CVM opens public consultation to streamline regulations applicable to management entities of organized markets

On December 18, 2023, the Brazilian Securities and Exchange Commission (“CVM”) opened a public consultation with proposed amendments to CVM Resolution 135 (“CVM Resolution 135”), of June 10, 2022, which provides for regulated securities markets. The public consultation is mainly focused on Articles 44, 45, 46, 152 and 154, which regulate participation in the share capital of management entities. The public consultation will be open for contributions until March 15, 2024.

Initially, it is worth highlighting the scope of the main articles subject to the new public consultation opened by the CVM. Article 44 of CVM Resolution 135 establishes that the acquisition of shares exceeding 15% of the share capital with voting rights of management entities requires prior authorization from the CVM. Article 45, in turn, prohibits the holding of more than 10% of the share capital with voting rights by a participant of an organized market under the responsibility of the corresponding management entity.

In the event of non-compliance with the articles mentioned above, Article 46 establishes that there must be a limitation on the voting rights attached to participation in the share capital exceeding 15%, and such limitation must be provided for in the management entity’s bylaws.

In addition, as regards organized, over-the-counter management entities, Article 152 removes the limitations provided for in Articles 44 and 45 whenever the conditions designed to ensure the handling of conflicts of interest, the segregation of activities, and the CVM’s regulatory powers over shareholders, managers and participants are duly met.

Finally, Article 154 establishes the aspects to be considered by the CVM when exercising the prerogative of setting limits on the exercising of voting rights of an organized, over-the-counter management entity, as well as the independence requirements for the managers of the corresponding management entity.

Through this public consultation, the aim of the CVM is to evaluate the possibility of easing the restrictions on the acquisition of stakes in the share capital of management entities. As a basis for the research developed on this topic, the following information was requested from management entities:

1. the importance of maintaining the current regime of limiting the stake that an organized market participant can hold in the voting share capital of the entity managing the organized market in question;
2. the appropriateness of the 10% limit in force in the cases described in item (i) above, also indicating any alternative percentage considered to be appropriate, as well as the criteria used to determine it; and
3. the additional mechanisms required to mitigate conflicts of interest arising from a potential easement.

Arguments in favor of removing the specific limit imposed on participants

Numerous contributions received were in favor of revoking Article 45 of CVM Resolution 135, thus removing the limitation on participants holding more than 10% in the voting share capital of management entities in which they are authorized to operate. Some of the arguments raised include proposals of:

• The maintenance of the obligation to seek prior approval by the CVM in order to acquire a stake in the management entity’s voting share capital, regardless of whether the acquirer is a participant, in accordance with Article 44 of CVM Resolution 135, including new duties on transparency and conduct for management entities, aimed at handling potential conflicts of interest.
• The revocation of Articles 44 and 45 of CVM Resolution 135, including the replacement of a mechanism similar to that of Article 152 of CVM Resolution 135 regarding the organized, over-the-counter market, which requires the management entity to establish:
  • internal regulations and procedures to identify, prevent and adequately handle conflicts of interest arising from market management activities;
  • mechanisms for segregating activities, barring managers who are employees and agents of both the management entity and the participant; and
  • legal instruments ensuring CVM’s regulatory powers over shareholders, managers and participants.

At the non-statutory level, the key arguments in favor of revoking Article 45 of CVM Resolution 135 include: reduced entry barriers to competition between management entities; the high level of maturity of the Brazilian capital market in handling potential conflicts of interest; and the regulatory imbalance across the organized stock exchange and over-the-counter markets.

Arguments against removing the specific limit imposed on participants

The arguments against removing the specific limitation on participants revolve around the extent of the duties assigned to management entities in relation to participants, thus highlighting the need to protect management entities from excessive interference by its participants for the purposes of maintaining order and efficiency in the functioning of the markets.

Another opposing argument, which had already been raised in public hearing notice SDM No. 06/07, concerns the rise of potential conflicts of interest. This argument is based on the idea that such conflicts persist in the current structure of the securities market. Depending on the proportion of the stake held, the participant could exercise influence over the operational and institutional decisions of the management entity, encompassing both the formulation and application of the regulations for the operation of the organized market, as well as decisions on the creation, change and elimination of products and services.

In light of this, the removal of the specific limitation on participants could intensify the risk of commercial favoritism of shareholders to the detriment of other participants, since it would trigger the creation of an organized stock exchange market managed by a single participant, or a group of participants, holding the share capital of the management entity.

Aiming to avoid these conflicts of interest, the arguments against such removal advocate for supporting an increase in supervision by the regulator, which would lead to an increase in both the regulatory cost of the management entities and the demand on the regulator’s human and material resources.

Proposal for a regulatory amendment 

By comparing both domestic and international jurisdictions, as well as arguments for and against regulatory changes, the CVM proposed:

• replacing the absolute limitation applicable to participants, provided for in Article 45, through a systematic definition of a participation threshold, which triggers the duty to seek approval from the regulator, similar to what is currently provided for in Article 44;
• adopting a single threshold of 15%, applicable to participants and non-participants who intend to acquire a stake in the share capital of a management entity; and
• incorporating minimum conditions for prior approval by the CVM in the event of an organized market participant acquiring a stake in the share capital of a management entity.

The recommendation is that Articles 44 and 45 of CVM Resolution 135 be redrafted. Article 44 will establish a 15% limit, which requires prior approval from the CVM, and will also list the entities, individuals, and securities that must be taken into account when calculating the stake held. Article 45 will now cover the minimum elements to be considered in the CVM’s analysis for granting the authorization referred to in Article 44, including the additional elements that will be required if a stakeholder is a participant in an organized market.

With regard to the removal of the limit on participation in the share capital of management entities and the adoption of a prior approval methodology (in the event that the 15% limit is exceeded), the CVM suggested adopting a more objective safeguarding measure to prevent conflicts of interest. This means that participants must not have any ties with any members of the board of directors, regardless of the percentage of interest held in the share capital of the management entity. The board of directors can still be formed by non-independent members, provided that they do not have ties with participants in the organized markets.

In addition, the CVM established that it is the duty of the management entity to maintain a balance between its own interests and the public’s in order to maintain the proper functioning of organized markets, as provided for in Article 14 of CVM Resolution 135, which also applies to major shareholders.

By making these changes, the CVM seeks to ease the regulations on participation in the share capital of management entities by organized market participants, while preserving the safeguards that ensure access and equitable treatment of participants, as well as the proper functioning of organized markets.

Prior approval of other activities carried out by management entities

This matter is governed by Articles 11, 12 and 184 of CVM Resolution 135. The current regime establishes that the activities of the management entities listed in the clauses of Article 11 are not subject to prior and express authorization by the CVM, and that the exercise of other activities by management entities must be preceded by authorization by the CVM.

Article 12, in turn, restricts participation in the capital of third parties solely to companies that carry out related or similar activities. In other words, the limits on the exercise of other activities apply to the direct and indirect exercise by the management entity, through other companies, whether controlled or not.

Article 184 determines that a resolution on the exercise of new activities is a matter for the Collegiate Board of the CVM, regardless of the nature of the new activity, either directly by the management entity or through other companies, whether controlled or not.

In light of this, the result was the submission, to the Collegiate Board of the CVM, of cases of low-risk acquisitions of participation in the share capital of three companies by Brasil, Bolsa, Balcão (“B3”). In these cases, the Superintendence of Market and Intermediary Relations (“SMI”) judged that the risks arising from this transaction had been duly identified and that the mitigators of these risks were adequate. For this reason, an amendment to CVM Resolution 135 is justifiable in order to replace the need for authorization, in all cases, with prior notification, after which the SMI, through a substantiated decision on a case-by-case basis, can condition the start of the new activity or the completion of the corporate acquisition on approval by the Collegiate Board of the CVM.

Prior approval of regulations for management entities and central securities depositories

The provisions that regulate these matters (Articles 180 to 184 of CVM Resolution 135) establish the need for prior authorization by the CVM for a number of acts carried out by management entities. In addition, they establish the procedure applicable to the form and substance of: the request for prior approval; the deadlines for analysis of the request by the SMI; and the cases in which prior authorization must be resolved by the Collegiate Board of the CVM.

To this end, a proposal was submitted to distinguish between the matters subject to prior approval, so that only certain documents and substantial changes are approved in advance by the SMI or by the Collegiate Board of the CVM, as the case may be.

Change in the procedure for Loss Reimbursement Mechanism (“MRP”)  

The MRP is mainly aimed at ensuring that investors are compensated for losses resulting from the action or omission of entities participating in organized securities markets, in relation to the intermediation of transactions carried out in such markets or the securities custody service, in the cases listed in Article 124 of CVM Resolution 135.

The CVM’s latest experience in assessing appeals on decisions denying the MRP has led to considering a potential change in the procedure for appeals against MRP decisions, in line with the concentration of appeals in the entities in charge of maintaining the MRPs, including adjustments to the CVM’s supervisory activities. The aim would be to streamline the procedure and protect investors, since appeals would be analyzed and judged by the same entity, thus preserving the defendant’s right to both an adversarial proceeding and full defense.

Read more about the public consultation on the regulations applicable to management entities of organized markets.

Our Capital Markets team  is available to provide clarifications on the topics addressed, as well as additional information on the subject.