Volume 4, Number 28, Page 2

Brazil: Changes to the Capital Markets Law

by Levy & Salomão Advogados

Brazil’s long-awaited amendment to its capital markets law (Law No. 6,385 of December 7, 1976) leaves unchanged certain essential features, such as the definitions of securities and public issuances, despite ongoing doctrinal and market demand. Nevertheless, the new law, Law No. 9,457 of May 5, 1997, is significant in that it provides for many changes, including substantial increases in administrative penalties, consideration of extenuating circumstances in violations, the ability to sign a consent decree, and the time limitations on administrative proceedings brought by the Brazilian Securities and Exchange Commission (CVM).

New Administrative Penalties

New penalties have been established for violations of the legislation governing capital markets. Under Clause IV of Article 11, investors may now be disqualified for up to 20 years from holding the post of officer or director of a listed company.

Clauses VII and VIII have been added to Article 11. They provide for, respectively, the temporary ban (up to 20 years) of distribution system member institutions from undertaking certain activities or operations, and the temporary ban (up to 10 years) of investors in general from engaging in one or more kinds of stock market operations.

The criteria for setting fines were also changed. A fine cannot exceed the largest of the following three amounts: 1) R$500,000.00; 2) 50% of the value of the issue or the irregular operation; or 3) three times the amount of the financial advantage obtained or the loss avoided as a result of the unlawful act.

Furthermore, the daily fine for failure to comply with an order of the CVM may reach R$5,000.00, regardless of whether CVM undertakes an administrative proceeding.

Extenuating Circumstances

In applying penalties, "the circumstance of any person spontaneously confessing an illicit act or furnishing material information with respect to such an act," will be taken into account.

Consent Decree

A consent decree, which now may be signed by anyone accused of an unlawful act in violation of the capital markets, is based on the legal premise that, in an administrative proceeding, the goal is not to punish the transgressor but rather to ensure that he ceases to commit the offending act and makes restitution for any loss arising in connection to it as quickly as possible.

The CVM may suspend administrative proceedings, at any stage, if the accused signs a declaration to cease committing the acts that the CVM considers illicit and to correct any irregularities identified, including making restitution for any losses sustained. A similar concept already exists in antitrust law: a declaration may be signed between the Council of Administrative Economic Protection (CADE) and a suspected violator of an economic order.

It is worth noting that the consent decree does not constitute a confession as to the facts of the case nor an acknowledgment of the illegality of the conduct in question.

Because the consent decree is a bilateral act reflecting an understanding reached by the parties, failure to comply with the decree cannot be interpreted as a criminal act of disobedience (contempt), as the new wording of paragraph 7 of Article 11 asserts. Only failure to comply with a legal order may be characterized as criminal contempt.

Time Limitations for Violations

A new article added to Law No. 6,385/76 establishes an eight-year time limitation for CVM to bring actions against violators of regulations CVM monitors. The article lists circumstances under which the running of the limitation term will be suspended.

This new article evidences that the understanding among various administrative authorities that there is no time limitation applicable to administrative violations is indeed incompatible with the Brazilian legal system.

The law firm of Levy & Salomão Advogados is located in Sao Paulo, Brazil. Its practice areas include international banking, contracts, taxes, litigation and corporations. Visit their Internet site at www.levysalomao.com.br.