Insufficient Information Summary
Per a 2005 report by the Organization for Economic Co-operation and Development, regulatory reforms in 2001 resulted in strengthening the autonomy and enforcement powers of the Securities and Exchange Commission (CVM), the Brazilian securities supervisor. Between 2001 and 2003, the CVM took steps to modernize the regulatory framework governing the Brazilian capital markets. Post 2004, the focus has been on effective enforcement of enacted regulations. A 2008 report published on the World Bank website mentions another initiative to create a more equitable, competitive and sustainable Brazil with the help of the World Bank, the International Bank for Reconstruction and Development, and the International Finance Corporation during the period 2008-2011. Under this program, the focus in the financial sector will be to improve the competitiveness, efficiency, and risk management of the sector, as well as to maintain the system's stability. The development of the capital markets was expected to be addressed in fiscal year 2009, with a technical assistance loan supervised by the CVM to foster improved regulation and supervision, increased transparency and enhanced minority shareholder protection. Although there are no updates on this front, a March 2010 progress report on the project mentions that one aim of the project is to improve financial sector regulation and develop the country’s financial institutions. A 2009 report by the International Monetary Fund commends the country’s sound financial system that has weathered the global financial crisis well but calls for continued oversight for risk buildup. None of the sources, however, address Brazil's overall compliance with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation.
General Overview
A 2005 Organization for Economic Co-operation and Development (OECD) report mentions that the 2001 corporate law and other reforms strengthened the autonomy and enforcement powers of the Securities and Exchange Commission (CVM), the Brazilian securities regulator, while the 2001-2003 period of depressed capital markets saw the CVM working on modernizing its regulatory framework by issuing new rules. Thereafter, since 2004, the CVM has been focusing on enforcing the new framework, the OECD report notes. In a related comment, a 2006 publication released by the then São Paulo Stock Exchange (Bovespa) mentioned that the Exchange had fully adopted and followed the International Organization of Securities Commissions (IOSCO) market principles, and so did its rules, by-laws, and Board. However, there is insufficient information publicly available regarding Brazil's overall compliance with the IOSCO Objectives and Principles of Securities Regulation. Brazil’s sovereign rating has, nevertheless, been upgraded by two major rating agencies (Standard & Poors and Fitch Rating) to investment grade in 2008, attesting to its attractive capital markets and openness toward foreign investment capital inflows to the country, mentions a 2008 KPMG report.
Although several published reports attest to Brazil's relatively sound financial system, there is no recent publicly available source on Brazil with regards to its compliance with the IOSCO Principles. Unlike with other large economies, the International Monetary Fund (IMF) has not recently published an Article IV Consultation report for Brazil. Similarly, a 2009 IMF/World Bank report mentions a 2003 Financial Sector Assessment Program (FSAP) for Brazil, the results of which were not published by the Fund or the Bank. Instead of Article IV Consultation reports, Brazil has had several published IMF’s Public Information Notices (PINs), which give an insight into the functioning of the country's financial system. The 2009 IMF’s PIN gave an optimistic outlook for Brazil’s recovery from the global financial crisis and attributed it mainly to “a healthy financial system.” As a 2009 Global Survey by the Institute of International Bankers (IIB) puts it “the Brazilian financial system passed with honors in the real stress test to which it was submitted in the wake of the deterioration in the international financial crisis which followed the demise of Lehman Brothers” (p. 49). Brazilian financial institutions, by virtue of the relative underdevelopment of the markets, were also not exposed to the shaky structured instruments that brought the global economy to its heels when their riskiness was exposed. Despite the overall stable scenario, the IMF reiterates that individual risks remain and advises the regulators to be vigilant for contagion, connected party, and large exposure risks and strengthen the financial safety net as well as clarify the roles of the central bank and other authorities in the event of a systemic crisis and in the use of the available resources. The IMF’s PIN recommends an FSAP Update to review the adequacy of financial sector oversight.
The 2006 Bovespa report mentions that the regulation and supervision of the securities market in Brazil is entrusted to the National Monetary Council (CMN), which is the highest regulatory body of the financial system, and the CVM, which is an independent federal agency directly under the Ministry of Finance (MdF). The main laws governing the stock market are the Securities Market Law (Law No. 6.385 of 1976 amended by Law No. 10.303 of 2001), which regulates the CVM, intermediaries, exchanges and issues of securities; the Corporations Law (Law No. 6.404 of 1976, also amended by Law No. 10.303 of 2001), which regulates companies and issuers in the stock market; and the Exchanges Resolution (CMN Resolution 2.690 of 2000), which governs the exchanges' structure and functioning, and established the Guarantee Fund. As a 2002 report by the Institute of International Bankers adds, Law No. 10.303 regulates the operations, disclosure, legal formalities, voting rights, and issuing of shares of corporations.
The CVM regulates the stock exchanges, securities brokers, distributors, pension funds, mutual funds, and leasing companies. As the 2006 Bovespa report adds, Law No. 6.385 gives the CVM regulatory authority "over all the participants, services and activities of the securities market including stock exchanges, brokerage firms, public companies and investors" (p. 6). The CVM also has the power to investigate irregularities in the market and penalize the perpetrators. Law No. 10.303 expanded its independence and stipulated stronger sanctions against insider trading, remarks a 2007 Country Commercial Guide (CCG) published by the U.S. Department of Commerce (DoC).
The 2005 OECD report points out certain constraints to the regulatory authority of the CVM. They include ineffective access to the judicial courts to sublimate enforcement. The judicial system works tardily and the judges are not well specialized in securities-related infractions and enforcements. The CVM also does not have direct access to information from entities shielded by bank secrecy laws. Lastly, the CVM faces capacity constraints in terms of numbers as well as expertise to conduct complex off-site analysis and on-site inspections of supervised entities. According to the OECD, a new department of enforcement will be helpful as will reinforce the staff resources of the CVM. Other measures for improvement recommended by the OECD report are a thorough reform of the judicial system to make it modern and efficient, change the system of appeals and the workings of the court structure, and make the appeals process shorter. Further, granting the CVM access to institution information protected by secrecy laws will enable Brazil to become a full cooperating member of the IOSCO Multilateral Memorandum of Understanding (MMoU). The CVM is listed as a member on the IOSCO website; as well as a member of the IOSCO Executive Committee. Brazil also became a signatory to the IOSCO MMoU in October 2009. Being a signatory to the IOSCO MMoU implies that the IOSCO screening committee considers that the Brazilian legal framework complies with Principles 11, 12, and 13 and that the CVM has the legal capacity to exchange supervisory information with and extend other forms of cooperation to foreign authorities. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU and provide effective cooperation to and coordinate with foreign regulators.
A 2008 Country Partnership Strategy for Brazil report published on the World Bank website mentions an initiative to create a more equitable, competitive and sustainable Brazil with the help of the World Bank, the International Bank for Reconstruction and Development, and the International Financial Corporation (IFC) during the period 2008-2011. Under this program, the focus in the financial sector is to improve the competitiveness, efficiency, and risk management of the sector, as well as to maintain the system's stability. The development of the capital markets was expected to be addressed in fiscal year 2009, with a technical assistance loan supervised by the CVM to foster "improved regulation and supervision, increased transparency and enhanced minority shareholder protection" (p. 55), the 2008 report states. These endeavors, per the report, aim to help institutionalize the progress made through the Novo Mercado (New Market) launched by the Bovespa in 2000. However, a March 2010 progress report on this project does not make any detailed mention of improvements and growth in the financial sector. The financial sector is summarily mentioned as exhibiting a robust recovery after the global financial crisis and note is made of assistance provided to the sector as part of the project. The IFC, for instance committed USD2.36 billion to Brazil between fiscal year 2008 and December 2009, of which half was channeled to developing the country’s financial institutions. Further, according to the 2008 Country Partnership Strategy, the World Bank has been providing non-lending technical assistance (NLTA) to Brazil “aimed at supporting efforts by the GoB [Government of Brazil] to further improve financial sector regulation and increase access to finance” (p. 6).
The Brazilian financial sector is “large and sophisticated” (p. 84), remarks the 2009 U.S. DoC’s CCG. However, the Brazilian stock exchanges largely serve the domestic need for financing, although the Bovespa has regional aspirations, notes the 2007 version of the U.S. DoC’s CCG. The Bovespa deals in private stock trading, whereas the Rio de Janeiro Stock Exchange trades in public securities. In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the Bovespa to form the Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A.) This has resulted in the largest exchange in Latin America, the second largest in the Americas, and the third largest exchange in the world in terms of market value, per information on the BM&FBOVESPA S.A. website.
In 2008, per the 2009 U.S. DoC’s CCG, there were four new initial public offerings on the BM&FBOVESPA, with a total value of Brazilian real (BRL) 7.5 billion. The total number of companies listed on the BM&FBOVESPA was 424 in 2008, a steady growth from 394 in 2006. Total daily trading volume in 2008 was BRL5.5 billion. However, the report finds that trading is highly concentrated in the top 10 stocks that cornered 53 percent of the turnover in 2008. 76 Brazilian firms have simultaneously listed their shares on the New York Stock Exchange (NYSE). Further, subsidiaries of some U.S. companies also list their stocks both on the BM&FBOVESPA and on the NYSE. Foreign investors played a predominant role in the Brazilian markets, accounting for 36.2 percent of the total turnover on Bovespa in 2008, whereas domestic institutional investors accounted for 23.8 percent, and individual investors accounted for 29.5 percent of the total transactions. The New Market, remarks the U.S. DoC’s CCG, which has stricter corporate governance requirements for companies listed on it, had 100 listed companies as of 2008. The launch of the Novo Mercado by the CVM, explains the 2008 KPMG report, was aimed at boosting the market and promoting investment. It was accompanied by the creation of two new intermediary segments: Niveis I and II, which had slightly less stringent corporate governance rules for companies listed on them.
The Principles
II1. The responsibilities of the regulator should be clear and objectively stated.
The CVM website enumerates the objectives of the CVM. It notes that Law No. 6385 of 1976 establishes the following objectives for the CVM: (1) to ensure the smooth and proper functioning of the stock exchanges and over-the-counter markets; (2) to protect securities holders against fraud or illegal activities of the issuing companies or securities intermediaries and their significant owners and managers; (3) to prevent artificial price formation in the market; (4) to ensure public availability of information related to issuing companies and their securities; (5) to prevent unfair trading practices by participants in the market; (6) to promote savings and investment; and (7) to promote the growth and efficiency of the securities market and the capitalization of state-owned companies. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
Per the text of Law No. 6385, the CVM is "an independent government entity linked to the Ministry of Finance, with its own legal entity and assets, endowed with independent administrative authority, absence of hierarchic subordination, fixed mandate, and stability of its Board of Commissioners, and financial and budgetary autonomy." Its chairman and commissioners are to be appointed by the President with Federal Senate approval. They may be dismissed for non-observance of their duties or commission of actions prohibited to their positions by the Minister of Economy through a special commission and with active judgment by the President of Brazil. The duties and functions of the CVM chairman and commissioners are to be established in accordance with the agency's internal regulation, the Law states. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
A 2004 Institute of International Finance (IIF) report observes that although the CVM is known to be an independent and professional regulator, it is significantly understaffed. The 2005 OECD report adds to this information by stating that the legal framework for securities regulation has seen great progress in terms of its quality and effectiveness in recent years and the CVM's autonomy and enforcement powers have also been strengthened by the 2001 reforms. The depressed capital markets period between 2001 and 2003 also saw the CVM modernizing its regulatory framework by issuing new rules amidst the capital law reform. The focus, as of the writing of the report, was on enforcement of the newly promulgated rules. The enforcement powers of the CVM indeed have better focus and effectiveness, observes the report, with a record number of punitive procedures and sanctions in 2005 and the CVM's intent of clearing all pending action by 2007. Further, its advisory activities have also seen a boost, and they act as extensions of the CVM's enforcement activities by enabling the prevention of disputes and market disruption.
The 2005 OECD report, however, points out certain constraints to the regulatory authority of the CVM. They include ineffective access to the judicial courts to sublimate enforcement. The judicial system works tardily and the judges are not well specialized in securities-related infractions and enforcements. The CVM also does not have direct access to information from entities shielded by bank secrecy laws. This leads to difficulty in investigating complaints of cases such as insider trading. Lastly, the CVM faces capacity constraints in terms of numbers as well as expertise and funding to conduct complex off-site analysis and on-site inspections of supervised entities. A new department of enforcement will be helpful as will reinforcing the staff resources of the CVM. Further, granting the CVM access to institution information protected by secrecy laws on justifiable grounds will enable Brazil to become a full cooperating member of the IOSCO MMoU.
Law No. 6385 enumerates the sources from which the CVM shall be funded: (1) appropriations of the monetary reserves granted by the CMN; (2) appropriations from the Federal Budget; (3) revenues for its services; (4) income from assets and contingent revenue; and (5) legal fees charged for its police powers. Despite the above description, there is insufficient information publicly available regarding Brazil's compliance with this principle.
II4. The regulator should adopt clear and consistent regulatory processes.
The CVM regulates all matters expressly provided for in Law No. 6385 and the Corporate Law in accordance with the policies defined by the CMN. The provisions of these laws do not exclude the authorities of the stock and futures exchanges and other entities engaged in clearing and settlement of securities in Brazil, reveals the text of Law No. 6385. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.
In 2008, the BM&F merged with the Bovespa to form the BM&FBOVESPA S.A. A 2006 publication released by the then BOVESPA mentioned that the Exchange had fully adopted and followed the IOSCO Principles, and so did its rules, by-laws, and Board. However, there are no updates to this information after the launch of the new entity.
II7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
See Principle 6.
II8. The regulator should have comprehensive inspection, investigation and surveillance powers.
As the 2006 Bovespa report observes, Law No. 6385 gives the CVM regulatory authority "over all the participants, services and activities of the securities market including stock exchanges, brokerage firms, public companies and investors" (p. 6). The CVM also has the power to investigate irregularities in the market and penalize the perpetrators. Law No. 10.303 expanded its independence and stipulated stronger sanctions against insider trading, remarks the 2007 U.S. DoC’s CCG. The 2005 OECD report points out certain constraints to the regulatory authority of the CVM. They include ineffective access to the judicial courts to sublimate enforcement. The judicial system works tardily and the judges are not well specialized in securities-related infractions and enforcements. The CVM also does not have direct access to information from entities shielded by bank secrecy laws. Lastly, the CVM faces capacity constraints in terms of numbers as well as expertise to conduct complex off-site analysis and on-site inspections of supervised entities. A new department of enforcement will be helpful as will reinforcing the staff resources of the CVM. Other measures for improvement recommended by the OECD report are a thorough reform of the judicial system to make it modern and efficient, change the system of appeals and the workings of the court structure, and make the appeals process shorter. Further, granting the CVM access to institution information protected by secrecy laws will enable Brazil to become a full cooperating member of the IOSCO MMoU. Being a signatory to the IOSCO MMoU would imply that the IOSCO screening committee considers that the CVM has the legal capacity to exchange supervisory information with and extend other forms of cooperation to foreign authorities. The above description notwithstanding, there is insufficient information publicly available regarding Brazil's compliance with this principle.
II9. The regulator should have comprehensive enforcement powers.
As the 2006 Bovespa report observes, Law No. 6.385 gives the CVM regulatory authority "over all the participants, services and activities of the securities market including stock exchanges, brokerage firms, public companies and investors" (p. 6). The CVM also has the power to investigate irregularities in the market and penalize the perpetrators. Law No. 10.303 expanded its independence and stipulated stronger sanctions against insider trading, remarks the 2007 U.S. DoC’s CCG. The 2005 OECD report points out certain constraints to the regulatory authority of the CVM. They include ineffective access to the judicial courts to sublimate enforcement. The judicial system works tardily and the judges are not well specialized in securities-related infractions and enforcements. The CVM also does not have direct access to information from entities shielded by bank secrecy laws. Lastly, the CVM faces capacity constraints in terms of numbers as well as expertise to conduct complex off-site analysis and on-site inspections of supervised entities. A new department of enforcement will be helpful as will reinforcing the staff resources of the CVM. Other measures for improvement recommended by the OECD report are a thorough reform of the judicial system to make it modern and efficient, change the system of appeals and the workings of the court structure, and make the appeals process shorter. Further, granting the CVM access to institution information protected by secrecy laws will enable Brazil to become a full cooperating member of the IOSCO MMoU. Being a signatory to the IOSCO MMoU would imply that the IOSCO screening committee considers that the CVM has the legal capacity to exchange supervisory information with and extend other forms of cooperation to foreign authorities.
Providing details on the enforcement powers of the CVM, the 2004 IIF report mentions that when a suspicious activity is identified, the CVM initiates an administrative enquiry to elicit further information through formal statements and collection of material evidence to pin the responsibility. Penalties range from warnings and fines to license cancellation. The penalized party may appeal the CVM's decisions in a specialized financial market appellate body. Despite the above description, there is insufficient information publicly available regarding Brazil's compliance with this principle.
II10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
As the 2006 Bovespa report observes, Law No. 6.385 gives the CVM regulatory authority "over all the participants, services and activities of the securities market including stock exchanges, brokerage firms, public companies and investors" (p. 6). The CVM also has the power to investigate irregularities in the market and penalize the perpetrators. Law No. 10.303 of 2001 expanded its independence and stipulated stronger sanctions against insider trading, remarks the 2007 U.S. DoC’s CCG. The 2005 OECD report adds to this information by stating that the 2001 regulatory reforms saw the strengthening of the CVM's enforcement powers. Between 2001 and 2003 the CVM modernized its regulatory framework. As of the writing of the report in 2005, its focus was on the enforcement of the newly promulgated rules. They indeed, have better focus and effectiveness, observes the report, with a record number of punitive procedures and sanctions in 2005 and the CVM's intent of clearing all pending action by 2007. Further, its advisory activities have also seen a boost, and they act as extensions of the CVM's enforcement activities by enabling the prevention of disputes and market disruption. The report, nevertheless, points out certain constraints to the regulatory authority of the CVM. They include ineffective access to the judicial courts to sublimate enforcement. The judicial system works tardily and the judges are not well specialized in securities-related infractions and enforcements. The CVM also does not have direct access to information from entities shielded by bank secrecy laws. Lastly, the CVM faces capacity constraints in terms of numbers as well as expertise to conduct complex off-site analysis and on-site inspections of supervised entities. A new department of enforcement will be helpful as will reinforcing the staff resources of the CVM. Other measures for improvement recommended by the OECD report are a thorough reform of the judicial system to make it modern and efficient, change the system of appeals and the workings of the court structure, and make the appeals process shorter. Further, granting the CVM access to institution information protected by secrecy laws will enable Brazil to become a full cooperating member of the IOSCO MMoU. Being a signatory to the IOSCO MMoU would imply that the IOSCO screening committee considers that the CVM has the legal capacity to exchange supervisory information with and extend other forms of cooperation to foreign authorities.
Providing details on the enforcement powers of the CVM, the 2004 IIF report mentions that when a suspicious activity is identified, the CVM initiates an administrative enquiry to elicit further information through formal statements and collection of material evidence to pin the responsibility. Penalties range from warnings and fines to license cancellation. The penalized party may appeal the CVM's decisions in a specialized financial market appellate body. The above description notwithstanding, there is insufficient information publicly available regarding Brazil's compliance with this principle.
EN11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
Per its text, Law No. 6.835 allows the CVM to share supervisory information with and provide other forms of assistance in investigations against Brazilian or foreign regulatory infringements to domestic regulators such as the BCB and the Federal Revenue Secretariat as well as foreign regulators or other relevant international entities. However, assistance and cooperation may be refused in public interest or if the information is deemed confidential by law. The 2005 OECD report, however, pointed out a constraint to the regulatory authority of the CVM. It did not have direct access to information from entities shielded by bank secrecy laws. Therefore, the report suggested that granting the CVM access to institution information protected by secrecy laws would enable Brazil to become a full cooperating member of the IOSCO MMoU. In this respect, the CVM website notes that Brazil became an IOSCO MMoU signatory in October 2009. Being a signatory to the IOSCO MMoU implies that the IOSCO screening committee considers that the Brazilian legal framework complies with Principles 11, 12, and 13 and that the CVM has, therefore, the legal capacity to exchange supervisory information with and extend other forms of cooperation to foreign authorities. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU and provide effective cooperation to and coordinate with foreign regulators.
EN12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
See Principle 11.
EN13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
See Principle 11.
II14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions.
In 2002, CVM Instruction 358 that deals with disclosure policy came into force. It regulates the provisions of Law No. 10.303, and per the 2006 Bovespa report, "enhanced the disclosure by companies of material information, information on public offerings, information on trading of the company's shares by managers, and established restrictions on trading by the insiders during sensitive periods (when privileged information may be available)" (p. 14). Nevertheless, there is insufficient information publicly available regarding Brazil's compliance with this principle.
II15. Holders of securities in a company should be treated in a fair and equitable manner.
The White Paper on Corporate Governance in Latin America published the OECD in 2003 recommended that the legal and regulatory framework must provide for clear and ex-ante rules regarding how minority shareholders are to be treated when there is a change in corporate control. In cases of de-listings or withdrawal rights, authorities must ensure a fair, practical and predictable system for valuing the shares of minority investors, the report adds. Furthermore, the report notes that if the legal framework allows shares with different voting rights, "this needs to be fully justified and accompanied by commensurately stronger and more effective protection of minority shareholders" (p. 2). As a 2004 Institute of International Finance (IIF) report notes, the IIF Code recommends that minority shareholders have the right to call special meetings with a minimum threshold of votes. The Brazilian Corporate Law stipulates such a right for shareholders with 5 percent or more of the outstanding capital stock; however, this right is rarely used because of the potential power of the majority shareholders to affect the outcome of such meetings in a way that would effectively undo the benefit of such minority investors' rights. Brazilian law also allows proxy voting - as recommended in the IIF Code - though it requires the physical presence of proxies in order to vote and normally does not permit voting by mail or electronically. Finally, in compliance with the IIF Code, the Corporate Law and the CVM Code provide for cumulative voting rights as well as the right of minority shareholders to put forward directors.
The authors of a 2005 OECD White Paper state that, in practice, all the companies that went public during 2004 and 2005 are either listed on the Novo Mercado and can only issue common shares, or on Level 2, where preferred shares may be issued but "with voting rights in the case of certain corporate operations and related party transactions, and that also benefit from at least 70 [percent] tag-along rights (i.e., the right to receive at least 70 [percent] of the price paid to the controlling shareholder in the case of a transfer of control)" (p. 3). These companies listed on the Novo Mercado and Level 2 are also subject to higher corporate governance standards. More recently, the 2008 Silveira and Saito paper points out that there seems to be a disregard for the rights of minority shareholders. However, the 2008 Country Partnership Strategy for Brazil notes that under the new initiative to create a more equitable, competitive and sustainable Brazil, the development of the capital markets is expected to be addressed in fiscal year 2009, with a technical assistance loan supervised by the CVM to foster "improved regulation and supervision, increased transparency and enhanced minority shareholder protection" (p. 55). The 2009 Padovan and Chipoletti report finds that under the Corporate Law each common share provides the right to one vote at shareholders meetings, with multiple votes per share being prohibited from any class of shares. The above information, however, does not directly address Brazil's compliance with this principle.
II16. Accounting and auditing standards should be of a high and internationally acceptable quality.
According to the assessment of Brazilian accounting and auditing practices conducted by the World Bank in 2005 and published in 2007, Brazilian Generally Accepted Accounting Principles (GAAP) have been converging with international standards; however, significant areas of inconsistency still exist. Empowered by Law 6.385/76, the CVM is responsible for the monitoring and enforcement of accounting requirements for listed companies. The World Bank notes that the CVM can impose sanctions for non compliance with the given requirements. Overall, the World Bank commends the CVM for having strengthened its enforcement capacity but points out that it needs to improve further in order to address the increasingly complex financial reporting requirements for entities listed on the Bovespa. The World Bank recommends mandating the application of International Financial Reporting Standards (IFRSs) in preparation of consolidated financial statements by all public interest entities, amending the Corporate Law and other legislation to bring Brazilian GAAP in line with international standards and establishing an independent accounting standard-setter. However, some of these recommendations have since been addressed.
According to the 2009 Ernst & Young (E&Y) report comparing the Brazilian GAAP to the IFRSs, Brazil has taken “two distinct but related paths” to IFRS adoption. The first path involves the CVM and other financial regulators requiring entities under their supervision to apply IFRSs in preparing their consolidated financial statements beginning in 2010. The second path takes the form of the 2008 Corporate Law 11.638, which requires all Brazilian companies, both public and non-public, to prepare their financial statements in accordance with the new set of local standards issued by the Accounting Standards Committee (CPC) - an independent accounting standard-setter - and based on IFRSs. Per the website as of April 2010, the CPC had issued 31 standards based on corresponding international accounting standards. Several differences still remain between CPC standards and IFRSs, which the CPC aims to eliminate by the end of 2010. Despite the above information, none of the cited sources directly address Brazil's compliance with this principle.
The same World Bank report also finds that the gap between national auditing requirements and International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) are nominal. Some differences exist as a few ISAs either do not have equivalent Brazilian standards or the latter does not incorporate several aspects of the corresponding ISA. However, due to the close alignment of national and international auditing standards, the World Bank foresees fewer difficulties and, therefore, recommends adopting ISAs completely. A 2010 IFAC report stated that a comparison of the Brazilian auditing standards with the ISAs was expected to be completed by September 2009. As of April 2010, however, there is no publicly available information regarding the progress of this initiative. Among other recommendations, the World Bank also suggests that all public interest entities (PIEs) which, as defined by the World Bank, include listed companies, banks, insurance companies, pension funds and large non-listed companies must be subject to a statutory audit. At the time of the assessment, the audit requirement was not mandatory for all entities and, therefore, extending the audit requirement to all PIEs was being discussed under a draft law. The World Bank recommends further that an oversight body be established to ensure that licensed auditors meet professional standards in discharging their duties and an overall strengthening of enforcement practices of various regulators. Some of these recommendations have since been addressed by the enactment of Law 11.638 effective January 1, 2008. Auditing standards are set by the Federal Accounting Council (CFC), which is legally empowered as the oversight body for the profession, and the Brazilian Institute of Independent Auditors (IBRACON), a not-for-profit organization primarily involved in accounting and auditing standard-setting, research and the advancement of the audit profession. While the CFC has the legal mandate for setting auditing standards, the IBRACON has its own set of standards and the latter works in close collaboration with the CFC in developing draft audit standards.
II17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
The 2008 KPMG report notes that mutual funds are regulated by the CVM and "must follow rules concerning diversification of investments, submission of daily information to the [BCB], bookkeeping and the publishing of their semiannual accounts" (p. 155). Further, their sponsor or manager must be a financial institution. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investors interest in the scheme.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II21. Regulation should provide for minimum entry standards for market intermediaries.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
As the 2008 KPMG report mentions, a securities "distribuidoras" funds its activities from its own capital or capital raised from deposits by banks outside the conglomerate or group that it belongs to. It is not allowed to borrow from other affiliates from the same conglomerate. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
The 2006 Bovespa report notes that Law No. 6.385 gives the CVM regulatory authority "over all the participants, services and activities of the securities market including stock exchanges, brokerage firms, public companies and investors" (p. 6). The CVM also has the power to investigate irregularities in the market and penalize the perpetrators. Law No. 10.303 stipulated stronger sanctions against insider trading, remarks the 2007 U.S. DoC’s CCG.
The text of CVM Instruction No. 387 of 2003 on self-regulating procedures elucidates that as auxiliary regulatory bodies, the stock exchanges are mandated to set appropriate standards to enable compliance with the Instruction and to monitor their members' activities and compliance with the Instruction. The exchanges are also required to provide the CVM all data and information on member activities gained during inspections. They are also required to forward information or suspicion of any irregularities or illegal acts committed by the members as well as non-members. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II27. Regulation should promote transparency of trading.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
II28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.
The 2006 Bovespa report notes that Law No. 6.385 gives the CVM regulatory authority "over all the participants, services and activities of the securities market including stock exchanges, brokerage firms, public companies and investors" (p. 6). The CVM also has the power to investigate irregularities in the market and penalize the perpetrators. Law No. 10.303 stipulated stronger sanctions against insider trading, remarks the 2007 U.S. DoC’s CCG. There is, however, insufficient information publicly available regarding Brazil's compliance with this principle.
II29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
There is insufficient information publicly available regarding Brazil's compliance with this principle.
CP30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
In a joint report issued by the Center for Latin American Monetary Studies (CEMLA) and the World Bank (WB) in 2004, the authors assert that "with the launch of the new Brazilian payment system in April 2002 the securities clearance and settlement systems are approaching full compliance with international standards" (p. 11). The report enumerates the different securities and derivatives settlement systems in Brazil. They are the: (1) SELIC, the federal government securities settlement system operated by the BCB that also acts as a central depository; (2) Clearinghouse for Custody and Settlement (CETIP), the main central depository and clearinghouse for debt securities issued by private sector entities; (3) Brazilian Clearinghouse for Settlement and Custody (CBLC), a Bovespa OVESPA affiliate and the central depository and clearinghouse for private securities and some equities derivatives; (4) BM&F Securities Clearinghouse, operated by the BM&F; and (5) BM&F Derivatives Clearinghouse, also operated by the BM&F, and the main clearinghouse for commodities and derivatives. Of the five, all except the CETIP are considered systemically important settlement systems and use the delivery-versus-payment (or payment-versus-payment) system to mitigate settlement risk. The SELIC is also a real-time gross settlement system. The CEMLA/WB report goes on to say that under Law No. 10.214 of 2001, all systemically important securities settlement systems designated by the Basel Core Principles (BCB) are obliged to maintain settlement accounts in the BCB, act as central counterparties, and guarantee final settlement of all transactions in the systems. Further, as the 2006 BCB report notes, the core principles under which the settlement systems function are set out in CMN's Resolution 2,882. Under the Resolution, the BCB is empowered to authorize, regulate, and supervise all clearing and settlement systems in Brazil. In the case of securities settlement systems, the BCB shares these powers with the CVM, although aspects of security and systemic risks pertaining to these systems are under the sole authority of the BCB. The BCB has articulated its powers under Law No. 10.214 and CMN Resolution 2,882 in its Circular 3,057. Attesting to the BCB's oversight, the November 2007 Financial Stability Review issued by the BCB remarks that the BCB complies with internationally established criteria by looking after the safety and efficiency of the Brazilian clearing and settlement systems through ongoing oversight of its systemically important systems. As a 2008 presentation by Jose Antonio Marciano adds, the BCB oversight objectives include preventing systemic risks, promoting payment system and instrument efficiency, and safeguarding the transmission channel for the conduct of monetary policy.
