervisory Settlement Committee (whose composition and functioning will be governed later) to evaluate the admissibility of the proposed settlements, therein responding within 30 days from the submission of the proposal and extendable for the same period. Once the settlement is concluded, with an express confession to participation by its signatories in an unlawful act, the following effects will be granted: (i) extinction of the punitive action by the public administration, in the event that the proposal was submitted without the CVM’s prior knowledge of the infraction reported, or (ii) a reduction by one-third to two-thirds of the penalties applicable in the administrative sphere, in the event that the CVM has prior knowledge of the infraction reported. If the proposed supervisory settlement is rejected, there will be no confession as to the matter of fact, nor acknowledgment of the illegality of the conduct that is the object of the proposal, of which no disclosure shall be made.
Effects of appeals to the CRSFN. The draft instruction establishes that appeals to the National Financial System Board of Appeals against a decision that imposes penalties of a warning or fine shall suspend the applicable sanctions until final judgment, while decisions with temporary disqualification, temporary prohibition, or suspension of authorization or registration shall apply immediately, and the accused shall be entitled to request suspension of sanctions to the board within 10 days counting from the notice of the decision.
A controversial point of the draft instruction is the possibility, provided for in article 70, that the CVM may “prohibit the accused from entering into contracts with official financial institutions for a period of up to five (5) years and from participating in bids for the acquisition, sale, and concession of public construction and services, within the scope of the federal, state, district, and municipal public administration and the entities of the indirect public administration.” With the same wording of its supporting Law No. 13,506, article 70 has been challenged by market participants and legal scholars since it exceeds the legal mandate of the CVM, which is to regulate and supervise the capital market, and not regulate the public administration generally.
[1] These are aggravating circumstances, according to article 67: (i) recidivism, if it was not considered in the establishment of the base penalty; (ii) systematic or repeated practice of irregular conduct; (iii) great prejudice caused to investors or minority shareholders; (iv) express advantage gained or intended by the offender, provided that the base penalty was not fixed based on the economic advantage obtained; (v) the existence of material damage to the image of the securities market or the segment in which it operates; (vi) the commission of an infraction through fraud or deceit; (vii) compromise or risk of compromise of a publicly-held company's solvency; (viii) breach of fiduciary duties arising from the position, role, or function that it occupies; and (ix) concealment of evidence of the infringement through trick, fraud, or deceit.
[2] These are mitigating circumstances, according to article 68: (i) confession of the offense or the provision of information regarding its materiality; (ii) the prior good record of the offender; (iii) the regularization of the infraction; (iv) the good faith of the accused; or (v) the effective adoption of internal mechanisms and procedures for integrity, auditing, and incentive to report irregularities, as well as the effective application of codes of ethics and conduct within the legal entity.
