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Brazil's Securities Regulator issues new rules on Enforcement Proceedings

In force since 1st September, CVM Instruction 607 (ICVM 607) deals with investigations into administrative infractions, procedure in enforcement proceedings, application of penalties, and administrative settlements and leniency agreements, which are provided for in Law 13.507/2017. 

ICVM 607 brings together rules on enforcement proceedings, administrative settlements, and access to the record of proceedings, which were formerly governed by different Instructions. In addition, legal provisions that were applied when the CVM’s specific regulations were silent are included in the Instruction, eliminating doubts about their applicability in the context of proceedings before the CVM. 

In addition to procedural rules, ICVM 607 makes important changes to enforcement proceedings. One of them is that the CVM’s branches may now opt not to bring enforcement proceedings. In making the decision, the following elements must be taken into consideration: (i) the conduct’s seriousness or repercussions, (ii) the amount of money involved, (iii) the extent of losses caused to investors and market participants, (iv) the conduct’s impact on the credibility of the capital markets, (v) prior offences by the persons involved, (vi) the good faith of the persons involved, (vii) steps taken to correct the infraction, and (viii) compensation paid to investors suffering losses. The decision not to bring enforcement proceedings can be appealed if the decision is not supported by good reasons, or is contrary to the predominant position in decisions by the CVM’s directors. 

Following the line taken in the CVM’s more recent precedents, ICVM 607 provides that in the event of a tie in a judgment session, the understanding of the law most favorable to the accused party should prevail, in accordance with the principle in dubio pro reo. This is an important change, particularly given that the National Financial Systems Appeal Council – CRSFN (Conselho de Recursos do Sistema Financeiro Nacional), which hears appeals from CVM decisions, has not adopted the same practice. 

Under Law 13.506/2017, one of the limits on fines leapt from BRL 500,000 to BRL 50 million. ICVM 607 now groups offences according to their seriousness, and sets out the maximum base penalty for each group. It is also establishes parameters for fixing penalties: the CVM’s Commissioners will decide on the base penalty, which can be increased or decreased in function of aggravating or mitigating circumstances. 

As examples of aggravating circumstances, ICVM 607 lists the systematic practice of the offending conduct, the use of fraud, sham or ruse to commit the infraction, significant losses resulting from the infraction, violation of fiduciary duties of office in committing the infraction, and concealment of evidence. Mitigating factors include confession of the infraction, the offender’s lack of prior infractions, the offender’s good faith, and the existence of a compliance program certified by a government agency or a recognized private entity. 

Fines can be increased by up to 25% for each aggravating circumstance and reduced by up to 25% for each mitigating circumstance. The penalty imposed cannot be a simple warning when the infraction would also constitute a crime. 

Another important aspect of ICVM 607 are the rules applicable to leniency agreements made with the CVM, which were introduced by Law 13.506/2017. Under these leniency agreements, which the Law refers to as “supervision agreements” (acordos administrativos em processo de supervisão), the CVM may exempt cooperating parties from liability, if previously unknown facts are brought to light through the party’s cooperation, or grant a reduction ranging from 2/3 to 1/3 of the applicable penalty, if an investigation is already underway. A Supervision Agreement Committee is responsible for negotiations on the agreement, and a leniency agreement proposal may be made at any time during an enforcement proceeding prior to the commencement of judgment. Once made, the terms of the leniency agreement will be kept confidential until the agreement is signed. 

After ICVM 607 was released, the CVM announced that the amounts to be paid under administrative settlements (termo de compromisso) will also be based on the table of base penalties attached to the Instruction. Accordingly, it is possible that amounts payable under administrative settlements may increase to bring them in line with the parameters established in ICVM 607.  

​This article belongs to BMA Review 66. Click here to download and read the whole issue.


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