Brazilian Securities and Exchange Commission issues resolution on insider trading
New regulation covers the use of privileged information, trading restrictions, trading policies and (dis)investment plans
On September 1, 2021, Brazil’s Securities and Exchange Commission (CVM) issued Resolution No. 44. The resolution concerns the disclosure of material information (acts or facts), information on securities trading, and securities trading before material acts or facts are disclosed. The resolution also revokes and substitutes CVM Instruction No. 358, which covered similar matters.
Although most of the rules of the abovementioned Instruction were maintained and solidified, there are certain changes related to misuse of privileged information, trading restrictions prior to the disclosure of financial and accounting information, obligations to adopt a disclosure policy for material acts or facts, individual investment plans and trading by investment funds. The main changes introduced by the new resolution are outlined below:
Misuse of privileged information
Resolution No. 44 formalizes a series of presumptions the CVM applies to cases involving alleged misuse of privileged information in securities trading:
- Presumption of use: A person who trades in securities with knowledge of undisclosed (inside) information makes use of it in such a trade. This presumption is also applied to any trading carried out by former managers of companies within three months of leaving their position;
- Presumption of Access: controlling shareholders, managers, board members, and the company itself (insiders) have access to all important information yet to be disclosed to the market. Members of technical or advisory bodies created via statutory provisions are not deemed to be insiders – therefore, this presumption does not apply to them;
- Presumption of confidential knowledge: when insiders and any person with a commercial, professional, or trusting relationship with a given company have access to important, undisclosed information, they understand that the information is privileged;
- Presumption of relevance: from the moment studies and analyses on these subjects commence, information is considered relevant if it pertains to corporate reorganizations, business combinations, changes to company control (including via executing, amending or terminating shareholder agreements), canceled registrations of publicly-held companies, changes to the environment or segment where shares are traded, as well as bankruptcy, judicial and extrajudicial organization requests.
From a practical standpoint, the presumptions remove the burden of proof from the prosecution and place it on the defendant – it is enough for the prosecution to establish that the accused was presumed to have access to inside information at the time of trading. The defendant is therefore responsible for providing evidence that these presumptions do not apply to their specific case.
These presumptions do, however, allow for evidence to the contrary to be admitted in specific cases. For example, they do not apply when stock is acquired as part of share-based compensation plans or repurchase agreements.
Restrictions on trading when in possession of inside information are also waived when companies trade in subscribed shares and other securities they have issued themselves. However, any such trading may not prejudice restrictions that apply to public offerings.
Trading prohibition period
During the fifteen days preceding the date a company reports its quarterly accounting information and financial statements, Resolution No. 44 establishes that insiders are prohibited from trading in the company’s securities (and any other securities referenced in the reporting), regardless of whether they actually possess relevant information.
Resolution No. 44 includes a rule for counting the 15-day period that excludes the day of disclosure, in line with previous CVM stipulations. Therefore, insiders may conduct trades with their company’s securities (and other referenced securities) on the same day financial and accounting information is disclosed, as long as this trading occurs after disclosing the information itself.
An exception applies to repurchase transactions (such as stock lending) intended to meet obligations assumed before the 15-day prohibition period. However, these transactions must be conducted:
- by financial institutions or other entities within the company’s economic group;
- as part of the normal course of business; and
- within pre-established parameters of the company’s trading policy.
Resolution No. 44 extends to anyone with an individual investment or divestment (trading) plan who, due to their relationship with the company, may potentially be subject to the resolution’s presumptions.
For both insiders and members of technical or advisory bodies created by statutory provision, trading plans must be authorized by the company’s trading policy. The resolution has also relaxed a rule that previously held a company’s board of directors responsible for verifying any trading occurred within the rules of its corresponding trading plan. Now, any of the company’s statutory bodies may oversee this matter.
However, the waiting period has been reduced from six months to three months for trading plans to take effect or be modified or canceled.
Resolution No. 44 removes the obligation for companies to adopt material act or fact policies unless they:
- are registered as a Category A Publicly-Held Company;
- have been authorized to trade shares on the stock exchange; and
- have outstanding shares.
Trading by investment funds
Similar to Instruction No. 358, Resolution No. 44 provides that trading conducted by investment funds with company insiders among their shareholders is not classified as indirect or third-party trading, provided that such shareholders cannot influence trading decisions.
The resolution provides for the presumption that trading decisions made by investment fund administrators and managers are influenced by shareholders, though evidence to the contrary is admissible. However, an exemption to this presumption applies to exclusive investment funds whose shareholders are insurance companies and pension funds, if these entities seek to transfer resources from certain pension (PGBL) or life insurance (VGBL) plans during the deferral period.
The presumptions, restrictions and reporting obligations on material acts or facts apply to any direct or indirect trading conducted inside or outside the regulated securities market, whether via controlled companies or third parties with a fiduciary or portfolio management agreement.