Sanctioning Activity in the Capital Market: Main Objectives, Justification, and Imperatives of Legal Certainty
(Published in RSDE, Semiannual Journal of Business Law, no. 24)
Sanctioning Activity in the Capital Market: Main Goals, Justification and Legal Certainty Imperatives
Ivo Waisberg[1]
Gustavo Rabelo Tavares Borba[2]
Luiza Azevedo Coelho da Rocha[3]
Summary: This article analyzes the main characteristics of the administrative sanctioning process at the CVM (Brazilian Securities and Exchange Commission) as an integral part of its regulation. lato sensu. It addresses, in particular, how, in the face of perplexities created by the interpretative evolution of some legal and regulatory norms, legal certainty can be affected by sanctioning activity, a situation in which the initiation of a sanctioning process may even be inadvisable before the regulator's clear position on the subject becomes effectively public and the norms are correctly assimilated by the market in general.
Keywords: administrative sanctioning process, legal certainty, new interpretation of rules, assimilation period.
Abstract: The paper analyzes the main aspects of the punitive administrative procedure at the CVM as part of the broad regulatory activity. In particular, it addresses how, in view of perplexities created by the interpretative evolution of some legal and regulatory standards, legal certainty may be affected by the sanctioning activity itself, a situation in which the bringing of a punitive procedure may even be discouraged before the regulator's clear position on the topic becomes public and rules become correctly assimilated by the market in general.
Keywords: punitive administrative procedure, legal certainty, new interpretation of regulatory rules, period of assimilation.
SUMMARY
2. Role of the Administrative Sanctioning Process 4
3.1. Evolution of the Concept of Securities. 9
3.2. Condohotel Classification within the CIC Concept. 11
4. Precedent Group 2 – Spoofing and Layering as Price Manipulation Techniques. 13
4.1. Spoofing and Layering. 14
4.2. Compliance with ICVM 08/79. 16
5. Legal Certainty in the Administrative Sanctioning Process 17
5.1. Legal Certainty in Brazilian Law. 18
5.2. Legal Certainty in Condohotel and Spoofing/Layering Precedents. 20
1. Introduction
This article provides a panoramic overview of the main purposes and characteristics of the sanctioning process, focusing its analysis on the issue of legal certainty in the face of complex situations arising from interpretative or regulatory developments that may, in certain contexts, generate a high degree of perplexity, making sanctioning activity inadvisable before the regulator has effectively disclosed a clear position on the matter.
For the development of this study, as a factual and pragmatic example of the hypothesis, two groups of precedents from the Securities and Exchange Commission (CVM) were adopted that dealt with legal certainty and, justifiably, arrived at diametrically opposed conclusions regarding the possibility of punishment by the regulator. The first set[4] The first group of precedents discussed the issue of classifying sales of units or ideal fractions of condo-hotel developments as public offerings of securities, while the second group[5] The precedents analyzed the possibility of punishing participants who, through the use of technological means, managed to manipulate the price of securities through "strategies" conventionally called "“"spoofing"” and“layering”.
Before addressing the topic based on precedents, however, the authors' reasoning on the function and purposes of the administrative sanctioning process in the regulatory environment of the capital market will be developed. Chapters 3 and 4 will explain each of these groups of precedents, and then, in Chapter 5, the issues of legal certainty within the scope of the administrative sanctioning process will be explored, with emphasis on how the concept has been applied in each of the cited groups of precedents and, more recently, in the issue involving the activity of digital influencers.
2. Role of the Administrative Sanctioning Process
As established by Law 6.385/76, in its article 8, the CVM (Brazilian Securities and Exchange Commission) has a very broad regulatory competence, through which the market regulator can create rules and interpretations that are capable of making the securities market safer and more efficient. The mere production of regulatory rules stricto sensu, However, this alone is not sufficient to guarantee that the conduct of regulated entities conforms to what has been established in the regulation, hence the need for the CVM (Brazilian Securities and Exchange Commission) to also provide guidance, oversight, and... enforcement and the eventual punishment of deviant conduct[6], thus ensuring that the regulation lato sensu to function properly, with the effective and real alignment of the regulated entities' conduct with what is deemed appropriate by the legislation.
In this context, the CVM's (Brazilian Securities and Exchange Commission) superintendencies will be responsible for guiding and overseeing the market, as well as, in the face of evidence of an infraction, initiating administrative sanctioning proceedings or adopting other supervisory measures, such as issuing warning letters.[7]. Moreover, the most recent reform of Law 6.385/76 (by Law 13.506/17) made it clear that the CVM (Brazilian Securities and Exchange Commission) must (emphasis added) analyze the advisability of initiating the sanctioning process in light of the relevance of the regulated entity's deviant conduct and the need to prioritize the most serious offenses:
Art. 9º (…) § 4o In investigating violations of securities market legislation, The Commission will prioritize serious offenses, where penalties will have a greater educational and preventative effect. for market participants, and The administrative sanctioning process may be refrained from initiating, considering the low relevance of the conduct, the minor nature of the harm to the protected legal interest, and the use of other supervisory instruments and measures that it deems more effective. (emphasis added by the author).
It should be emphasized from the outset that, when punishing a deviant participant, the regulator's main objective is not the punishment itself, but rather, through it, to ensure that the behavior of those regulated conforms to the rules that the CVM (Brazilian Securities and Exchange Commission) considers most appropriate for the market, thus sending a message to the market in general that deviant behavior will not be tolerated, and that, even from an economic perspective, it would be more convenient for participants to observe the rules of regulation.
Unlike criminal proceedings, where the idea of strict legality prevails and the penalty must be applied as objectively as possible upon proof of the infraction, administrative sanctioning proceedings involve a more open-ended legality (within, of course, certain parameters established by law), which can be complemented by regulatory provisions that are not necessarily closed in nature. The penalty should not be applied automatically, since, as already mentioned, the main objective is to shape the conduct of market participants (the retribution for wrongdoing, when present, is secondary), so the penalty must be justified and customized according to these objectives and the individual characteristics of each participant.
To use a simple example, one could say that the same irregular conduct might justify a substantial penalty for a participant who repeatedly violates the rules and traditionally refuses to follow the regulator's guidelines, and a lenient penalty, or even the adoption of alternative supervisory measures, for a participant who has a history of respecting the rules and who, upon being alerted to the irregularity, immediately took all measures to reverse the situation and compensate any potentially harmed parties.
In line with Article 11, § 1, of Law 6.385/76, the CVM (Brazilian Securities and Exchange Commission) must consider the principles of proportionality and reasonableness when examining the seriousness of the conduct and apply a sanction appropriate to the peculiarities of the actual situation. In this aspect of individualized assessment, it is even possible, as seen above, not to initiate a sanctioning process. Therefore, the determination of the penalty is a much more complex activity in the administrative sanctioning process than in the criminal process, since the penalty must be justified according to these objectives that go beyond the specific infraction under analysis.
For these reasons, the administrative sanctioning process is said to be an instrument of regulation. lato sensu, Therefore, its primary goal is to educate the market and prevent illicit conduct. Through it, the CVM seeks to guarantee a healthy economic environment where participants can compete on a level playing field, without some observing regulatory rules while others disobey them, which could generate various problems, including the granting of competitive advantages to offenders over others, since... compliance With regulatory rules, it almost inevitably generates some cost for those being regulated.
In this context, the administrative sanctioning process gained relevance in the second half of the last century, given the unsatisfactory response provided by the Judiciary regarding the judgment of infractions committed in complex economic environments (capital markets, competition issues, energy markets, water resources, etc.), both due to the need for specialized technical knowledge to analyze these issues (which would not be within the scope of the Judiciary's general knowledge), and due to the strict typicity of criminal law, which would be incompatible with the dynamics of illicit acts in the economic area – the pace of evolution of practices and, consequently, of illicit acts, could never be adequately captured by typical conducts defined in a closed manner in formal law.
The speed at which these markets change and evolve demands less permanent and more flexible rules, produced by professionals specialized in each segment. Therefore, regulation, in addition to being renewed more rapidly, allows for more open rules that can be applied more efficiently in the face of evolving realities and, consequently, more effectively combat illegal activities committed in these highly sophisticated and specialized environments.
It should also be noted that the sanctions applicable within the administrative sanctioning process are generally more lenient.[8] than in ordinary criminal proceedings (where there is the possibility of restriction of liberty), the level of evidence required for administrative conviction is naturally lower. In this sense, it is not uncommon for administrative proceedings to be based on circumstantial evidence.[9], provided they are convergent and unambiguous[10], and rebuttable presumptions that, if not refuted by the defense, may be sufficient to apply a specific administrative sanction.
Therefore, in the administrative sanctioning process, and provided that the principles of full defense and presumption of innocence are observed, the standard of "preponderance of evidence" is used, unlike what occurs in criminal proceedings, in which the conviction of the defendant requires the judge's conviction beyond any reasonable doubt. This is one of the reasons why the administrative process is sometimes more suitable for punishing infractions in the capital market, where cases in which the evidence is not unequivocal (there is no "body" or "weapon of the crime") are not uncommon, so that the sum of circumstantial evidence can lead to the conviction of the accused, thus allowing a more adequate response from the State to these complex situations, even when the level of evidence is not sufficient for a criminal conviction.
The study of the nature and objectives of the administrative sanctioning process is certainly a fascinating and complex topic that would require an extensive doctrinal and pragmatic approach to the subject, which would be incompatible with the space available here. For a more in-depth analysis of the sanctioning scenario in general, we recommend reading Alice Voronoff's excellent monograph on the subject: Administrative Sanctioning Law in Brazil – Justification, Interpretation, and Application[11].
Following this brief, general introduction to the topic of sanctions, we will restrict our scope to the regulatory environment specific to the capital market, where the characteristic dynamism of this environment demands that the classifications of conduct be "open" and that the conduct be rigorously analyzed in light of the specific case. An emblematic example of this reality is CVM Instruction 08/79 (the oldest CVM instruction), which regulates, in a very open and summary manner (in a single article, subdivided into 4 items), the offenses of artificial supply and demand conditions, price manipulation, fraudulent operations, and unfair practices. Due to these characteristics, the instruction has managed to adapt to the new realities of the market and, precisely for this reason, is still intensely used today.
In this context, balanced regulation and the corresponding enforcement Adequate conditions are fundamental for the efficient functioning of the market, since it is essential that potential investors perceive the securities trading environment as sufficiently safe for conducting operations, which would tend to make them feel confident in investing their resources with the aim of obtaining reasonable returns. Conversely, in a market where the regulator neither oversees nor punishes wrongdoing, investors will either refrain from investing (fearing the irregularities that proliferate there) or demand exceptional returns on their investments (to compensate for the risks of expropriation). This creates an inefficient market, with less robustness, and where the cost of capital is very high for publicly traded companies seeking to raise capital.
It should be noted, however, that the solution to achieving an efficient market would not simply be to create a heavily regulated and monitored environment, as excessive regulation would also render the market inefficient due to the costs necessarily imposed by this exaggerated regulation. The virtue of regulation, as is usually the case with almost everything, lies in balance, so there is a relationship between the degree of regulation and the costs arising from it. In this equation, there is a point of efficiency optimization, when a balanced regulation is achieved, which prevents most illegal activities but does not disproportionately burden market participants with regard to... compliance regulatory.
It should be kept in mind that a market without illegal activities is an unattainable ideal, since there will always be agents with deviant behavior. This is combated not through excessive regulation that generates a disproportionate cost for all participants, but rather through efficient market oversight and well-conducted sanctioning processes, which will make acting in violation of the established rules less attractive.
It is therefore clear that regulation, oversight (enforcementThe regulatory process and the sanctioning process constitute the three bases upon which the same overarching objective is sought: to guarantee an efficient market in which participants observe the rules established by regulation. These more general considerations regarding the role of the sanctioning process as part of regulatory activity... broad sense This appears important for the proper development of the reasoning that follows regarding legal certainty and the caution that must be exercised in applying new interpretations to past situations.
3. Precedent Group 1 – Classification of collective investments in condo-hotels within the concept of Securities (CIC – Collective Investment Contract)
The first group of precedents dealt with the classification of collective investment contract offers in condo-hotels.[12] such as securities offerings subject to registration with the CVM, as determined by article 2, IX of Law 6.835/76.
Initially, it is important to highlight that classifying an asset as a security is particularly relevant because an investment classified as such is subject to the CVM's (Brazilian Securities and Exchange Commission) rules regarding the registration of offerings and their conditions, if the offering is made publicly. This ensures informational asymmetry among potential investors, as everyone can assess the risk of the transaction based on the information that must be disclosed according to the regulations, in addition to being subject to CVM supervision.
3.1. Evolution of the Concept of Securities
According to the legal definition originally provided for in Law 6.385/76, only securities issued by publicly traded companies expressly referred to in Law 6.404/76 (shares, debentures, subscription warrants, beneficiary shares and deposit certificates) or those to which this character was attributed by the National Monetary Council were considered securities.
Before the legislative reform that originated Law 10.303/01, therefore, the CVM (Brazilian Securities and Exchange Commission) did not have the authority to oversee public offerings of assets that did not fall under the above options (which became notorious in light of scandals, such as the one known as "Boi Gordo").“[13]The amendment introduced by Law 10.303/01 (which initially appeared in Provisional Measure 1637/98) broadened the concept of securities to allow collective investments offered to the public to be considered as such, regardless of the nature of the issuer or their link to traditional securities. This change forced the market to assimilate more open concepts for classifying investments as securities, which did not always happen smoothly. Regarding this phenomenon, it is interesting to present the enlightening analysis carried out by Ary Osvaldo Mattos Filho:
Our legislation, similar to US legislation, has adopted open concepts such as 'any other securities or collective investment contracts' [...] It was from this change in our legislation that our legal scholars sought in Howey the characterizing elements of this matrix contract in relation to other hypotheses foreseen by law. It is from this perspective that I have sought to emphasize that the characterizations found in Howey resulted from an analysis of the evolution of US jurisprudence, from the beginning of the 20th century until its crystallization in 1946. However, I believe it is also important to emphasize that this is not a finished process and, therefore, immutable.[14]
In the US, the debate about the nature of collective investment contracts (CICs) took several decades until the necessary requirements for their characterization as securities were defined in the celebrated precedent “Securities and Exchange Commission v. WJ Howey Co.”. The Howey case involved offers, formalized by separate contracts, for small plots of land for citrus fruit cultivation, which would be operated by professional service providers in order to generate financial returns for the buyers. The offers highlighted that returns on investment would not be possible if the owner directly exploited the land.
Given that CICs are financing instruments that can take on various forms in different sectors, from the "Howey case" to the decisions of the US Supreme Court.[15] They opted to conduct an analysis of the economic substance of the investment in order to classify it as a security subject to registration. This investigation, as established by US case law, is carried out by submitting to the requirements of what is known as "“Howey Test”, that is, the existence of “contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”[16].
In Brazil, these same requirements were consolidated in item IX of article 2 of Law 6.835/76, which states that the following are securities:
Article 2 (…) IX – when publicly offered, any other securities or collective investment contracts that generate a right to participation, partnership or remuneration, including those resulting from the provision of services, whose income derives from the effort of the entrepreneur or third parties. (Clause included by Law No. 10.303, of 10/31/2001)
With the introduction of this open concept into the legislation, the CVM, in a similar exercise to what happens in common law, It then began to assess the mandatory registration of the investment on a case-by-case basis, which, in essence, implies evaluating the legitimacy of the Authority's own oversight of this then-new "type" of issuing agent.[17].
The evolution of the various uses and forms of CIC (Central Investment Contracts) is related to the dynamism and creativity characteristic of the capital market. However, while the inclusion of open concepts in regulation allows the CVM (Brazilian Securities and Exchange Commission) to keep pace with the rapid development of this market, it also hinders the understanding of the nature of investments by market participants, especially those who are not typical operators. This will be explored further below.
3.2. Condohotel Classification within the CIC Concept
An analysis of item IX of the current wording of article 2 of Law 6.385/76 leaves no doubt that investment in condohotels involves, provided the publicity requirements are met, a public offering through which the investor applies a certain amount to the venture and expects a financial return whose success depends on the actions of third parties: the developer and the hotel entrepreneur. Despite the clarity, at this stage of the evolution of the topic, regarding the classification of the CIC (Condohotel Investment Certificate) as a security, for some time this matter was subject to various perplexities and a high degree of imprecision.
One of the reasons behind the initial hesitation on the subject stemmed from the fact that, before its inclusion as a security, the collective investment contract was already widely used as a form of real estate investment in Brazil, causing the condo-hotel market to develop outside the regulation of the CVM (Brazilian Securities and Exchange Commission) and under the exclusive observance of the rules on real estate incorporation (Law 4.591/64) and the Civil Code. Therefore, the perception of the participants in this market was that condo-hotels were exclusively real estate investments.[18], This is why they would not be subject to the rules of the capital market. The prospect of being subject to CVM (Brazilian Securities and Exchange Commission) oversight seemed absurd and unusual for a sector that, in fact, had obtained some legal opinions stating the opposite.[19].
Regarding the CVM's stance, it is noteworthy that, after the legislative insertion, the Authority did not act for more than a decade to guide, warn, or punish participants in relation to their condohotel offerings. In other words, there was no effort by the CVM to make the market aware of the classification of these ventures as securities and their consequent subjection to registration rules. This "omission" only ended in December 2013, with the publication of a "Market Alert," in which the CVM officially communicated its understanding of the classification of CICs as condohotels under the definition of Law 6.385/76.
Even with the publication of the alert in December 2013, many ventures continued to offer contracts without requesting registration or exemption from the CVM (Brazilian Securities and Exchange Commission), both because discussions remained regarding which condo-hotel venture models would be considered securities (only the sale of ideal fractions or also in the case of units?) and how to regularize the situation, as well as due to the specific characteristics of condo-hotel investments – spread throughout the national territory and sold without the traditional intermediation of a financial institution – hindering the dissemination of information at a national level (agents were not familiar with the CVM) and the supervisory role of the regulatory body itself. This period, from the publication of the Market Alert (December 2013) until the issuance of CVM Resolution 734/15 (May 2015), which stipulated concrete guidelines for granting exemptions for public offerings of condo-hotels, became known as the "nebulous period".“[20].
Given this scenario, the CVM Board unanimously understood that it was impossible to apply punitive measures to offers made before the publication of the Market Alert in December 2013, since, until its publication, the Authority's own understanding of its competence to oversee such investments was neither consolidated nor public. In May 2015, with the publication of Deliberation 734, not only did the CVM's understanding become institutionalized, but the market had already had time to correctly assimilate the nature of these investments, so that there would be no doubt as to the punishment of offers made without the proper registration/exemption after that date. Regarding the penalties for offers made during the unclear period (approximately 1 year and 5 months), which was from the publication of the alert until the issuance of Deliberation 734, it was understood that the application of administrative sanctions would depend on the analysis of each specific case, since the participants' understanding of the investment's classification would depend on several factors, including the size of the issuer, the receipt of official communications from the CVM, and any request for exemption from registration of new offers made after the alert.
4. Precedent Group 2 – Spoofing and Layering as Price Manipulation Techniques
The second group of precedents assessed the use of "strategies" for inserting artificial buy and sell orders for assets into the stock exchange's order book – known as spoofing e layering – such as practices of “price manipulation”, an infraction foreseen in item II, “b”, of CVM Instruction 08/79 (ICVM 08).
As mentioned at the beginning of this work, ICVM 08 is a classic example of "open" classification in Brazilian regulation, which aims to give greater flexibility to the CVM's role in monitoring the development of market practices. As Nelson Eizirik points out, although the generality of the instruction often causes some confusion between the types of "creation of artificial conditions" and "price manipulation," it is certain that what is sought to be protected, in general, through this rule, is "the regularity and transparency of the securities market, ensuring that the price formation process is governed by supply and demand."“ [21].
4.1. Spoofing and Layering
In an environment that thrives high frequency trading[22], the spoofing and the layering These are "strategies" that seek to influence the prices of assets listed on the stock exchange through artificial pressure applied to other traders. spoofing This involves placing a "real" buy or sell order, which the investor intends to execute, on one side of the order book, simultaneously with placing an "artificial" order for a significant lot of assets on the other side of the order book. layering, Simultaneously with the "effective" offer, several "artificial" offers are inserted on the opposite side of the order book. In both cases, after the execution of the intended offers, the "artificial" offers are immediately canceled.[23].
Both spoofing how much layering, Pressure on traded prices occurs through the insertion of "artificial" offers that generate simulated information in the stock exchange's trading system ("order book") and serve to attract counterparties to the opposite side of the "effective" offer, favoring the closing of transactions under the conditions actually desired by the offender. Thanks to the automation of the exchange system, this entire process consumes a very small fraction of time (a few seconds or even milliseconds).
Recognizing a growing tendency among investors and brokers to use technological means to perpetuate such infractions, BM&FBovespa Market Supervision (BSM) launched initiatives in 2012 to monitor abusive practices, such as... spoofing and the layering, defining its elements, issuing warnings to participants in the face of evidence of irregularities, and explicitly including, in the market access rules, the two practices as conduct that must be identified and prevented by participants.[24]:
Item 126. The Participant must monitor all operations and offers it intermediates, in order to identify, evaluate, record, prevent and report, at least to the responsible director, situations defined in current regulations as Abusive Practices, examples of which are: creation of artificial conditions of demand, supply or price; price manipulation; fraudulent operations; unfair practices; Layering; and Spoofing.
(…)
Layering – Inserting buy and/or sell offers for a security, in collusion with another person or persons or not, at different prices and volumes, within short time intervals and with high cancellation rates, aiming to alter the conditions of demand, supply or price of the security.
Spoofing – Inserting limited buy (or sell) offers at different prices, without the intention of executing them, subsequently inserting sell (or buy) offer(s) on the other side of the order book which, after being executed, is/are followed by the rapid removal of the initially inserted limited offers.
Internationally, the spoofing and the layering From the end of the first decade of the 21st century, these factors began to be predicted with greater precision in the rules governing capital markets. In this sense, the Dodd-Frank Act, Following the 2008 financial crisis, the US changed the legislation applicable to the derivatives and commodities market. (Commodity Exchange Act) aiming to increase the transparency of the financial system by prohibiting the practice of spoofing or any other similar unfair practice[25]:
SEC 747. ANTIDISRUPTIVE PRACTICES AUTHORITY
Section 4c(a) of the Commodity Exchange Act (7 USC 6c(a)) (as amended by section 746) is amended by adding at the end of the following:
(5) DIRUPTIVE PRACTICES – It shall be unlawful for any person to engage in any trading practice, or conduct on or subject to the rules of a registered entity that –
(A) violates bids or offers;
(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or
(C) is of character of, or is commonly known to the trade as 'spoofing' (bidding or offering with the intent to cancel the bid or offer before execution).
(6) RULE MAKING ATHORITY – The Commission may make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to prohibit the trading practice described in paragraph (5) and any other trading practice that is disruptive of fair and equitable trading.
(7) USE OF SWAPS TO DEFRAUD – It shall be unlawful for any reason to enter into a swap knowing, or acting in reckless disregard of the fact, that its counterparty will use the swap as part of a device, scheme, or artifice to defraud any third party (emphasis added).
In the European Union, the Final Report published by the European Securities and Market Authority (ESMA) in 2015, it began to predict... spoofing and the layering as hypotheses of market manipulation in the following terms: “submitting multiple or large orders to trade often away from the touch on one side of the order book in order to execute a trade on the other side of the order book (…) usually known as layering and spoofing”[26].
4.2. Compliance with ICVM 08/79
Despite international efforts to specifically and notably predict the spoofing and the layering In Brazil, these practices, considered illicit conduct within the capital markets, are not specifically named in any law or normative instruction. However, the CVM (Brazilian Securities and Exchange Commission) rulings did not seek to evaluate the conduct in light of international concepts found in foreign regulations, but rather to assess whether the two practices could be classified under the concept of "price manipulation," as defined in ICVM 08/79.
In this context, however much the spoofing and the layering While these practices only gained greater development with the advent of virtual technology for trading on stock exchanges or organized over-the-counter markets, and are not yet explicitly named as infractions in Brazilian regulations, both are behaviors that can be punished by the CVM (Brazilian Securities and Exchange Commission) when, in the analysis of the specific case, the minimum requirements for classifying the conduct as price manipulation are met. This concept demands "the use of any process or artifice intended, directly or indirectly, to raise, maintain, or lower the price of a security, inducing third parties to buy and sell it."“
As correctly pointed out in both rulings, the irregularity of the practices does not lie in the insertion of simultaneous offers in both parts of the book, nor in the placement of significant or multiple offers or their subsequent cancellation. The characterization of spoofing and of layering As an illicit practice, one must consider the joint existence of all these factors – identified by BSM based on observation of market practices and subsequently adopted by the CVM's technical area when initiating proceedings – together with the intention of altering the price of assets through this "strategy".“[27].
According to the decisions of the Board in both cases, the spoofing and the layering They can therefore be considered forms of conduct typified in ICVM 08/79, item II, “b”[28]. The open-ended nature of the regulation has allowed the CVM (Brazilian Securities and Exchange Commission) to assess and punish various practices that constitute price manipulation, which, given the legitimate and dynamic nature of the market, could not even have been specifically conceived when the regulation was issued. In this sense, it should be noted that the topic has already been extensively explored in several CVM proceedings analyzing the offense from different perspectives, leaving the Authority's position regarding the punishability of the conduct uncontroversial.[29].
5. Legal Certainty in the Administrative Sanctioning Process
Based on the analysis of precedents, we now turn to an analysis of legal certainty within the scope of the CVM's sanctioning activity. Taking as a basis the issues raised in the judgments described above, this article analyzes the need for an assimilation period for participants to adapt to the existence of a new interpretation by the regulator regarding the nature of a given conduct, comparing and differentiating this hypothesis from precedents that addressed the issue of a new factual model for a type of irregularity already foreseen in the regulation. Initially, we will briefly analyze how the principle of legal certainty is enshrined in Brazilian law, then analyze its application to the cases considered in the two groups of precedents, and finally, bring the discussion to the most recent case of digital influencers, which is closely related to this discussion.
5.1. Legal Certainty in Brazilian Law
The principle of legal certainty is present in our legal system in various ways, including the creation and application of rules that respect the legitimate expectations of individuals. In this sense, the Legislative Branch and Regulatory Bodies, although not bound by such expectations, need to create and apply rules that do not create a situation of constant instability or cause unjustified harm.
As José dos Santos Carvalho Filho explains, while the principle of legal certainty brings an objective aspect to the idea of stability in legal relations, its corollary, which is the principle of protection of legitimate expectations, highlights the subjective aspect that is related to "the individual's feeling in relation to acts, including and especially those of the State, endowed with a presumption of legitimacy and with the appearance of legality."“[30].
The predictability of state action is therefore undeniably important in the drafting and application of legal norms, given the expectations built up over time (objective aspect) and based on objective good faith (subjective aspect). This is especially relevant in the current reality, in which, as Luís Roberto Barroso warns, legitimate expectations tend to be minimized in favor of a pragmatic interpretation of the norms.
The speed of change—not only economic, technological, and political, but also legal—and the pragmatic and functionalist obsession, which also contaminates the interpretation of law, often leads people, their dreams, their projects, and their legitimate expectations to be treated as trivialities to be discarded.[31].
Within the scope of judicial decisions, the principle was enshrined in Law 9.868/99, which, in its article 27, states that legal certainty may justify the production of effects of an unconstitutional law:
Article 27. When declaring a law or normative act unconstitutional, and considering reasons of legal certainty or exceptional social interest, the Supreme Federal Court, by a two-thirds majority of its members, may restrict the effects of that declaration or decide that it will only be effective from the date of its final judgment or from another moment that may be determined.
In administrative matters, Article 2 of Law 9.784/99 is also very clear regarding the observance of the principle of legal certainty:
Article 2. The Public Administration shall obey, among others, the principles of legality, purpose, motivation, reasonableness, proportionality, morality, full defense, adversarial process, legal certainty, public interest, and efficiency.
More recently, and reflecting a current trend towards preserving this value, Law 13.655/18 added Article 30 to the Law of Introduction to the Norms of Brazilian Law (LINDB), listing some means – not exclusive – by which authorities can contribute to preserving legal certainty in the application of norms:
Article 30. Public authorities must act to increase legal certainty in the application of rules, including through regulations, administrative summaries, and responses to inquiries.
As explored in the initial part of the article, the capital market is based on a complex network of relationships.[32] which, ultimately, depend on the trust and predictability of the agents' – and the regulator's – behavior to function efficiently. Any abrupt change in this structure is capable of causing truly catastrophic effects. This is highlighted by Carlos Henrique Abrão, when making the following comment on the application of the principle of legal certainty to the peculiarities of CVM's oversight:
Public authorities have been granted the behavioral power and duty to collaborate in increasing legal certainty in the application of norms, including through regulations, administrative summaries, and responses to consultations, as per Article 30 of Law No. 13.655/18. In this regard, the federal agency, given its experience and flexibility in sanctions, will be responsible for analyzing the repercussions of the conduct, its potential for lesser severity, and alternative punitive measures.[33].
Given this regulatory framework, it is clear that the CVM, as a federal agency within the public administration, responsible not only for issuing regulatory norms but also for overseeing the conduct of market participants, must seek to preserve legal certainty by respecting the legitimate expectations created regarding its actions, so as not to unjustifiably and disproportionately harm market participants, in pursuit of greater efficiency and always upholding the principle of reasonableness.
5.2. Legal Certainty in Condohotel and Spoofing/Layering Precedents
When comparing the two sets of precedents, it can be seen that both dealt with the appropriateness of applying administrative penalties to conduct that, due to the rapid evolution of the capital market, could generate legal uncertainty or render the reasons for applying the penalty unsustainable.
In both cases, legal certainty was invoked as a defense argument to support the idea that a new interpretation of the rules could not be applied to past events, nor could old rules be invoked to encompass new operational models, since a sanctioning process would require the prediction of conduct "appropriate" or "specifically" defined by the CVM as illicit. Despite the... spoofing and the layering Although, just as condohotel offerings were not explicitly covered by CVM legislation and regulations for many years, the two groups of precedents differ in four crucial points, which led the Authority to justifiably reach different conclusions regarding the application of sanctions.
The first point of divergence concerns the very... legislative evolution. In the case of condo-hotel offerings, the uncertainty regarding their classification as securities led to a substantial legislative reform, heavily influenced by international experience and the boom in collective investments in Brazil during the 1990s. This reform sought to bring the configurations of collective investment contracts within the definition of securities subject to registration with the CVM (Brazilian Securities and Exchange Commission). As previously stated, the inclusion of CICs (Contractual Investment Contracts) in the legislation required time for assimilation by market participants and the CVM itself, which, for years, failed to monitor a series of offerings carried out irregularly. In the case of... spoofing and the layering, It cannot be said that there have been significant changes in legislation – which could justify an adaptation period for participants – since it would not even be necessary, given the existence of a comprehensive rule in ICVM 08 for practices aimed at altering the natural configurations of the market.
The second point relates to the very doubt that lingered regarding... nature of investments. In the precedents of condohotels, there was legitimate doubt as to whether the offerings fell under the concept of CIC (Contractual Investment Certificate) subject to registration. This doubt was fueled not only by the understanding that it was a real estate investment, but also by the assimilation time necessary after the legislative reform to correctly understand all aspects of the disruptive change in the concept of securities – a time that, as seen, even influenced the CVM's (Brazilian Securities and Exchange Commission) stance.[34]. In the precedents of spoofing e layering, On the other hand, there was, at most, a personal doubt on the part of the accused regarding the classification of the practices within the concept of price manipulation. This is because, as seen above, the configuration of this offense only requires compliance with the requirements of ICVM 08, which typifies conduct in a deliberately open manner, with the purpose of adapting to the new variations that constantly arise in an innovative and sophisticated market such as the capital market (precedents on the subject demonstrate this evolution). Therefore, one could not speak of a "general market doubt" regarding the nature of the... spoofing and of layering, nor, equally, any conduct on the part of the CVM that may have contributed to any possible perplexity.
The third point relates to habitual behavior of the agents in the capital markets. Unlike the offerors in the first group of precedents, that is, real estate entrepreneurs who were not accustomed to dealing with the communications and requirements of the CVM (Brazilian Securities and Exchange Commission), the defendants in the second group were typical participants in the capital markets and habitual stock exchange operators, so they could not claim any kind of ignorance regarding the illegality of their conduct.[35], Therefore, given their behavior, it was to be expected that they would be fully aware of the applicable regulatory standards.
The fourth and final point concerns... CVM's stance. From the legislative change (in 1998) until the publication of the Market Alert (in 2013) – or, arguably, until the end of the “period of uncertainty,” with the issuance of Deliberation 734 in May 2015 – there was no concrete position from the CVM (Brazilian Securities and Exchange Commission) regarding the classification of condo-hotel investments as CIC (Construction and Investment Certificates), an open concept that, in itself, was already facing difficulties in market assimilation, given its disruptive nature in relation to traditional concepts of securities. On the contrary, the CVM did not take a position for more than 10 years.[36], Any measures taken to guide the market or monitor potential irregular offers contributed to creating a legitimate expectation among market participants that condo-hotels were not subject to CVM (Brazilian Securities and Exchange Commission) oversight. Conversely, in the cases of the second group of precedents, there is no question of CVM omission, since, in addition to the conduct of price manipulation being provided for in regulatory norms since 1979, the agency and the self-regulatory body (BSM) have constantly analyzed cases related to this offense.
It is clear, therefore, that legal certainty is a value that must be preserved in accordance with the specific characteristics analyzed in each case. This protects the regulated entity from abrupt and unexpected changes in the regulator's position, without, on the other hand, representing a shield for knowingly irregular actions by participants who use a new formal model to perpetuate an infraction already defined, albeit openly, in the applicable regulation.
5.3. Digital Influencers as Investment Analysts: Current Position of the CVM (Brazilian Securities and Exchange Commission)
Finally, it is important to note that, more recently, the issue of legal certainty has once again permeated discussions within the CVM (Brazilian Securities and Exchange Commission) in light of the growing wave of digital investment influencers in a context of a vertiginous increase in the participation of individuals (small investors) in the Brazilian capital market. With the advent of social media, platforms such as Twitter and Instagram have become means for influential people (influencers) if they used their extensive follower base to make asset recommendations.
As is known, professional investment recommendations are an activity exclusive to securities analysts and are regulated by CVM Instruction 598/18, which requires that those who "prepare analysis reports intended for publication, dissemination or distribution to third parties" (art. 1º, caput) that “may assist or influence investors in the investment decision-making process” (art. 1, § 1) be accredited by an entity authorized by the CVM (art. 2).
Given the reach driven by social networks, which is capable of influencing market prices, the CVM (Brazilian Securities and Exchange Commission) began to more closely monitor activities carried out in the virtual environment. In November 2020, the Authority issued its first warning (Circular Letter 13/2020) regarding the activities of... influencers, clarifying some points, among them, that accreditation is only necessary for those who carry out the activity professionally.
In this regard, the alert highlighted that the language used in the channels is extremely important for assessing whether the service is professional. According to item 6, any messages that adopt “More assertive or appealing content reinforces the perception that the agent is attempting to convince and induce the recipients to follow him.”In other words, they are capable of influencing investors' decision-making.[37]. The following item warns that recommendations aimed at creating artificial market conditions, price manipulation, fraudulent operations, or unfair practices in general may fall under the offenses foreseen in ICVM 08/79 – regardless of whether they are carried out by professionals.
Again, this is a situation where the natural evolution of society in general and market practices in particular, influenced by rapid technological advancement, has created a framework of legal uncertainty regarding the CVM's competence to oversee and punish conduct that was not explicitly and specifically provided for in the regulations. Indeed, the activity of investment analysts operating through social media is not expressly regulated by the CVM, but this does not mean that the regulator cannot oversee conduct that may eventually fall under the existing guidelines.
In this regard, it is important to highlight that individuals who may be carrying out their professional activity as securities analysts through social media are regular market participants and, therefore, should be aware of the limitations imposed by the CVM (Brazilian Securities and Exchange Commission) for the exercise of this activity – whether it is carried out on digital platforms or not. For those influencers For those who did not traditionally work with matters related to the capital market, but decided to venture into this field, it is only natural that they are aware of the recent guidance from the CVM (Brazilian Securities and Exchange Commission), which, in this case, received extensive publicity in traditional and digital media.
Given these circumstances, it is worth highlighting the swift and highly commendable action taken by the CVM (Brazilian Securities and Exchange Commission) in issuing Circular Letter 13/2020, seeking to clarify the main doubts regarding the topic and, consequently, preserve legal certainty in these activities. This publication aligns with the current logic of sanctioning activity, which seeks not only to respect the legitimate expectations of participants but also to assess the circumstances and consider the best guidance and oversight measure in each specific case, so that it is not necessary to initiate an administrative process if another measure proves effective.
6. Conclusion
Based on the study of legislation, doctrine, and precedents, it can be concluded that the application of the principle of legal certainty in administrative sanctioning processes must necessarily involve a detailed and in-depth analysis of the characteristics of the specific case. This relates to the fact mentioned at the beginning of this work that, due to the specific objectives of regulation... lato sensu (to conform conduct) and the open-ended classification of capital market regulatory norms, the supervisory activity/enforcement The decision to initiate a sanctioning process must consider all the particularities of the actual situation, so that this set of aspects is taken into account for the possible application of an administrative sanction.
It was due to this specific and thorough analysis that different conclusions were reached in the aforementioned groups of precedents: in the first group, the CVM Board recognized that the inclusion of the open concept of CIC (Construction Industry Certificate) in the list of securities and the historically real estate nature of condo-hotel developments, along with the CVM's inert stance, contributed to the fact that sanctions were not applicable to conduct prior to Market Alert/2013; in the second group of precedents, the Authority considered that it would suffice for the conduct of the accused, typical stock exchange operators, to be subject to what is stated in ICVM 08 regarding price manipulation, an old and frequently examined offense by the CVM, thus making specific and nominative classification unnecessary. spoofing and of layering for the application of sanctions.
Regarding the recent case of digital influencers, it is possible to see that the CVM (Brazilian Securities and Exchange Commission) reacted quickly to the new situation, proactively disclosing the situations in which the Authority could act to punish irregular conduct. This brought more legal certainty to the market and will allow for greater consistency in its sanctioning and oversight activities.
7. Bibliography
ABRÃO, Carlos Henrique. “CVM Sanctioning Process”. In: ABRÃO, Carlos Henrique et al (Coord.). Sanctioning Process: Central Bank and CVM – Law No. 13.506/2017. São Paulo: Iasp Publishing House, 2018.
ARAÚJO, Valter Shuenquener. The Principle of Protection of Legitimate Expectations: A New Form of Citizen Protection against the State. Niterói: Impetus, 2009.
BARROSO, Luis Roberto. “Somewhere in the past: legal certainty, intertemporal law and the new civil code”. In: ANTUNES ROCHA, Cármem Lúcia (Coord.). Constitution and legal certainty: acquired rights, perfect legal act, and res judicata. Studies in homage to José Paulo Sepúlveda Pertence.. 2nd Edition. Belo Horizonte: Fórum, 2005.
CARVALHO FILHO, José dos Santos. Administrative Law Manual. 32nd Edition, São Paulo: Atlas, 2018.
COPOLA, Marina; CORDONIZ, Gabriela; PATELA, Laura. “Comments on Article 2”. In: CORDONIZ, Gabriela (Coord.) Comments on the Capital Markets Law. 1st Edition, São Paulo: Quartier Latin, 2015.
EIZIRIK, Nelson. Capital Markets: Legal Framework. 3rd Edition, Rio de Janeiro: Renovar, 2011.
MATTOS FILHO, Ary Osvaldo. Securities. In: ULHOA COELHO, Fabio (Coord.). Treatise on Commercial Law: Public Limited Company. São Paulo: Saraiva, 2015.
PROENÇA, Marcos Saldanha. “Spoofying and Layering, the New Forms of Price Manipulation”. In: TAVARES BORBA, Gustavo; TAVARES BORBA, Rodrigo; ASSIS DE ALMEIDA, José Gabriel (Coord.). Securities and Exchange Commission – Commented Precedents. Rio de Janeiro: Forense, 2020.
TRINDADE, Marcelo Fernandez. “Offering autonomous units of a real estate development to the public. Not characterized as an issuance or public offering of securities.”. Brazilian Journal of Civil Law – RBDCivil, Belo Horizonte, vol. 11, p. 117-142, Jan./Mar. 2017.
VORONOFF, Alice. Administrative Sanctioning Law in Brazil – Justification, Interpretation, and Application. Belo Horizonte: Editora Fórum, 2018.
[1] Associate Professor of Commercial Law, PhD in International Economic Relations Law and Master's in Commercial Law from PUC/SP. LLM in Regulatory Law from New York University. Professor of Commercial Law at PUC/SP. Partner at Thomaz Bastos, Waisberg, Kurzweil Advogados.
[2] Master's and Doctoral candidate at PUC/SP. Visiting Scholar at Columbia Law School(1o (Semester/2019). Visiting Professor at PUC-RJ to teach the elective course "Administrative Sanctioning Process at the CVM" in the 1st and 2nd semesters of 2020. Lecturer at FGV/RJ. Former Director of the CVM. Former Chief Prosecutor of the Commercial Registry of Rio de Janeiro. Partner at the law firm Tavares Borba Advogados.
[3] Bachelor's degree in International Relations from PUC/RJ. Law student at PUC/RJ. Intern at the law firm Tavares Borba Advogados Associados.
[4] CVM Administrative Proceeding SEI No. 19957.004122/2015-99 (“Oliva Case”), decided on April 12, 2016; CVM Administrative Sanctioning Proceeding No. 19957.008081/2016-91 and CVM Administrative Sanctioning Proceeding No. 19957.003266/2017-90 (“Setin Case”), both decided on August 7, 2018.
[5] Administrative Sanctioning Process CVM SEI No. 19957.005977/2016-18, judged on March 13, 2018, and Administrative Sanctioning Process CVM SEI No. 19957.006019/2018-26, judged on October 1, 2019.
[6] According to Article 11 of Law 6.385/76, the CVM (Brazilian Securities and Exchange Commission) is responsible for overseeing and punishing offenders not only in relation to its own regulatory norms, but also regarding the provisions of Law 6.404/76 and Law 6.385/76 itself (insofar as it does not require regulation).
[7] Both are provided for in CVM Instruction 607/19, which governs the procedures relating to the CVM's sanctioning actions.
[8] According to article 60 of CVM Instruction 607/19, the following penalties may be applied by the CVM: warning, fine, suspension of authorization or registration, temporary disqualification, and temporary prohibition.
[9] It is worth noting, however, as Nelson Eizirik states: “Circumstantial evidence, which constitutes a form of indirect proof, must be assessed with great caution by the judging authority, since decisions that do not result from direct evidence are normally sources of numerous errors. Circumstantial evidence is only sufficient to allow the conviction of the accused when there is a chain of circumstantial evidence that links the accused's actions to the alleged offense and when there are no counter-indications that cast doubt on the actual responsibility of the accused” (EIZIRIK, Nelson). Capital Markets: Legal Framework. 3rd ed. Rio de Janeiro: Renovar, 2011, p. 321).
[10] In this regard, see the decision of the CVM Administrative Proceeding No. 06/95 (Judge Norma Parente, Official Gazette 05/05/2005): “The circumstantial evidence has sufficient probative value to warrant a conviction. However, it is required that such circumstantial evidence be convergent and unequivocal. The existence of counter-evidence sufficient to inspire doubt in the judges should lead to acquittal, in accordance with the principle of presumption of innocence.”.
[11] VORONOFF, Alice. Administrative Sanctioning Law in Brazil – Justification, Interpretation, and Application. Belo Horizonte: Editora Fórum, 2018.
[12] A condohotel is a real estate financing instrument aimed at developing hotel projects in the form of a condominium, to which investors contribute financially in exchange for returns that will depend on the performance of the project.
[13] Before the enactment of Provisional Measure 1637/98, companies like Fazendas Reunidas Boi Gordo popularized a type of collective investment offering to the public based on cattle breeding, where profit generation depended on the weight and market value of the animals. Without any oversight at the time from the CVM (Brazilian Securities and Exchange Commission), thousands of investors suffered serious losses.
[14] MATTOS FILHO, Ary Osvaldo. Securities. In: ULHOA COELHO, Fabio (Coord.). Treatise on Commercial Law: Public Limited Company. São Paulo: Saraiva, 2015. V. 3, p. 36-37.
[15] Other examples of Supreme Court decisions regarding the classification of investment offerings as registered CICs include: Continental Marketing Corporation v. Securities and Exchange Commission; Securities and Exchange Commission v. Cultivated Oyster Farms Corp; Securities and Exchange Commission v. Bourbon Sales Corp.
[16] Available at: https://supreme.justia.com/cases/federal/us/328/293/. Accessed on: December 22, 2020.
[17] According to Gabriela Cordoniz, Laura Patela, and Marina Copola: “In practice, it is the broad scope of the provision in item IX of article 2 of Law No. 6,385/76 that assigns to the CVM (Brazilian Securities and Exchange Commission) the duty to analyze specific cases, expressing its opinion regarding the appropriateness and convenience of its supervision and, consequently, regulating the matter.” (COPOLA, Marina; CORDONIZ, Gabriela; PATELA, Laura. “Comments on Article 2”. In: CORDONIZ, Gabriela (Coord.). Comments on the Capital Markets Law – Law 6.385/76. (São Paulo: Quartier Latin, 2015, p. 72).
[18] In light of this, even after Law 10.303/01 came into effect, no condo-hotel development requested registration or exemption from offering with the CVM (Brazilian Securities and Exchange Commission) until 2012. This demonstrates that both entrepreneurs in the area and the market in general continued to understand that condo-hotels were not classified as collective investment contracts subject to registration.
[19] In this regard, we can cite the conclusion of the former President of the CVM (Brazilian Securities and Exchange Commission), Marcelo Trindade, in a legal opinion requested by a hotel entrepreneur: “(…) our understanding is that: (i) the public offering of autonomous units of the Hotel Development subject to a Lease Agreement is an operation regulated by the Condominium and Incorporation Law (and by the Tenancy Law and the Civil Code), which establishes its own legal regime; (ii) the aforementioned offering cannot be characterized as an issuance or offering of securities, and Law No. 6,385/76 cannot be applied to the offering under analysis, with the consequent lack of competence of the CVM to supervise the operation; and (iii) provided that the legal requirements of the Condominium and Incorporation Law are met, the Developer will be authorized to begin offering the autonomous units of the Hotel Development to the public.” (TRINDADE, Marcelo Fernandez. “Public offering of autonomous units of a real estate development. Not characterized as an issuance or public offering of securities”). Brazilian Journal of Civil Law – RBDCivil, Belo Horizonte, vol. 11, p. 117-142, Jan./Mar. 2017). Opinion. Available at: https://rbdcivil.ibdcivil.org.br/rbdc/article/viewFile/21/17. Accessed: January 11, 2021.
[20] During this period (2014-2015), the CVM Board decided individually on requests for registration of condo-hotels: CVM Administrative Proceedings No. RJ 2014/1503; RJ 2014/6342; RJ2014/5323; RJ2014/9466; RJ2014/10135. In practice, the period of uncertainty symbolized that, despite the signal given by the CVM regarding its position, real estate market agents – unaccustomed to communications from the Authority, with the exception of those that were publicly traded companies – were still in the process of assimilating the change in the regulator's position, especially since clearer rules regarding registration/exemption were only definitively defined with Deliberation 734.
[21] EIZIRIK, Nelson, Capital Markets: Legal Framework, op. cit., pp. 547-548.
[22] From the 1990s onwards, the stock exchange began operating through an automated platform (Mega Bolsa system) which, since then, has evolved to the point of allowing traders to carry out transactions in a completely virtual environment in a short period of time and based on pre-established algorithms (these are called high-frequency traders).
[23] For a more in-depth reading on the subject, we suggest reading the article by Marcos Saldanha Proença, which analyzes the CVM's precedents on the topic: Spoofing and Layering: New Forms of Price Manipulation (In: TAVARES BORBA, Gustavo; TAVARES BORBA, Rodrigo; ASSIS DE ALMEIDA, José Gabriel (Coord.). Securities and Exchange Commission – Commented Precedents. Rio de Janeiro: Forense, 2020, pp. 403-413.
[24] Operational Qualification Program – Basic Roadmap. Available at:
<http://www.b3.com.br/data/files/40/43/D7/46/38DA3610DF40D936790D8AA8/Novo%20Roteiro%20Basi
co%20-%20JAN%202019.pdf>. Acesso em: 22 dez 2020.
[25] Available at:
<https://www.federalregister.gov/documents/2010/11/02/2010-27547/antidisruptive-practices-authority-contained-in-the-dodd-frank-wall-street-reform-and-consumerAccessed on: December 23, 2020. In this regard, see also the Interpretative Guidance and Policy Statement on Disruptive Practices from the CFTC, published in 2011, in which the entity provided the public with general guidance on the prohibition of unfair practices and examples of conduct that may be classified as such. spoofing. Available at:https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dtp_factsheet.pdfAccessed on December 22, 2020.
[26] ESMA's technical advice on possible delegated acts concerning the Market Abuse Regulation (ESMA/2015/224). Available at: https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-224.pdf Accessed on December 23, 2020.
[27] According to the vote of Director Henrique Machado in the judgment of PAS CVM SEI nº 19957.005977/2016-18 (spoofing"Obviously, it is not irregular to have offers on both sides of the order book, on the sell order book and on the buy order book. Nor is it irregular to register significant offers on either of these sides. And neither is it irregular to quickly cancel any of these registrations. However, when these elements are intentionally organized in a process designed to alter the price of a security, inducing a third party to buy or sell it, this constitutes price manipulation as defined in item I, in conjunction with item II, "b", of CVM Instruction No. 8/79, specifically spoofing.".
[28] In the trial of the case of spoofing A question arose regarding whether this practice fell under item II, paragraph “a” of ICVM 08 (“creation of artificial conditions of demand, supply or price of securities”), according to BSM's understanding, and not under item “b” of the same section (“manipulation of prices in the securities market”), which would be the understanding of the Superintendence of Market and Intermediary Relations (SMI). Recognizing that the two types are intrinsically related and aim to preserve market integrity, the Reporting Director followed the understanding of the CVM's technical area. At the time, one of the authors of this article (Gustavo Borba), in a dissenting opinion, clarified that “The main objective, in these cases, seems to be price manipulation, but this ultimate goal is achieved through the creation of artificial demand conditions. In this context, and seeking support in criminal law, I believe the principle of absorption or subsumption is applicable to the case, according to which the main offense, which defines the offender's objective, absorbs the other offenses that constitute means to achieve the final purpose. In this case, the final objective would be price manipulation (which would allow the operation to be carried out under the desired conditions), which would be achieved through the creation of artificial demand conditions (artificial order on the other side of the “book”). Thus, although the BSM's understanding cannot be considered unreasonable (since artificial demand conditions were indeed created), I believe that the classification adopted by the SMI, in light of the principle of absorption or subsumption, would be the most appropriate for the specific situation under analysis.”.
[29] Throughout the 40 years since the publication of ICVM 08, numerous precedents have been judged and published on the matter. Therefore, however open the concept expressed in the instruction may be, it could never be said that the CVM did not evaluate price manipulation conduct. Notable examples include: CVM Administrative Inquiry 26/00; CVM Administrative Inquiry TA-RJ 2001/6226; Administrative Sanctioning Process 2001/0236; Administrative Sanctioning Process 06/01; Administrative Sanctioning Process 05/01; Administrative Sanctioning Process 14/00; Administrative Sanctioning Process 2004/2131; Administrative Sanctioning Process 06/95; Administrative Sanctioning Process 2005/7389; Administrative Sanctioning Process 16/03.
[30] CARVALHO FILHO, José dos Santos. Administrative Law Manual. 32nd Ed. São Paulo: Atlas, 2018, p. 90.
[31] BARROSO, Luis Roberto. “Somewhere in the past: legal certainty, intertemporal law and the new civil code”. In: ANTUNES ROCHA, Cármem Lúcia (Coord). Constitution and legal certainty: acquired rights, perfect legal act, and res judicata. Studies in homage to José Paulo Sepúlveda Pertence.. 2nd Ed. Belo Horizonte: Fórum, 2005, pp. 137-163.
[32] As Valter Shuenquener de Araújo very aptly observed regarding the principle of trust in state action:
“[…] the high dynamism of contemporary society and the strong influence that the State exerts on the lives of those governed demand a firmer preservation of the legitimate expectations arising from state action. Without the preservation of trust, a country's economic development is weakened, and only less complex legal relationships become viable. Trust is, therefore, a relevant and indispensable reducer of complexity in social relations. The intention with the protection of trust is not to impede the evolution of law, but to encourage it to occur in the least traumatic way possible without weakening the state's reputation” (ARAÚJO, Valter Shuenquener). The Principle of Protection of Legitimate Expectations: A New Form of Citizen Protection against the State. Niterói: Impetus, 2009, p. 237).
[33] ABRÃO, Carlos Henrique. “CVM Sanctioning Process”. In: ABRÃO, Carlos Henrique et al (Coord.) Sanctioning Process: Central Bank and CVM – Law No. 13.506/2017. São Paulo: Editora Iasp, 2018, p. 178.
[34] In this specific case, the CVM's inaction was related to the same adaptation period that prevented participants from observing the rules on offering registration. As summarized in the opinion of Administrative Process CVM SEI No. 19957.004122/2015-99: “[…] if the lack of oversight stems, for example, from deficiencies in the structure of a state entity, this will in no way influence the application of the rule during a certain period, but when the rule is not enforced because there was plausible doubt about its application, I consider it unwarranted to penalize the individual who, in good faith, failed to observe it.”
[35] In Brazilian criminal law, a mistake of law is recognized when an individual has a justified lack of knowledge of the unlawfulness of their conduct; that is, when they have no way of knowing that such conduct is illegal. According to Article 21 of the Penal Code: “Ignorance of the law is inexcusable. A mistake regarding the unlawfulness of the act, if unavoidable, exempts from punishment; if avoidable, it may reduce the penalty by one-sixth to one-third.” This, as can be seen, is not a situation that applies to those who practiced... spoofing e laying.
[36] As referenced in CVM Administrative Proceeding No. 19957.004122/2015-99 (“Oliva Case”), even after the warning, the CVM continued to act for some time only at the instigation of investors.
[37] Available at: http://conteudo.cvm.gov.br/legislacao/oficios-circulares/sin/oc-sin-1320.html. Accessed on: December 29, 2020.