Jayme Petra de Mello Neto
Coordenador Jurídico do Escritório Marcos Martins Advogados
Introduction
Economic activity is dynamic and fast by definition. The growing shortage of goods, aggravated by the existence of high opportunity costs and limited credit available to producers, drives economic activity beyond natural limits and leads it to overcome obstacles through constant innovation in the means of acquiring and organizing factors of production, here understood as natural resources, labor, technology and capital.
With regard to the latter, in particular, economic activity specializing in financial activity innovates on a daily basis, seeking greater access to available resources and the fruition of credits, with the aim of carrying out economic development as a premise for achieving the common good.
Not only with the political aim of achieving the common good in mind, but also for the primary purpose of maximizing the company’s values, the financial activity of raising funds and circulating Treasury assets is innovative and of great value.
There are several innovative means of raising funds. Verbi gratia, currency, foreign exchange, direct investment, banking and securities. The latter are considered to be the most efficient, as they are directly related to the promotion of economic activity through Popular Savings, eliminating intermediate costs and expenses, such as the banking spread, defined as the difference between the rate at which funds are raised and the rate at which loans are granted.
Securities
The legal economic instruments referred to as securities are the external forms of raising and circulating the loans taken out with Poupança Popular.
The legal definition of securities, as a classificatory genre, still presents reasonable problems for the Doctrine, and has not been settled at all.
There is a strong understanding, pointing to a definition, especially in vogue among scholars of stock market law, which leads to scientific certainty. However, scholars who are more attached to the past and the structures inherited from commercial law deny its existence as an a priori concept. Either because they believe that the list of securities is an arbitrary collection by the legislator, which meets a momentary economic and financial demand and may vary in elements over time, or because they consider that the category of securities is nothing more than a special form of circulation of securities[1].
According to the current majority, securities are definable a priori and their characterization is general, encompassing some species. This position, in addition to being scientifically rigorous and reducing the empiricist prius, allows legal science to keep pace with rapid innovation in economic activity, leaving legislative gaps that will have to be integrated by dated principles and rules, which are extremely inconvenient for economic and social development, politically elected as the foundation of the Brazilian state.
And even under the aegis of maximizing efficiency or the value of the company, the a priori definition allows ethical and legal limits to be granted, avoiding the abuse of economic power and fulfilling a pacifying purpose.
Conceptualizing securities is a task that requires historical empiricism. Business law is closely related to the historical sciences, which develop their objects based on the repetition and continued use of a certain technique, and not the other way around, as is usually the case with the exact sciences.
It can be said with a degree of precision that the history of the definition of securities is recent, with the 1930s to 1950s in the United States being the high point.
The circulation of “company papers” is contemporary with the work of the West India Company in the Netherlands, around the 16th century. Already at this time, the trading of shares or warrants of this company can be identified on the trading floor of the city of Amsterdam.
The stock market was and still is the great apex and starting point for the distribution of other securities, which, due to specialization and opportunities, end up entering the trading cycle, enriching the forms of funding and generating greater opportunities for economic development.
However, the allocation of species to the securities genre has always been arbitrary, based on an empirical sense of similarity. Shares were joined by debentures, certificates and fund shares, among others.
It was only after the outbreak of the global financial crisis, triggered by the collapse of the New York Securities Exchange in 1929, that a conceptual definition of securities was created.
As a result of the crisis experienced after the 1929 crash, the state became more concerned with regulating the securities market. Legislative work culminated in 1933 in the Securities and Indentures Act in the United States, a law that became a reference for other countries around the world. Prior to this legislative moment, the definitions and regulations of securities were few and loose, left to the local taste of each legislator, adapted to a regional reality, which became known as blueskies laws.
The SeAct of 1933, now incorporated into the Uniform Commercial Code of the United States (Chapter 15), adopted a rather curious method of definition. The law listed all the financial instruments known at that time in an incredibly long list, giving them the character of securities.[2] At the same time, in France, the legislature chose to adopt a different methodology when it published the Monetary and Financial Code, making a complex mixed enunciation in an attempt to define securities[3]. The French model presented a stricter and more static list, which was not well accepted by the vast majority of local laws.
Later, still in the United States, a government body was created that would perform the functions of administrative police of the securities market and regulatory body, introducing the idea of self regulatory powers: the Securities Exchange Commission[4]. The role of the organizing body is to supervise the activity of capturing and trading securities, as well as improving the system by issuing disciplinary and integrative regulations.
The publication of the SeAct was not enough to give the term securities a legal definition. It was only with the advent of a United States Supreme Court judgment that this happened. The emblematic case is the agricultural company W. J. Howey Co., which offered the public rights to participate in the planting of oranges, by investing in land that could even be exploited directly, but which in fact would only generate profitability if exploited by Howey-in-the-hills, a company in the group. The Securities and Exchange Commission (SEC) took the view that this investment paper fell within the concept of a 1933 security and demanded registration. Objecting to the SEC, the case was taken to the American courts and was heard in 1946 by the country’s Supreme Court, which handed down a decision that became known as the Howey Test or HoweyRule.
According to the U.S. Supreme Court decision, any investment of money in a joint venture with the expectation of profit, where the profit comes exclusively from the efforts of third parties, is considered a security. This rule, applied to the SeAct list, leads to the adequacy of all the instruments mentioned therein, and is therefore the generalizing factor of the particularities described.
From this moment on, the vast majority of doctrine began to view securities under the Howey Rule. In this respect, Nelson Eizirik’s lesson is interesting:
“According to the Howey definition, security comprises the investment of money in a common enterprise, in which the expectation of profits depends solely on the efforts of third parties.”[5]
In Brazil, although it was already at the time of the aforementioned US laws, the national legislator neglected to take into account the advances brought to the matter by the Howey Rule, preferring the primitive technique of listing the types of securities. This was done in both Law No. 6.385/76 and Law No. 6.404/76. In its original list, Law No. 6.385/76 contained a timid list:
Art. 2 Securities subject to the regime of this Law are:
I – shares, beneficiary shares and debentures, the coupons of these securities and subscription warrants;
II – securities deposit certificates;
III – other securities created or issued by corporations, at the discretion of the National Monetary Council.
Sole Paragraph – Excluded from the regime of this Law are:
I – federal, state or municipal public debt securities;
II – foreign exchange securities held by financial institutions, except debentures.
This list has been added to over the years as the national capital market has improved.
It was only in 2001, with the advent of Law 10.303, that the list of securities in Law 6.385/76 became more extensive and included the Howey Rule:
Art. 2: The following are securities subject to the regime of this Law: (Wording given by Law no. 10.303, of 31.10.2001)
I – shares, debentures and subscription warrants; (Edited by Law 10.303, of 31.10.2001)
II – coupons, rights, subscription receipts and split certificates relating to the securities referred to in item II; (Redacted by Law no. 10303, of October 31, 2001)
III – securities deposit certificates; (Edited by Law 10303 of October 31, 2001)
IV – debenture bills; (Item included by Law 10303 of October 31, 2001)
V – shares in securities investment funds or investment clubs in any assets; (Item included by Law 10303 of October 31, 2001)
VI – commercial notes; (Item included by Law 10303 of October 31, 2001)
VII – futures, options and other derivative contracts whose underlying assets are securities; (Item included by Law 10303 of October 31, 2001)
VIII – other derivative contracts, regardless of the underlying assets; and (Item included by Law 10303 of October 31, 2001)
IX – when publicly offered, any other securities or collective investment contracts that generate participation rights, partnership rights or remuneration, including those resulting from the provision of services, the income from which derives from the efforts of the entrepreneur or third parties. (Item included by Law no. 10.303, of 31.10.2001)
It can be seen, then, that the idea of systematizing and conceptualizing securities in positive law is recent in the national experience. Previously, there was no generalizing criterion, which was only adopted in item IX of Law 6.385/76. If you take any of the species referred to in items I to VIII, you will find that they fit the generic concept of item IX.
The list of species, which took shape with the enactment of Law 10.303/2001, is already beginning to show signs of insufficiency in the face of the dynamics of economic activity.
At this point, it is necessary to ask whether legal regulation is essential for assigning the attribute of a security to any piece of paper.
The Securities and Exchange Commission
Along the lines of US law, the Brazilian legislator created an authority that acts as a market policeman and has some functions that integrate legal norms. This is the Securities and Exchange Commission, created by law no. 6.385/76. Article 8 of this law states:
Art . 8 The Securities Commission is responsible for:
I – to regulate, in compliance with the policy defined by the National Monetary Council, the matters expressly provided for in this Law and in the Corporations Law;
II – manage the registers established by this Law;
III – to permanently supervise the activities and services of the securities market, as referred to in Article 1, as well as the dissemination of information relating to the market, its participants and the securities traded on it;
IV – to propose to the National Monetary Council the possible setting of maximum price limits, commissions, emoluments and any other advantages charged by market intermediaries;
V – supervise and inspect publicly traded companies, giving priority to those that do not show a profit on the balance sheet or those that fail to pay the minimum mandatory dividend.
According to the national hermeneutic standard, rights and obligations can only be created by law, which is an attribute of the legislative function. Acts issued by administrative bodies are integrative in nature, and never create law. Their actions are infralegal, under the guidelines established by law. As an autarchy, executing the administrative function, its legal parameter is the law that established it. In the words of Celso Antonio Bandeira de Mello:
Administrative function is the function that the State, or whoever takes its place, performs in the intimacy of a hierarchical structure and regime and that in the Brazilian constitutional system is characterized by the fact that it is performed through infralegal or, exceptionally, binding infraconstitutional behaviors, all of which are subject to control of legality by the Judiciary.[6]
In a narrow and extreme legalistic view of the CVM, one must consider, from the content of article 8 of law 6.385/76 and the lessons of administrative law, that it can only enforce the rules relating to securities.
It so happens that the CVM, as an intrinsic characteristic of economic activity[7], cannot just monitor the market as a static observer and a cold repressor. Its actions must be guided by energetic diligence, paying attention to innovations in the economic and financial environment, otherwise its maintenance will be inefficient and inconvenient[8].
In 2009, the Brazilian Securities and Exchange Commission (CVM) innovated the types of known securities by introducing, through CVM Instruction 476, of January 16 of that year, the financial bill, which is a security subject to registration and regulated distribution. The definition of the financial bill will be discussed below, and at this point it is important to check whether this type of security could have been included by a mere CVM Instruction or whether it should have been preceded by a legislative reform to amend Article 2 of Law 6.385.
The CVM performs a dual function. At times, it is the securities market’s police force, and at other times, it is the body that integrates the legal rules that govern the scenario.
In its role as market police9, the CVM is responsible for identifying and regulating possible issues and distributions of securities that are taking place without registration, even those that are not being directed by a publicly traded company or a financial institution in the capital markets[9]. Its actions are aimed at the public interest, suppressing possible harmful behavior. These behaviors in the capital market have immense harmful potential, since the primary value is the People’s Savings Account, which houses a large number of individuals and a significant amount of capital.
The administrative police can manifest itself both through concrete and specific acts (for example, punishing a company that issues irregular securities) and through generic normative acts aimed at restricting and disciplining individual rights in the public interest.
CVM Instruction 476/2009 is not an act that creates rights by listing financial bills among securities, but rather an act of administrative market policing. When it became clear that a type of paper was in fact circulating that should potentially be classified as a security, the CVM, instead of remaining inert, carried out due diligence and regulated it, restricting individual rights in favor of the public interest of the legal holders of Poupança Popular.
Even if the issue of standardization by CVM Instruction 476/2009 is obstructed from the perspective of the absence of mention of the species in the list of article 2 of Law 6.385/76, it must be borne in mind that after 2001, with the enactment of Law. 10.303 and the adoption of the Howey Rule as the basic concept of securities, such an objection cannot stand. In effect, the financial bill constitutes a collective investment security, publicly offered, which generates a right of participation, partnership or remuneration, including as a result of the provision of services, the income from which derives from the efforts of the entrepreneur or third parties.
The Financial Bill
The National Monetary Council, which is part of the National Financial System, through Resolution 3,836 of February 25, 2010, authorized some financial institutions to issue financial bills.
Until then, this type of bill was non-existent in Brazilian law, so a study of it is in order.
Having authorized its issuance within the scope of the National Financial System, the National Monetary Council did not attempt to define what a financial bill is. Thus, the task fell to the Doctrine.
A financial bill is a security representing a loan agreement of a different nature.
Financial bills have a peculiar characteristic in terms of the issuing agent. Only multiple banks, commercial banks, investment banks, credit, financing and investment companies, savings banks, mortgage companies and real estate credit companies can issue financial bills. With this particularization of issuers, the financial bill gains a dual control aspect. One is controlled by the CVM and the other by the Central Bank, given the legal nature of the issuing agents.
The minimum redemption period for financial bills is 24 (twenty-four) months, and total or partial redemption before maturity is prohibited. After the minimum term of 24 months, bills issued with a longer term may include periodic payments (redemptions) every 180 days, as a minimum interval.
Objectively, financial bills cannot have an issue value of less than R$ 300,000.00 (three hundred thousand reais) per unit.
Their profitability may be linked to a fixed interest rate, whether or not combined with floating rates, and those issued with a foreign exchange variation rate are prohibited.
There is a peculiarity about financial bills that is not found in other securities. If the issuers of financial bills wish to hold them in treasury, they may only do so at a percentage not exceeding 5% (five percent) of the total issued, and any financial bills held in treasury by other financial institutions that are part of the same economic conglomerate must also be taken into account when reaching this ceiling. The rule must also be observed that the institution’s financial bills that are intended to be held in treasury may only be acquired on the stock exchange or over-the-counter market, and the financial institution may not hold them originally. What’s more, it can only acquire such bills if it does so on the over-the-counter market or stock exchange.
Finally, it is forbidden to issue financial bills with a subordination clause.
Financial bills, then, are defined as securities representing a loan agreement, with a minimum redemption period of 24 months, with only multiple, commercial and investment banks, credit, financing and investment companies, mortgage companies, savings banks and real estate credit companies as issuers.
In fact, financial bills should be understood as forms of debentures, since their discipline is identical to that of debentures[10].
On Public Distributions
Before addressing the particularly agile form introduced with the advent of financial bills, it is necessary to analyze, even briefly, what distributions of securities are.
The distribution of securities is regulated by the Securities and Exchange Commission Instruction 400 of 2003. Since then, this Instruction has served as a theoretical and interpretative basis, maintaining its basic structure and altering or including procedures as the market itself improves.
The definition of public distribution of securities is broad, covering both the strict acts of distribution and other operations. Cite:
Art. 3 Acts of public distribution are the sale, promise of sale, offer for sale or subscription, as well as the acceptance of a request for sale or subscription of securities, containing any of the following elements:
I – the use of sales or subscription lists or bulletins, leaflets, prospectuses or advertisements, intended for the public, by any means or form;
II – the search, in whole or in part, for undetermined subscribers or purchasers for the securities, even if carried out by means of standardized communications addressed to individually identified recipients, by means of employees, representatives, agents or any natural or legal persons, whether or not they are members of the securities distribution system, or, furthermore, if in disagreement with the provisions of this Instruction, the consultation on the viability of the offer or the collection of investment intentions from undetermined subscribers or purchasers;
III – trading in a store, office or establishment open to the public intended, in whole or in part, for undetermined subscribers or purchasers; or
IV – the use of advertising, oral or written, letters, announcements, notices, especially through mass or electronic media (pages or documents on the World Wide Web or other open computer networks and electronic mail), understood as any form of communication addressed to the general public with the aim of promoting, directly or through third parties acting on behalf of the offeror or issuer, the subscription or sale of securities.
The Instruction sets out types of conduct with the aim of covering and regulating the entire securities market, as can be seen.
The scope of the regulatory definition is to protect Popular Savings. This can be seen in the repetition, in the elementary sections, of the indeterminacy of investors and the publicity of any circulation. Through these acts, the rule aims to keep under CVM control the large-scale target to be reached when securities are dispersed on the capital market.
Public distribution is the rule, which, however, allows for exceptions.
Since what is at stake in the general rule is Popular Savings, if this is removed from potential reach, either because the amount issued and its circulation will not lend itself to serving the ordinary population, or because the distribution is related to a capitalization procedure aimed at one or a small group of investors, the rule may be set aside.
CVM Instruction 400/2003 itself highlights this reality when it establishes, in Article 4, the exemption from distribution registration:
Art. 4 Considering the characteristics of the public offer for the distribution of securities, the CVM may, at its discretion and always observing the public interest, adequate information and investor protection, waive registration or some of the requirements, including publications, deadlines and procedures provided for in this Instruction.
§ Paragraph 1 In the waiver mentioned in the caput, the CVM will consider, cumulatively or separately, the following special conditions of the intended transaction:
I – the category of registration as a publicly-held company (art. 4, § 3, of Law no. 6404, of December 15, 1976);
II – the unit value of the securities offered or the total value of the offer;
III – the securities distribution plan (art. 33, § 3);
IV – the distribution takes place in more than one jurisdiction, in order to make the different procedures involved compatible, provided that at least equal conditions with local investors are ensured;
V – characteristics of the exchange offer;
VI – the target audience of the offer, including its geographical location or quantity; or
VII – be aimed exclusively at qualified investors.
Therefore, with a target audience of qualified investors in mind, there is nothing more coherent than carrying out a faster and less formal form of distribution, dispensing with registration.
Another form of distribution that is quicker and takes into account the special qualifications of the investor are the securities distribution programs provided for in CVM Instruction 400. By means of these, the public company can carry out scheduled distributions of securities, under the conditions set out in the program, without the need for registration and approval for each issue. The modality is provided for in article 11:
Art. 11: A publicly-held company that has already made a public distribution of securities may submit a Securities Distribution Program (“Distribution Program”) for filing with the CVM, with the aim of making public offerings of the securities mentioned therein in the future.
The primary objective is to speed up the issue of securities, making it possible to raise funds quickly.
The distribution programs are valid for two (2) years, and the information and data in the prospectuses must be updated every year, on the date on which the information is due to the CVM or within a maximum of one year, whichever comes first.
Once the distribution program has been filed, the issuance of securities will only require the preparation of an issuance supplement, sent to the CVM.
Continuous Distribution Programs
The peculiar nature of the specific security and its issuers means that financial bills have a different applicability to debentures.
By tradition, debentures are designed to raise funds for large and important investments in companies. It is a loan taken out in consideration of an expansion of assets. They are not suitable for cash circulation or small investments.
However, considering the peculiarities of the issuers of financial bills, we can see that they will be used for medium-term funding and that the amount raised will not necessarily be used to make a significant investment in the issuer’s assets, but rather will serve as backing for new bank loans, new financial operations, etc?
With this in mind, one could not think of an issue registration procedure that followed the same degree of formality and processing time.
On December 16, 2010, the Securities and Exchange Commission published Instruction 488, which aims to regulate the trading of financial bills, thus creating a simplified means of registering and distributing these securities, under the name “Continuous Distribution Program”, which aims to enable multiple distributions without having to re-register for each one.
A Continuous Distribution Program is defined as the registration of a securities offering (CVM Instruction 400/2003) which has the characteristic of automatically registering the distribution of financial bills of multiple series simultaneously or multiple distributions of the same series.[11] The purpose of the Continuous Distribution Program is to register and distribute these securities.
The Continuous Distribution Program has as its material object only financial bills, created as a result of Resolution No. 3,836/2010 of the National Monetary Council. However, there is a restriction on the number of issuers that can apply for it.
The list of issuers in CVM Instruction 488/2010 is smaller than the list in the Resolution, leaving aside financial institutions that do not conform to the concept of a bank. In other words, although they are authorized to issue financial bills, credit, investment and financing companies, mortgage companies and real estate credit companies will not be able to use the Continuous Distribution Program to trade the securities. If they are issued by these financial institutions, the financial bills must comply with the common distribution registry, in accordance with the general part of CVM Instruction 400/2003.
This is because these financial institutions have, as a rule, greater liquidity and equity, and do not expose Popular Savings to intense risks, as the governing value of the Capital Market. In addition, the very value of the financial bills, combined with the speed of issuance intended in the Program, implies targeting an issuer that has a large potential number of investors at its disposal, better fitting the banking image than credit companies.
CVM Instruction 488/2010 introduced the possibility of the National Bank for Economic and Social Development (BNDES) being an issuer of these securities and registering a Continuous Distribution Program. The aforementioned financial institution does not have a specific role in one of the hypotheses authorized by the National Monetary Council. However, as a major promoter of national economic activity, it is highly recommended that the BNDES be included among those that can issue financial bills and put them into circulation through the continuous distribution program.
There is no incompatibility in the CVM’s inclusion of the financial institution without mentioning it in the category of authorized issuer, in the absence of specific mention in Resolution 3,836/2010 of the National Monetary Council.
Once the continuous distribution program has been authorized, the issuer will be bound to comply with obligations which, if not complied with, will be sanctioned with the loss of the right to enroll in the continuous distribution program, the maintenance of information obligations and, more severely, the suspension of trading in the securities issued under the continuous distribution program.
An interesting point about the continuous distribution program is that it allows the issuer to benefit from the automatic registration of distributions, which is an expedited procedure reserved for issuers with large market exposure[12].
The process becomes agile and continuous.
A major difference between the continuous distribution program and other value distribution programs is the absence of an expiry date. It is understood that the two-year expiry date provided for in the general rule does not apply to continuous distribution, since the purpose of continuous distribution is to enable frequent capitalization of the financial market as a whole and not just the securities market.[13] This is not the case with continuous distribution.
However, it must be assumed that the rules on updating prospectus information must be observed, as a way of complying with the principle of eliminating informational asymmetries, especially with regard to principal-agent relationships, moral hazards and adverse selection[14]. This position on informational prevalence, already established in the capital market as an informational value, leads to a greater degree of reliability. Instruction 488/2010, maintaining the full disclosure policy, also provides that the Continuous Distribution Program and financial bills will receive prominent information on the issuer’s and distributor’s website on the World Wide Web.
Conclusions
Having exposed the financial bill as a security, defended its creation by means of Resolution 3.836/2010 of the National Monetary Council, with no need for a law amending the list in Law n. 6.385/76, the aim has been to provide a legal profile of the security in question, which still lacks a doctrinal basis.
The exposure of the security in question becomes more relevant with the introduction of the Continuous Distribution Program, a new model for registering the issue and distribution of securities, which basically meets the funding requirements of institutions in the strict financial market.
It has been shown that the Continuous Distribution Program does not fit in with the current securities distribution programs, which originated in CVM Instruction 400/2003. It has essential differentiating characteristics such as the absence of a validity period, the subjective relevance of the issuer and the use of the automatic issue registration process, previously reserved for issuers with large exposure to the market.
This is not an exhaustive examination, but a specific investigation of the topic presented.
Bibliographical References
BANDEIRA DE MELLO, Celso. Course in Administrative Law. 14. ed. São Paulo: Malheiros, 2002.
COSTA COELHO, Paulo Magalhães. Manual of Administrative Law. 1st Ed. São Paulo: Saraiva, 2004.
EIZIRIK, Nelson et al. Mercado de Capitais Regime Jurídico. Rio de Janeiro: Renovar, 2008.
MELLO FRANCO, Vera Helena and SZTAJN, Rachel. Manual de Direito Comercial. v. 2. São Paulo: Revista dos Tribunais, 2005.
YAZBECK, Otávio. Regulation of the Financial and Capital Markets. Rio de Janeiro: Elsevier, 2007.
[1] Vera Helena de Mello Franco and Rachel Sztajn oppose the idea of securities as collective investment contracts: “It is impossible to classify securities solely under the broad notion of negotiable interest, participation in a collective investment contract, mass issuance, offering to the public or any of the characteristics listed above.” (MELLO FRANCO, Vera Helena and SZTAJN, Rachel. Manual of Commercial Law. Vol. 2. 1st ed. São Paulo: Revista dos Tribunais, 2005. Page 103).
[2] The original text of the Securities and Indentures Act of 1933 reads as follows:
Definitions
When used in this title, unless the context otherwise requires–
The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
[3] Article L 211-2. Securities are securities issued by moral persons, whether public or private, transferable by inscription in a bank account or by tradition, which confer rights identified by category and give access, directly or indirectly, to a share in the capital of the moral person in question or to a general right of creation over its assets. Securities also include parts of common placement funds and common creation funds.
[4] The Securities Exchange Commission was introduced in the United States by the Securities Exchange Act of 1934 (SEAct). Section 4 — Securities and Exchange Commission
The Securities Exchange Act of 1934 defines it as follows:
Establishment; composition; limitations on commissioners; terms of office
There is hereby established a Securities and Exchange Commission (hereinafter referred to as the “Commission”) to be composed of five commissioners to be appointed by the President by and with the advice and consent of the Senate. Not more than three of such commissioners shall be members of the same political party, and in making appointments members of different political parties shall be appointed alternately as nearly as may be practicable. No commissioner shall engage in any other business, vocation, or employment than that of serving as commissioner, nor shall any commissioner participate, directly or indirectly, in any stock-market operations or transactions of a character subject to regulation by the Commission pursuant to this title. Each commissioner shall hold office for a term of five years and until his successor is appointed and has qualified, except that he shall not so continue to serve beyond the expiration of the next session of Congress subsequent to the expiration of said fixed term of office, and except (1) any commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his predecessor was appointed shall be appointed for the remainder of such term, and (2) the terms of office of the commissioners first taking office after June 6, 1934, shall expire as designated by the President at the time of nomination, one at the end of one year, one at the end of two years, one at the end of three years, one at the end of four years, and one at the end of five years, after June 6, 1934.
[5] Nelson Eizirk et alli. Mercado de Capitais Legal Regime. 2nd ed. Rio de Janeiro: Renovar, 2008. Page 32.
[6] BANDEIRA DE MELLO, Celso. Course in Administrative Law. 14th Ed. São Paulo: Malheiros, 2002. Page 34.
[7] To illustrate the point, the capital market is always part of the idea of financial innovation. “The process of development of contemporary economies, which are predominantly monetary, has led to the emergence of various instruments which, as substitutes for money and based on a process of specialization, make it possible to meet certain needs of economic agents, especially with regard to risk management. These arrangements and instruments are the fruit of what is known as “financial innovation.” (YAZBECK, Otávio. Regulação do Mercado Financeiro e de Capitais. 1st Ed. Rio de Janeiro: Elsevier, 2007. Page 62)
[8] The CVM’s activity is called, in the Economic Theory of Law, “capture”, defined as: “The theory of ‘capture’, originally developed by political scientists, considers that regulation is nothing more than a response to the demands of organized interest groups, each of which acts to maximize the interests of its members; over time, regulatory agencies would tend to be captured by the regulated industries, which usually constitute the strongest pressure groups with the most resources to lobby on the processes of drafting and applying the law”. (EIZIRIK, Nelson ET alli. Mercado de Capitais Legal Regime. 1st Ed. Rio de Janeiro: Renovar, 2008. Page 15).
[9] Paulo Magalhães da Costa Coelho, PhD in State Law and Judge of the São Paulo State Court of Justice, explains what police power is. Always didactic: “Police power is the attribution of the Public Administration that aims to discipline and sometimes restrict the exercise of individual rights and the use and enjoyment of goods for the benefit of the public interest or the State itself.” (COSTA COELHO, Paulo Magalhães. Manual of Administrative Law. 1st Ed. São Paulo: Saraiva, 2004. Page 68). The author continues, clarifying that: “Police power can be expressed both through general acts of a normative nature and through concrete and specific acts.” (op. Cit. Page 69).
[10] It is worth mentioning the provision of Law 6.404/76, referring to debentures, in order to demonstrate the similarity: Art. 52. The company may issue debentures which will grant their holders credit rights against it, under the conditions set out in the deed of issue and, if any, in the certificate.
[11] The concept is drawn from a combinatorial analysis of the elements in items I to III of § 2 of Art. 13-A of CVM Instruction 400/2003. § Paragraph 2 The Continuous Distribution Program allows:
I – the use of an automatic distribution registration procedure, under the terms of Articles 6-A and 6-B of this Instruction, for distributions of the securities provided for therein;
II – the registration of the distribution of multiple series of financial bills simultaneously; and
III – the registration of multiple distributions of the same series of financial bills.”
[CVM Instruction 482, of April 5, 2010, amended CVM Instruction 400/2003 to include automatic registration of distribution for companies with large market exposure, due to their degree of reliability with investors in general. To wit:
Art. 6-A The registration of a public offering for the distribution of securities issued by a company with large market exposure, as defined in a specific rule, will be granted automatically.
§ Paragraph 1 The application for automatic registration must be submitted to the CVM by the offeror, together with the institution leading the distribution, and must be accompanied by the following documents:
I – specific request for the use of the automatic registration procedure;
II – a reasoned statement that the issuer falls within the definition of an issuer with large exposure to the market;
III – the documents set out in Annex II;
IV – Prospectus, preliminary or definitive, drawn up in accordance with Annex III; and
V – in the event of the use of a Preliminary Prospectus, proof of publication of the notice provided for in Article 53 of this Instruction and a draft of the commencement announcement.
§ Paragraph 2 – It is forbidden to submit, in the automatic registration procedure, a request for exemption from the requirements set out in this Instruction.
Art. 6-A included by CVM Instruction 482 of April 5, 2010.
Art. 6-B The registration of a public offering for the distribution of securities referred to in Art. 6-A shall take effect five (5) business days after the application is filed with the CVM.
§ Paragraph 1 The offer registered under the terms of the heading shall only commence after:
I – publication of the Announcement of Commencement of Distribution; and
II – the availability of the Definitive Prospectus and its submission to the CVM, under the terms of art. 42, § 3.
§ Paragraph 2 The only information that may be added to the Announcement of Commencement of Distribution and to the Final Prospectus in relation to the documents referred to in Paragraph 1 of Article 6-A submitted at the time of the application for registration of distribution is the price or value of the remuneration.
§ Paragraph 3 The CVM may, at any time:
I – demand that the information provided be brought into line with the relevant legal and regulatory provisions;
II – convert the automatic registration procedure into the analysis procedure provided for in articles 8 and 9; or
III – suspend or cancel the distribution offer, under the terms of art. 19.
Art. 6-B included by CVM Instruction 482 of April 5, 2010.
[13] In the words of Otávio Yazbeck: “Most analyses, however, are based on just one of those essential purposes, considering that the basic function of the financial system is to mobilize and channel resources into productive activities, in other words, to transform savings (unconsumed surplus) into investment. From then on, the genre “financial market” is split into two types: the financial market in the strict sense and the “capital market”. In the first of these (which could also be called the “credit market” or the “banking market”), the mobilization and channelling of surpluses is carried out through a financial intermediary who stands between the investor and the beneficiary of the investment. This would be, as already mentioned, one of the typical roles of banking institutions, which raise money (through passive operations) and pass it on to third parties (through active operations), in both cases acting as counterparties to their clients. The remuneration of these institutions is initially a spread, i.e. the difference between the cost of raising funds (what is paid to the original investor) and the cost charged to the final beneficiary of those funds. Because of the centrality of the intermediary, the banking market is, as Mosquera (199b, p. 259) explains, a “financial intermediation” market.
On the other hand, in the capital market (the “securities market”), the financing relationship is established directly between the provider of funds and its beneficiary, through the issuance by the latter of primary or direct bonds (Andrezo and Lima, 2002, p. 05), such as shares, debentures or commercial papers, acquired by the former. Intermediary structures are also created for this type of market, both for financial transactions and to allow for an efficient approach between the interested agents. In this case, however, the intermediaries are merely interveners (and no longer counterparties), providing approximation, representation or settlement services for their clients, the real parties. Here, as Mosquera (199b, p. 260) points out, there is a “banking disintermediation” market. (op. cit . Page 132)
[14] Principal agent relationships are those in which the economic agent, using his knowledge, acts for his own benefit, to the detriment of those with more limited knowledge. Moral Hazard, in turn, is characterized when it is difficult for the principal to monitor the agent’s actions, revealed in hidden actions. In the end, adverse selection can be seen in informational asymmetry, leaving hidden knowledge.
