During the year 2017, Brazil faced a lot of corruption scandals involving uncommon relationships between the private and public sectors. Once and again, Brazilians unfortunately will keep in their memories another difficult moment.
From a securities market perspective, we have the Securities and Exchange Commission of Brazil (“CVM”) created by the Federal Law 6,385/76 in 1976, almost at the same time as Brazil´s Corporation Law was published.
Some of CVM mandates are to protect the holders from securities and the investors of the market against the use of relevant information not disclosed and ensure, the observance of fair trade practice in the securities market.
Considering that, to enable CVM to comply with its mandates, it is important to remind that the reliable securities market is one of the reasons to ensure every investor of the amount invested is being at least monitored and controlled.
Since that listed corporations in Brazil are strictly regulated from CVM´s perspective and according to the article 13 and paragraphs of CVM Instruction 358/02, it is completely forbidden (prior to the disclosure to the market of a relevant fact or act, to trade securities issued by the company), by its shareholders, executive officers and several other positions.
CVM is responsible to investigate and to apply administrative penalties based on several evidences if there has occurred or not, trade of securities upon the use of privileged information.
For that reason, in the year 2017, relevant changes in the Federal Law 6.385/76 have occurred, as we will identify below;
CVM is commonly known as “The Securities Police”, due to its high level of regulations published and their proper administrative investigation procedures. It is important to remind that CVM can only apply administrative measures, such as penalties, suspension, and others.
The administrative penalties that can be applied in case of offense based on insider trading, are several, but one specifically is the applicable fines.
The limit of CVM fines was five hundred thousand reais (R$ 500,000.00) in case of the occurrence of an insider trading act, for example. Then, for several reasons, in the middle of 2017, a Provisional Measure number 784/2017 was issued by Brazilian President Michel Temer, and raised the fine to one thousand times (1000) the fine´s amount, which went from five hundred thousand reais (R$ 500,000.00) to five hundred million reais (R$ 500,000,000.00).
These facts caused a lot of repercussion and discussion, and instead of increasing to one thousand times (1000) the fine´s amount, the new Federal Law approved 13,507/2017 on November 14th, 2017, modified again the fines limit, and defined that the maximum amount to be applied on a fine is one hundred (100) times the old amount, currently fifty million reais (R$ 50,000,000.00).
This new federal law was only published a few days ago and also intensifies the criminal impact of a case of insider trading conviction, by the Court, see hereby the following text:
Federal law 6,385/76
Art. 27-D. Use of relevant information that has not yet been disclosed to the market that is capable of providing, for themselves or for others, an undue advantage by negotiating, in their own name or by third parties, securities: (Redaction provided by Law 13,506, 2017)
Penalty – imprisonment, from 1 (one) to 5 (five) years, and a fine of up to 3 (three) times the amount of the illicit advantage obtained as a result of the crime. (Included by Law No. 10,303, dated October 31, 2001)
Paragraph one – The same penalty shall be imposed on anyone who transfers confidential information related to a material fact to which he or she has had access because of a position or position that occupies the issuer of securities or because of a commercial, professional or trust relationship with the issuer. (Included by Law 13,506, dated 2017)
Paragraph two – The penalty is increased by 1/3 (one third) if the perpetrator commits the crime foreseen in the caput of this article using relevant information of which he has knowledge and of which he must maintain secrecy. (Included by Law 13,506, dated 2017)
The new Federal Law innovates CVM administrative proceedings and intensifies the crime of insider trading. A clear message that CVM is aware of the facts in Brazil.
Hardening the law, CVM is discouraging the practice of unlawful acts, especially the occurrence of insider trading. Intensifying the criminal law against insider trading is an important fact.
Important to mention, is not fair that several investors that operate in the securities market with a standard and public information of the companies, suddenly be surprised that one investor traded with insider information, and profited a lot in comparison to another.
Insider trading, in our view affects the securities market, the investors and the proper country. An existing company create jobs, pay taxes, and generates value to the society and develops the local market in some cases.
As the companies keep bringing benefits to the society and the country, it is imperative and commonly said in Brazil “do not play a game with marked cards”, which means you know the final result.
The company’s administration must blindly comply to the duties of loyalty and secrecy of the company.
With the new Federal Law 13,506/2017, we realize that the Securities Market is becoming even more regulated, with the clear objective to bring more confidence to investors and encouraging fair market practices.
* Originally published in Recht & Steuern issue 4/2017
Allékos Genadopoulos was an associate at Pacheco Neto Sanden Teisseire Law Firm.