In late June the CVM (Brazilian Securities and Exchange Commission) published four new rules establishing a new regulatory framework for procedures related to sanctioning actions by the authority. The first of them was CVM Instruction No. 607, of June 18. A week later, it was followed by CVM Instructions No. 608 and No. 609, which update the framework and the values for punitive fines, consolidating the applicable values of fines into a unified standard, and CVM Resolution No. 819, which amends procedures applicable to appeals to boards of the body against decisions issued by its commissioners.
With the initiative, the CVM systematized previously sparse provisions in various resolutions and instructions into a single rule regarding sanctioning administrative proceedings within its purview. The following rules were repealed: (i) CVM Resolution No. 390/01, regarding the execution of Consent Orders; (ii) CVM Resolution No. 538/08, regarding sanctioning administrative proceedings; (iii) CVM Resolution No. 542/08, on the adoption of preventive and supervisory procedures in the scope of CVM's supervisory activity; (iv) CVM Resolution No. 552/08, on CVM Resolution No. 538/08; (v) CVM Resolution No. 775/17, regarding the simplified procedure for sanctioning administrative proceedings within the purview of the CVM; and (vi) CVM Instruction No. 491/11, on cases of serious infringement, pursuant to paragraph 3 of article 11 of Law No. 12,715/2012.
The systematization of the content related to sanctioning administrative proceedings within the purview of the CVM seeks essentially to adjust the regulations to the new rules established by Law No. 13,506/17, which, among other measures, increased the limit of the maximum penalty that may be applied by the CVM and introduced the administrative settlement in supervisory proceedings, reinforcing the regulatory framework for measures that may be used by the CVM as a securities market oversight body in Brazil. In addition, by means of CVM Instruction 607, the regulator sought to provide greater legal certainty to covered parties in relation to the procedures for the CVM's sanctioning actions.
In this manner, CVM Instruction 607 sought to clarify, simplify, and objectify, among other issues, the rules, procedures, and deadlines for the performance of procedural acts both by covered parties and by the CVM itself, its departments, and the Specialized Federal Prosecution Office. In addition, the new norm establishes objective parameters for the initiation of sanctioning proceedings and the dosimetry of the penalties that may be applied, by defining the base penalties, mitigating and aggravating conditions, and their impacts.
Some specific points which we will discuss below draw attention to these parameters and should be considered by the managers of public companies and other entities subject to the CVM’s supervision.
One of the main points of CVM Instruction 607 is the concern with complying with the command of paragraph 4 of article 9 of Law No. 6,385/76, as amended by Law No. 13,506/17, to the effect that the sanctioning actions of the body should prioritize infractions of a serious nature in order to provide greater educational and preventive effect for market participants.
In the same vein, the norm makes clear the discretion of CVM's departments so that they, considering the information obtained in the investigation of administrative infractions, may refrain from presenting a charging document when the conduct under investigation is of little relevance or the significance of the threat or harm to the legal goods protected by the rules infringed is low. It is at the discretion of the departments to also use other supervisory instruments or measures.
Although this is a subjective analysis by the CVM, the standard sought to establish the parameters that should be considered in this evaluation of the relevance of the conduct or significance of the harm, including: (i) the degree of reprehensiveness or repercussion of the conduct; (ii) the significance of the sums associated with the conduct; (iii) the significance of the losses caused to investors and other market participants; (iv) the impact of the conduct on the credibility of the capital markets; (v) the background and good faith of the persons involved; and (v) the reimbursement of the investors harmed.
Thus, while on the one hand the subjectivity of the assessment removes legal certainty from the covered parties, on the other the specification of the factors that must be taken into consideration allows covered parties and their attorneys to better define a defense strategy.
Another issue that draws attention in CVM Instruction 607 is the concern with making the procedures and procedural deadlines clear. In this sense, one sought to establish transparent and objective criteria for summons, presentation of charging documents, presentation of defenses, requests for the production of evidence, judgment of cases, appeals, production of effects of decisions, and other eminently procedural issues.
The counting of deadlines was unified and aligned with the rules of the Brazilian Code of Civil Procedure, thus reducing the divergence in understanding on the subject among the departments of the CVM. Henceforth deadlines shall be calculated exclusively in business days, excluding the first day and including the last day. Filings shall be considered valid until 11:59 pm of the last day of the deadline.
In a very efficient manner, the norm allowed the use of electronic means for the communication of the procedural acts of sanctioning administrative proceedings by establishing management and processing of cases exclusively via digital means and mentioning the requirements for the summons and subpoenas of the parties and for the counting of deadlines.
Such changes represent a gain in legal certainty for the covered parties to act in their defenses.
Another point that draws attention is the special focus on the principle of administrative law regarding the validation of administrative acts. The norm even allows the reformulation of charging documents when the requirements related thereto are not met. It also makes clear that absolute nullity of acts will be exceptional.
Also noteworthy is the application of confidentiality to administrative sanctioning proceedings, which will become the rule, contrary to the fundamental precept of law that administrative proceedings are public, and may proceed under seal on an exceptional basis. With the new rule, only the parties and their attorneys will have access to the record, and access by third parties should be evaluated by the reporting judge.
CVM Instruction 607 also established objective criteria for the dosimetry of penalties that may be applied by the CVM, which now have very high bases for pecuniary sanctions and with objectively defined mitigating and aggravating factors to guide the calculation of the final penalties. Thus, the norm gives greater predictability to penalties according to the type of conduct and its severity.
To set the base penalties for fines with a limitation criteria up to R$ 50 million (there are other criteria for setting the fine, such as three times the economic advantage obtained or twice the damage caused to investors, among others), the new rule establishes different values and limits depending on the nature of the infringement. To this end, the CVM divided administrative offenses into five large groups and established for each of them a maximum value for the base penalty. Below are some examples of conduct and the respective maximum values of the base monetary penalty:
- Group I (infractions related to the preparation and maintenance of the corporate books, failure to disclose periodic and occasional information, among others): R$ 300,000;
- Group II (non-disclosure or untimely disclosure of a material fact, non-preparation or preparation of periodic and occasional information not in compliance with regulations, among others): R$ 600,000;
- Group III (infractions related to the preparation of financial statements and non-compliance with the fiduciary duties of the audit committee, among others): R$ 3,000,000;
- Group IV (infractions related to the exercise of the voting rights of shareholders, directors and officers in a conflict of interest situation, among others): R$ 10,000,000; and
- Group V (infractions related to non-compliance with the fiduciary duties of directors and officers, abuse of control and voting rights, and use of information not yet disclosed to the market, among others): R$ 20,000,000.
Once the base penalty has been established, it is necessary to check for mitigating or aggravating circumstances. Each occurrence of a mitigating or aggravating circumstance will add to or reduce the base penalty by up to 25%.
Examples of aggravating circumstances are: (i) systematic or repeated performance of irregular conduct; (ii) high damage caused; and (iii) significant advantage obtained by the offender, among others. Examples of mitigating circumstances include: (i) confession to the offense or provision of information regarding its commission; (ii) the good record of the offender; (iii) reversion of the infraction; and (iv) effective adoption of internal integrity procedures and application of codes of conduct and ethics, among others.
The CVM board will also consider, for dosimetry of the penalty, any sanctions related to the same facts that have already been or will be applied by other authorities.
The new standard also includes procedural rules regarding Consent Decrees and Supervisory Settlements, established by Law No. 13,506/17.
The wording of CVM Instruction 607 implies that there will be a hardening on the part of the regulator with respect to the application of much higher penalties. Because of this, it is important to encourage effective adoption of internal integrity, audit, and reporting mechanisms and procedures, as well as effective application of codes of ethics and conduct within publicly-traded companies, as this is considered a mitigating circumstance in the application of the penalties provided for and may reduce them by up to 25%.
It is prudent, therefore, that publicly-traded companies and their directors and officers adopt a more proactive stance with respect to compliance with the CVM rules applicable to them by enhancing their corporate governance structures in order to prevent infractions.
CVM Instruction 607 enters into effect on September 1, 2019, and will be immediately applicable to ongoing proceedings, without prejudice to acts that have been performed thus far. CVM Instruction 608, in turn, will enter into force on January 1, 2020, and will apply to periodic or occasional information whose delivery period expires after its entry into force, as well as with respect to non-compliance with specific orders issued by the CVM after that date. Finally, CVM Instruction 609 also enters into effect on January 1, 2020, amending and adding provisions to various other instructions, including CVM Instruction 480/09, which sets forth the main periodic and contingent obligations applicable to publicly-traded companies in Brazil.