13/02/2023|Notícias e InformativosMarket roundup: Brazil’s market regulators have a reach problem

With all eyes on Americanas’ BRL 20 billion accounting scandal, the CVM is also under scrutiny.

 

Brazil’s securities regulators too tiny to perform

 

In the last five years alone, Brazil’s Securities and Exchange Commission (CVM) has seen the country’s regulated capital market go from nearly BRL 19 trillion (USD 3.64 trillion) to over BRL 27 trillion. Its budget, meanwhile, shrank from BRL 27 million to BRL 24 million over the same period.

State of play. Brazilian markets are grappling with the country’s biggest accounting scandal ever — the “inconsistencies” of BRL 20 billion on the books of retail giant Americanas.

• But while the embattled retailer faces ten investigations and two criminal inquiries, the securities regulator is also under scrutiny, as investors want to know how the CVM let a scandal like this happen.

CVM woes

 

Why it matters. For over a decade, CVM executives have warned the government and Congress that, as Brazil’s capital market grows, the regulator’s ability to fund its own work decreases.

• With a bigger budget, the CVM could invest in technology to monitor companies. Also, a larger staff would allow for nonstop inspection plans divided by issue-based committees, according to former CVM chairperson Luciana Dias.
• Today, the CVM elects priorities within a biannual supervision plan.

What the law says. Created in 1976, the CVM is an autonomous body linked to the Finance Ministry. And since 2001, a federal law allows the regulator to use the amount collected in inspection fees to cover its expenses and investments.

Yes, but … True autonomy exists only in name. Every year, the CVM needs to present a budget proposal to the Finance Ministry. That proposal can be tweaked by the ministry and Congress. Last year, CVM almost saw its budget cut in half — but managed to avoid the blow.

By the numbers. Inspection fees raised over BRL 930 million. Its budget for payroll and costing amounts to BRL 240 million, with only BRL 24 million for “discretionary expenditures.” That is, regulatory projects or new tech, among others.

• More than BRL 670 million collected in fines contributed to the federal government’s primary surplus. For 2023, the federal budget sets BRL 25 million in discretionary spending for CVM.

A comparison. The U.S. Securities and Exchange Commission had a USD 2.98 billion (BRL 15.6 billion) budget to spend last year. Moreover, the U.S. watchdog has over 4,500 employees distributed in six divisions and 25 offices across the U.S. The CVM has around 600 active staff members and offices in just three cities (São Paulo, Brasília, and Rio de Janeiro).

• “People often underestimate this aspect, but having regulator agents close to market participants is essential to scrutinize and catch irregularities before they escalate,” Romeu Amaral, a lawyer specializing in M&A and the capital market, tells The Brazilian Report.

Staff. There has not been a public tender for hiring new CVM employees since 2010. Currently, there are 177 vacant positions, and just last year the regulator asked to fill 127 of them in 2023, but this needs the approval of Finance Minister Fernando Haddad and President Luiz Inácio Lula da Silva.

A single fund. The current CVM chairman, João Pedro Nascimento, also wants to present a proposal for creating a “market improvement fund,” funded with at least part of the resources from inspection fees.

• This would put the CVM’s money in a separate jar, which would bring not only more resources, but more predictability to the regulator’s budget. With new rules making the collection of inspection fees annual, this makes even more sense.
• Besides the new government’s green light, the idea would probably need Congress’s support, as it may depend on changing legislation.

High expectations. A bigger and better-funded CVM would probably mean more control over the regulated market but would not necessarily stop fraud attempts.

• “Fraud will happen no matter what,” warns Mr. Amaral. But a stronger CVM would definitely translate into agility to guide the industry, reorient participants towards more efficient practices, and encourage the sector’s growth possibilities, such as recent initiatives in agribusiness, crowdfunding, receivables-backed bonds, and crypto assets.
• “Without resources and people, CVM is far from its potential, albeit doing an amazing job within its current possibilities,” ponders the lawyer. In other words, the sector expects from CVM the same proinnovation attitude as that of the Central Bank.