Last verified on Friday 18th November 2016
In Brazil, securities are regulated solely at the federal level. The Brazilian Securities Commission (CVM) is the public authority in charge of law enforcement in the securities market pursuant to the Federal Law 6,385/76 (Brazilian Securities Act), Federal Law 6,404/76 (Brazilian Corporations Act) and the resolutions of the National Monetary Council (CMN). Unlike regulators in other jurisdictions, CVM also concentrates its powers to oversee derivatives, which are included in the definition of securities.
Self-regulation has also been gaining particular importance in the securities field, especially by rules of conduct to intermediaries in exchange and over-the-counter (OTC) environments. The most relevant self-regulators today are: (i) BM&FBOVESPA SA – Bolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA) and its subsidiary BM&FBOVESPA Supervisão de Mercados (BSM) for the exchange and OTC markets under their administration; (ii) Cetip SA – Mercados Organizados (Cetip) for the OTC markets under its administration; and (iii) Brazilian Association of Financial and Capital Market Entities (ANBIMA) for intermediaries in general, but subject to voluntary adhesion.
Finally, CVM cooperates with the federal public prosecutor in violations that may result in class actions and those also constituting criminal offences (eg, insider trading).
The rules and regulations concerning investigations carried out by self-regulators are generally in line with CVM’s legal framework, except for some specific details. In view of such similarity, this publication will focus on the rules and regulations applicable to CVM.
CVM investigates the following violations and legal issues:
CVM focuses on investigations in the administrative sphere and may benefit from information obtained in investigations by self-regulatory bodies. Cases containing evidences of criminal offences should be communicated to the federal public prosecutor and, thereafter, CVM cooperates with such authority in the respective civil or criminal proceeding submitted to court.
Civil proceedings are usually carried out by the federal public prosecutor, but some class entities and investors also lead specific cases. In any judicial case related to the activity of CVM, such authority is communicated and may present memoranda, clarifications and even file appeals in case the parties do not do so.
Criminal proceedings usually begin with a communication by CVM with evidences of the following criminal offences: (i) market manipulation (by means of fraud, creation of artificial conditions, manipulation of prices or unfair practices); (ii) insider trading; or (iii) unauthorised activity in securities market.
The federal public prosecutor has investigatory powers and may also cooperate with the federal police in investigations.
Many Brazilian judges are not familiar with securities and related matters, so the result of the administrative proceeding and the intervention by CVM are usually critical to a case in court. There have still only been a few cases in the civil field and a few convictions in the criminal field.
CVM has investigatory powers and can bring proceedings only in the administrative field related to facts pertaining to its scope. As detailed in question 3, the federal public prosecutor is the main authority in charge of civil or criminal proceedings, usually resulting from communications and exchange of information with CVM.
In general, administrative proceedings carried out by CVM are public under the Federal Law 6,385/76 (Brazilian Securities Act) and the Federal Law 12,527/11 (Brazilian Freedom of Information Act). Exception is made for data protected by privacy and bank secrecy rules, as well as information deemed critical to the planning of the investigation by CVM. As a result, access by journalists is becoming very common in landmark cases.
In recent years, CVM has also started to release information on the investigation of cases covered by media, as well as require the public release of a series of communications exchanged with publicly held companies in order to ensure compliance with the regulation in force. Moreover, administrative proceedings must be publicly disclosed in curriculum vitae prepared for officers and directors of publicly held companies.
Meetings to decide on conviction or acquittal of persons accused in administrative proceedings are also generally public, even though CVM may restrict access based on the public interest involved.
In spite of the above, the Board of CVM holds weekly private meetings to discuss and decide on (i) regulation and enforcement in general, (ii) consultations from market participants, and (iii) settlement agreements to close administrative proceedings in course or prevent their beginning. In such meetings, access by persons in general (including lawyers) is not allowed.
Investigations by CVM in the administrative field may be targeted at both the company and individuals involved, depending on the specific violation at hand.
In courts, civil proceedings may target both company and individuals for purposes of indemnification, while criminal proceedings are targeted at the individuals only.
CVM may begin an investigation either ex officio or based on complaints by the public. Investigations usually begin from regular examinations of transactions and market participants, as well as public news in cases of high profile. For further details on the phases of an administrative proceeding of CVM, please see question 12.
CVM has wide discretion to gather elements to begin an investigation.
A formal accusation, however, depends on the prior opportunity for the defendant to present preliminary clarifications and, subsequently, the demonstration by CVM of concrete elements that identify a person, a conduct and the occurrence of a violation. The federal public prosecutor is entitled to verify the compliance with such requirements, but both the divisions and the general legal counsel of CVM still preserve the final word in the decision to propose a formal accusation or not.
CVM is generally entitled to analyse and require copies of corporate books, accounting papers, and documents in general. CVM may also cooperate with the federal public prosecutor and the federal police to obtain judicial permission to collect original information for further examination (ie, dawn raids).
Internal reviews follow the same rationale applied to material facts in general. Therefore, an internal review deemed material for investment decision must be publicly disclosed by means of a “material fact” or, in less critical scenarios, a notice to the market. Also depending on materiality, the information about the internal review must be disclosed in the public statements of the company (eg, formulário de referência – similar to a 20-F Form), including in risk factors sections, as the case may be.
Any material non-public information may be kept confidential based on a “legitimate interest” of the company, except in cases of leakage of the information or unusual fluctuation of the public quotation, price or volume of a security issued by the company. In case of doubt about the existence of a “legitimate interest” to retain the information, CVM may be provoked by means of a confidential proceeding to decide if the information shall be publicly disclosed or not.
In any case, voluntary disclosure of a violation to rules and regulations under the powers of CVM (identified in an internal review, for instance) is considered for purposes of diminishing penalties or negotiating lower payments in settlement agreements.
Investigations usually begin from regular examinations of transactions and market participants, as well as public news seen in the most relevant cases.
In some cases, however, like those related to abuse of control and similar violations, whistleblowing is an important instrument. CVM, however, does not award any legal benefit or financial compensation to the whistleblower.
For legal benefits arising from voluntary disclosure (ie, disclosure of a wrongdoing committed by the own person reporting the fact), please see question 10.
The phases of an administrative proceeding in CVM can be summarised as follows:
CVM may begin an investigation either ex officio or based on complaints by the public. Investigations usually begin from regular examinations of transactions and market participants and, in cases of high complexity, the division in charge of the suspicious act may request the beginning of an administrative inquiry (inquérito administrativo) for further investigation, including the use of subpoenas and other means. After due assessment of the suspicious activity, CVM may propose closing of the investigation or the formal accusation of the suspected person, based on concrete elements to identify that the conduct has connection with a violation of the rules and regulations of the securities market. Such accusation may not be proposed without prior clarification of the facts by the defendant and the opinion of the federal public prosecutor on the compliance with the requirements in italics above (even though, such opinion is non-binding). At that stage, CVM also communicates the federal public prosecutor about any evidences of crimes or other public authorities about suspected acts under their powers.
Advocacy usually begins in the first steps of an investigation and the careful drafting of responses should put violations in question and prepare for a line of defence.
Defence and settlement agreement
The defence against the accusation must usually be filed within a month, including all reasons, theories and questions deemed appropriate. If the defendant is interested in a settlement agreement with CVM (termo de compromisso), this intention has to be mentioned in the defence and a complete proposal (usually, including a suggested payment) shall be filed until a month later. Generally speaking, a settlement agreement is a two-way compromise between the person and CVM to close an administrative proceeding (or prevent its beginning), except in cases of anti-money laundering and counter-terrorism financing. On one hand, the person agrees to cease and correct the supposed violation, including the payment of an indemnification, without the need to acknowledge any fact or illegality. On the other hand, CVM agrees to suspend the proceeding and, after due performance of the agreed obligations, close the proceeding without a decision on the merits of the case (or to not even begin the proceeding).
Decision by the Board of CVM
The Board of Commissioners is the body with authority to decide on the conviction or acquittal of persons accused by CVM. The session is public and legal counsels may present final allegations orally, as well as any clarification of fact deemed important to the case. The Board is also in charge of the final decision on whether to accept or reject proposals for settlement agreements (based on a discretionary power), after a prior negotiation of the terms and conditions of such proposals with the Settlement Committee of CVM. The sessions of the Board to decide on settlement agreements are not public, so legal counsel and persons related to the case have no access until the resolution is made public on CVM’s website.
Final decision by CRSFN
Owing to a recent amendment to the rules in force, the case is closed in the administrative sphere after an acquittal by the Board of CVM. In case of conviction, however, an appeal may be filed to submit the case to a second tribunal, namely the Council of Appeals of the National Financial System (CRSFN). The decision of the CRSFN is final in the administrative sphere, except for very particular situations involving new facts, obscurity or corrections of material mistakes. The session is public and legal counsels may present final allegations orally, as well as any clarification of fact deemed important to the case.
There is also a reduced proceeding conducted by divisions of CVM in less complex cases, usually resulting from the non-compliance with disclosure requirements, subject to an appeal to the Board of CVM and a final appeal to the CRSFN.
Lastly, Brazilian courts upheld in a set of precedents that their power to revise an administrative decision should be exercised solely for the purposes of control of the due process of law, without discussing the merits of the case.
CVM cooperates with a number of regulators around the globe for purposes of exchange of information and enforcement. This concerted approach towards regulation of securities and market participants is guaranteed by a set of bilateral and multilaterals MoUs, including the IOSCO Multilateral Memorandum of Understanding, dated May 2002.
As per item 13, CVM has expressly agreed with the exchange of information by means of the MoUs executed with regulators outside Brazil and, therefore, may take into account findings by such regulators.
CVM is entitled to (i) analyse and require copies of corporate books, accounting papers and documents in general (in either electronic or physical support), (ii) issue subpoenas to market participants, and (iii) request information from market participants and public authorities. In this context, the powers of CVM are similar to those of the federal public prosecutor. Notwithstanding, CVM may also cooperate with the federal public prosecutor and the federal police to obtain judicial permission to collect original information for further examination (ie, dawn raids).
Some rules and regulations require market participants to keep records and documentation about transactions for a certain term. Notwithstanding, CVM’s power to apply penalties is subject to a statute of limitation of five years, so it is advisable to preserve documentation during that term. Brazilian law considers that hampering or interfering with investigations or supervision by regulatory and/or enforcement authorities – such as the CVM – is an infraction that can subject corporate entities to the same sanctions set forth in Law 12,846/2013 (Anti-Corruption Law). However, there is no obligation to issue a litigation hold or other type of hold notice.
Brazil regulates the subjects of attorney-client privilege and work-product pursuant to a doctrine that one may translate as the principle of “non-violation of lawyer’s acts and expressions”. The Brazilian Bar Statute – a federal statute – expressly protects and renders safe from violation the lawyer’s office or workplace, his or her work instruments, and any written, electronic or telematics correspondence as long as they are related to the performance of lawyer-related activities.
By extension, the doctrine also protects any such work products, and any written, electronic or telematics correspondence with, or in possession of the client. Therefore, securities and related law enforcement authorities cannot request, to the client or the lawyer, production of materials protected by attorney–client privilege.
The question on whether authorities can use protected materials if it obtains them legally from third parties is debatable, as no particular law or binding precedent are available to guide interpretation. Pursuant to the Brazilian Constitution, evidence obtained by illegal means is inadmissible. In this regard, it is important to highlight that the Criminal Code provides that the unwarranted breach of professional confidentiality is a crime. The law describes such conduct as “to disclose to third parties, without just cause, secrecy that one is aware due to his or her occupation, function, office or profession, which disclosure may cause damages to someone”.
Confidential information or commercially sensitive information must be provided to CVM if requested by such regulator, even though a disclaim on its confidentiality should be considered in order to restrict access by third parties.
Owing to the law enforcement powers granted to CVM, one cannot deny to produce a document if requested, subject to a fine and an administrative proceeding.
The Brazilian Federal Constitution protects privacy and personal data as a fundamental right. In addition, a set of specific statutes set forth rules on the secrecy and permission to disclose customers’ personal data and bank data.
On one hand, a person under investigation may only provide personal or bank customer data, on a voluntary basis, with the prior express consent of the customer.
On the other hand, a person under investigation has the obligation to produce materials (even if subject to data privacy, bank secrecy and other data protection laws) if required by CVM or a valid court order.
Despite the foregoing, foreign authorities may obtain access to protected data only in the following circumstances: (i) if CVM and the foreign authority have an agreement regulating the exchange of information; (ii) via cooperation treaties (eg, mutual legal assistance treaty, MLAT); or (iii) if a foreign court order is issued and validated in Brazil via due process of law.
The Brazilian legislation does not impose restrictions on where documents and communications must be stored or reviewed during an investigation. However, in the event that public prosecutors or courts in Brazil request access to such documents, companies are required to comply.
Yes. Please see questions 13 and 14 for details of the cooperation between CVM and other regulators worldwide for purposes of exchange of information.
Yes. CVM may conduct witness interviews and record them as well. The public disclosure of such interviews is subject to the general rules described in question 5.
No one can deny attending to a mandatory request to testify in CVM, but the person may remain in silence grounded on the right against self-incrimination. The witness silence should not be a reason to draw a negative inference against the same witness.
There is no rule requiring a legal counsel for witnesses. Notwithstanding, witnesses may appoint a legal counsel to assist in any testimony with the right to give reasons and raise questions. In addition, witnesses with less favourable economic conditions may request a public legal counsel for their assistance.
Yes, but Brazilian courts upheld in a set of precedents that their power to revise an administrative decision should be exercised solely for purposes of control of the due process of law, without discussing the merits of the case.
Please see question 12 for details on the phases of an administrative proceeding of CVM.
Advocacy should begin in the very first stages of an investigation and the careful drafting of responses should put violations in question and prepare for a line of defence. Throughout the remaining of the administrative proceeding, advocacy consists on monitoring the movements of the case by telephone and promptly clarifying any new facts that may appear. Lastly, the legal counsel’s presence in the judgment by the Board of CVM is seen as critical in complex cases.
In general, advocacy positions, theories and strategies may be modified or even substituted for purposes of defence.
Regarding clarification of facts, a change of a prior statement may be seen as resulting from a false information provided to the authority. Providing false information is a criminal offense in Brazil, so careful attention should be given to the statement of facts during an administrative proceeding.
Any statement provided in the course of an administrative proceeding follows the general rules concerning public information detailed in question 5.
As a rule, the limitation period for charges by CVM is of five years after the fact. This period may be extended or reduced for violations also resulting in criminal offenses, as the limitation period of the crime prevails.
In addition, stoppages in administrative proceedings by CVM or CRSFN for more than three years culminate in the closing of the case.
The limitation period begins when the violation occurs. In continuous violations, however, the limitation period begins when the conduct ends.
Limitation periods are interrupted in cases of (i) notification or summon, even if by public notice, (ii) any unequivocal act of investigation, (iii) decision of conviction subject to appeal, and/or (iv) any unequivocal statement for settlement purposes inside the federal public administration. After the interruption, the limitation period starts again from its beginning.
In addition, limitation periods are suspended during the term of settlement agreements with CVM. After the occurrence of a suspension, the limitation period continues to be counted from the moment it was suspended.
Tolling agreements are not used in Brazil.
Timing varies substantially depending on the complexity of the case, number of parties and subject matter. In general, cases take from two to three years until a final decision by CVM and two to three years more until a final decision by CRSFN. For further details of the phases of an administrative proceeding, please see question 12.
Notwithstanding, CVM and CRSFN usually give priority to certain cases deemed of greater educational effect to the market.
The division in charge of the investigation may close the proceeding ex officio without notification to the investigated person. Closing notifications occur in very specific cases and may also be issued to warn the person that the conduct shall not be repeated, even though it did not give rise to a formal accusation.
Specifically in administrative inquiries, the enforcement division and the federal public prosecutor shall request the closing to the general legal counsel of CVM. Closing notifications are not required in this procedure and also occur in very particular cases.
Settlement usually begins with a proposal by the accused person after filing a defense. Notwithstanding, a settlement agreement may be proposed during the early stages of an investigation and even prior to its beginning. For further details on the phases of an administrative proceeding of CVM, see question 12.
Generally, the division of CVM in charge of an investigation has the final decision on whether to proceed with a formal accusation, including the selection of the supposed violations.
In administrative inquiries, however, the general legal counsel of CVM has the final word on whether to proceed with a formal accusation and which charges should be selected.
CVM has wide discretion in selecting charges and the severity of any penalty or fine. Usually, the seriousness of an offence, including a broad impact in the market, is considered important for reaching the maximum fines permitted by law. Unfortunately, decisions of the Board of CVM are not always clear about the reasons for raising or reducing penalties.
For further details on the selection of penalties, please see question 38.
CVM may impose a variety of penalties, including warnings, fines, suspension from activity, temporary ban from certain transactions, cancel authorisation.
CVM has wide discretion in selecting the penalties, even though it is subject to a set of limits. For instance, fines are limited to the greater of (i) 500,000 Brazilian reais, (ii) 50 per cent of the value of the irregular issuance or transaction, or (iii) three times the economic advantage arising from the violation; in case of recidivism, such values may be raised up to triple. Suspensions, bans and cancellation of authorisations may only be applied in cases of serious offense or recidivism. In addition, cooperation with CVM is considered for the reduction of penalties and negotiation of lower payments in settlement agreements, as also happens with mitigation of the impacts of the violation and voluntary disclosures.
Penalties imposed by CVM do not prevent any court from deciding on the payment of an indemnification or fine, along with criminal penalties (eg, imprisonment).
CVM does not have legal authority to impose the disgorgement of illegal profits, even though fines may be fixed at an amount that neutralises the economic gain obtained from violations.
In the context of settlements, CVM may condition the execution of a settlement agreement to the payment of indemnification to the persons who suffered the loss or to the market as a whole. Notwithstanding, the decision to accept a settlement agreement remains with both the CVM and the counterparty (ie, the person proposing such agreement).
Finally, a conviction by CVM is usually very influent in a private litigation for indemnification, as many Brazilian courts are not familiar with securities law and related matters and tend to rely on CVM’s technical judgment.
No, criminal charges for violations of securities and related laws can only be brought against individuals.
Cooperation with CVM is considered for the reduction of penalties and negotiation of lower payments in settlement agreements, as also happens with corrections of the results arising from the violation and voluntary disclosures. There is no standard for the use of such elements, though.
In Brazil, the effect of a non-prosecution agreement is obtained by a proposal of settlement agreement that is presented to CVM prior to a formal accusation. For further details on settlement agreements, please see question 12.
Settlement agreements only need the approval of the Board of CVM. In certain cases, however, a person may propose a settlement agreement also including the federal public prosecutor.
No. As detailed in question 12, a settlement agreement with the CVM is not conditioned to the acknowledgement of any fact or illegality. This may explain why settlement agreements are very common in the Brazilian securities market.
Yes. Please see questions 12, 33 and 46 for further details on the phases of an administrative proceeding of CVM.
As detailed in question 12, in case of acquittal by the Board of CVM, the case is closed in the administrative sphere.
In case of conviction, however, an appeal may be filed to the CRSFN, which will give a final decision in the administrative sphere.
If the CRSFN gives a decision to acquit the appellant, the case is closed in the administrative sphere and no negative inference should be drawn in future proceedings.
Conversely, the CRSFN may give a decision to maintain the conviction and either confirm the same penalties or increase them. The modification of a previous decision to worsen the situation of an appellant is deemed very controversial in Brazil (reformatio in pejus) and may be challenged in courts, even though the CRSFN has already given some decisions in that sense.
Fines confirmed by the CRSFN are increased by (i) a default penalty limited to 20 per cent, (ii) a floating interest rate of government bonds (Taxa SELIC), both counted as of the maturity of the fines imposed by CVM, and (iii) a fixed interest rate of 1 per cent at the month of payment.
Finally, administrative proceedings must be publicly disclosed in curriculum vitae prepared for officers and directors of publicly held companies.
In Brazil, settlement agreements with CVM are not conditioned upon any admission to wrongdoings and CVM does not issue any opinion on the merits of the case. Therefore, we believe no collateral consequences should arise to a person entering into such agreement.
As explained above, courts are only required to rule securities cases in view of civil or criminal consequences arising from a violation. Generally, there are no collateral effects of a conviction and imposition of liability by a court in a civil proceeding. In the criminal area, instead, a final conviction is deemed a bad record for future cases, which can result in heavier penalties for the convicted individual.
In the administrative sphere, where securities cases are more often in Brazil, a final conviction by CVM may hamper the appointment of an individual to the management of companies, particularly financial institutions. Moreover, the conviction is deemed a bad record with impact in the imposition of penalties by CVM in future proceedings. Also see question 46 for collateral consequences arising from a final conviction after appealing from CVM’s decisions.
Yes. In fact, legal claims in parallel to investigations by CVM are becoming usual in landmark cases for purposes of seeking indemnification or enforcing criminal sanctions to violations of rules and regulations applicable to the securities markets. In particular, the investment fund industry in Brazil has seen significant claims against administrators in the past few years. Recent criminal cases also follow the same trend.
For further details on how an administrative proceeding of CVM may affect cases submitted to courts, please see questions 3 and 39.
Brazilian authorities may use findings by authorities in other jurisdictions as evidences in local civil proceedings. In general, documents should face more acceptance by Brazilian judges, whereas testimonials or experts’ assessments may be seen as less reliable owing to the absence of a Brazilian authority supervising the procedure abroad.
See question 5 for details on the rules concerning public information in the context of administrative proceedings of CVM.
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