Brazil’s securities market authority also needs new public hiring test, according to current and previous directors

11/28/2022

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In the 20 years between the Lula administration back in 2003 and his third term in office starting in 2023, Brazil’s capital market has evolved as never. But despite several IPOs, a record number of investors, and the emergence of new products, the Securities and Exchange Commission of Brazil (CVM), the country’s market regulator, has shrunk in size. There has not been a single public hiring test since 2010, and the financial independence provided by law has never happened in practice.

The prevailing assessment is that the financing of the agency is a delicate matter because of the discussions about public spending in the new administration. On the other hand, people close to President-elect Luiz Inácio Lula da Silva’s team have signaled that a public hiring test would be feasible.

The Brazilian capital market began to take off in the 2000s, during Mr. Lula’s first term in office. Novo Mercado was created at the time and established stricter corporate governance rules and greater transparency for the market. In the following years, in 2006 and 2007, the country experienced the first IPO boom, which consolidated the new phase. A new record occurred between 2020 and 2021, with 73 offerings.

Currently, there are nearly 700 listed companies on the CVM, which represent a fraction of the 78,162 entities regulated by the capital market authority. They include investment funds, brokerage firms, administrators, analysts, consultants, investment advisors, distributors, credit rating agencies, and securitization companies, among others. CVM operates with a surplus. Annually, it collects about R$800 million from inspection fees, a counterpart for the regulator’s service. The regular budget totals nearly R$260 million and discretionary spending is historically around R$25 million.

Law 10.303, of 2001, provided that funds from the collection of the inspection fee can be used to fund the activities of the agency, but this financial autonomy does not exist in fact: the funds go to the single account of the National Treasury. CVM has to prepare its budget proposal and send it to the Ministry of Economy, which can change it. The general budget is forwarded to Congress, which can also change the amounts. In 2022, the agency’s budget was under threat – it was almost cut by more than 50%, but, at the end, managed to keep it in full.

Joao Pedro Nascimento — Foto: Leo Pinheiro/Valor

CVM has been warning in recent years about the increased level of risk related to the lack of personnel. A number of employees was moved from the Brazilian Development Bank (BNDES) and other state-owned companies to CVM, but it is insufficient in view of the growth of the market. CVM President João Pedro Nascimento speaks of funding and personnel problems even before taking office, as predecessors like Marcelo Barbosa and Leonardo Pereira did before him.

“CVM has reached a limit situation. We badly need a public hiring test in order to be prepared to serve a market that grows in size and complexity,” said Mr. Nascimento. This year, preparations were started for a hiring test to be held in 2023. And now, for it to materialize, the approval of the Lula administration will be necessary. The matter is a priority to be dealt with by the presidential transition team.

On the financing side, the current president of the CVM intends to create a capital market improvement fund, with part of the funds from the fees, which also depends on Brasília. “It is important to be able to predict that a certain amount will be allocated to CVM. In other words, predictability. Then we can organize ourselves to make the best use of those funds.”

In response to the special secretariat of treasury and budget, CVM has indicated representatives who will work to meet the demands of the presidential transition team, including the agency’s chief.

Those who led CVM know the difficulties. Economist Maria Helena Santana held the position between 2007 and 2012, when the market was a fraction of its current size. “[Back then], we didn’t manage to keep part of the money with CVM, and proportionally, today, the amount that stays in the hands of the agency is even smaller,” she said. The agency needs to have a minimum of predictability to make long-term plans, she said.

Under Marcelo Trindade, Ms. Santana’s predecessor, CVM had its funding most assured. The lawyer took over in 2004, replacing Luiz Leonardo Cantidiano. After facing difficulties in his relationship with the Ministry of Finance, Mr. Cantidiano resigned. “Because it generated this serious consequence, the government came to its senses and ensured the conditions for the functioning of the agency, from the standpoint of autonomy and financing,” said Mr. Trindade.

After the episode with Mr. Cantidiano, there are no more reports of government interference in CVM, which continues its work independently. “I hope the good times will come back, and I wish the new administration remembers its successful experience so that things work well,” said Mr. Trindade.

Another historical problem faced by CVM is the slowness in defining new board members, who have fixed terms. In the Bolsonaro administration, for example, the board spent most of 2020 with only four members and 2021 with only three, out of a total of five. Mr. Nascimento was an exception, as he took office immediately after the departure of Mr. Barbosa, his predecessor.

Maintaining the current composition, the next vacancy in the board should open at the end of 2023, as the term of director Flávia Perlingeiro will come to an end. Regarding CVM’s work, lawyers and former directors of the agency told Valor there is independence to establish a liberal regulatory agenda and make decisions. “The profile of the new minister will make all the difference in the nominations and projects for CVM. João Pedro [Nascimento] will work hard to build a good relationship,” a former director says.

*By Juliana Schincariol — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/