i Legal structure
Pursuant to the Colombian Constitution, Congress has the power to prescribe the general legal framework within which the government and other authorities regulate the Colombian capital markets. The Constitution also permits Congress to authorise government intervention in the economy by statute. The agencies vested with the authority to regulate the financial system are the board of directors of the Colombian Central Bank, the Ministry of Finance, the Superintendency of Finance, the Superintendency of Industry and Commerce, and the Securities Market Self-Regulatory Organisation (SRO).
Consistent with the civil law system, laws, decrees and judicial decisions are organised as a subordinated set of rules. As such, at the top of the legal system in terms of hierarchy and applicability is the Constitution, and below are the laws enacted by Congress. Directly below the laws are decrees issued by the national government, which often regulate specific fields within the range of the provision of the law that authorises their issuance. Being deemed less important than in a common law system, the decisions of judges are subordinated to the laws and decrees on the grounds of which their positions are defined regarding specific issues.
This basic and general description of the Colombian legal system explains the features of the regulation of the capital markets on the basis of the active role of the government and the numerous interactions arising among participants, also taking into account the importance that has been constitutionally ascribed to the stability of the Colombian financial system. Colombia's capital markets are mainly governed by Law 964, issued by Congress in 2005, which provides the framework for the government's intervention. Following the general principles of Law 964, the government issued Decree 2555 in 2010, which consolidates the various regulations that were issued prior to 2010 to regulate the capital markets, and which – more importantly – automatically embraces any decrees issued afterwards in an effective attempt by the government to modernise the regulation and match it to international standards.
Law 964 provides the fundamental relevant concepts, but Decree 2555 became the most important source of rules for participants in the financial, securities and insurance activities described therein; in fact, each supervised financial entity (banks, insurance companies, credit rating agencies, etc.) will find the corresponding rules that govern its activities within Decree 2555. Likewise, every procedure before the Superintendency of Finance regarding authorisations or supervised matters of financial entities is governed by Decree 2555.
Colombian securities markets are subject to the supervision and regulation of the Superintendency of Finance, which was created in 2005 following the merger of the Superintendency of Banking and the Superintendency of Securities. All the powers and responsibilities of the former Superintendency of Banking and Superintendency of Securities were assigned to the newly created Superintendency of Finance. The Superintendency of Finance is an independent technical regulatory entity ascribed to the Ministry of Finance. It has the authority to inspect, supervise and control the financial, insurance and securities exchange sectors and any other activities related to the use, investment and management of resources collected from the public. Accordingly, issuers of securities and their subsidiaries are subject to the control, supervision and regulation of the Superintendency of Finance as financial institutions as well as issuers of securities. In general terms, the Superintendency of Finance has the responsibility to supervise the Colombian financial system with the main purpose of preserving its stability, as well as protecting the users of financial and insurance services and investors in general.
The Colombian Stock Exchange is the sole trading market for common and preferred shares. There are no official market-makers or independent specialists on the Colombian Stock Exchange to ensure market liquidity; therefore, orders to buy or sell in excess of corresponding orders to sell or buy will not be executed.
Self-regulation in the capital markets was formally introduced in Colombia by Law 964 of 2005, and the SRO was created in June 2006. The SRO is a private entity that has the power to supervise, sanction and regulate those entities subject to self-regulation (i.e., including securities intermediaries and any entities that voluntarily submit themselves to self-regulation). The SRO's supervisory powers entitle it to review compliance with the applicable laws and regulations and to impose sanctions in the event of violations. The SRO may also propose regulations aimed at various matters, including conflicts of interest and improving the integrity and quality of the capital markets.
ii Specific issues
Minimum requirements of capital
Decree 2555 is a technical compendium of rules regarding the Colombian financial system that aims to set out a comprehensive set of measures protecting the market's transparency and customers' security. The first issue that has broadly concerned the government is the minimum solvency indicators required by financial entities to legally undertake activities in Colombia. The capital structures of different financial entities must comply with minimum requirements that are calculated under precise rules specifically described in the Decree. These rules are very strict when a new local or foreign financial entity plans to undertake a supervised activity in Colombia, but previously established financial entities must also periodically demonstrate their compliance with the capital minimums.
Control over investments
Another issue that has been extensively regulated is the investment limits of financial entities, particularly regarding the shares of other corporations. As a result of this regulation, affiliates of a financial entity may only be those expressly permitted under the corresponding rules according to the nature of each financial entity, and the transactions by the financial entity may not stray outside the principal purpose of the financial entity, to avoid the risk of the entity entering non-core business area.
In recent years, the Superintendency of Finance has assumed the duty of protecting the market from illegal financial activities that are mainly carried out by unauthorised parties or companies. In that regard, financial institutions must obtain the authorisation of the Superintendency of Finance before commencing operations. Any such authorisation given by the Superintendency of Finance to a financial entity is usually limited to the activities requested, fulfilling specific requirements, but may exclude other activities that might be considered illegal if they are undertaken, and may include authorisations for different financial activities.
Securities issuers must comply with the regulations regarding public information disclosure, which have been integrated into the Decree 2555 rules. According to the group of articles regarding public information disclosure, events that should have been taken into account by a prudent and diligent expert when buying, selling or keeping a security must be disclosed to the market. In addition, under Decree 2555, the aforesaid general rule is supplemented by specific situations that warrant disclosing information without completing a subjective analysis regarding the materiality of the event. The Superintendency of Finance has arranged an online system, SIMEV, through which such information must be disclosed to the market.
Under Decree 2555, investment funds have been subject to more extended regulation for the important reason that these instruments have garnered more attention from local and foreign investors. Investment fund administration is a task that only brokers, investment administration corporations and trusts companies can perform. Moreover, securities of investment funds are not negotiated on the same platform used to negotiate stocks, as a specific negotiation platform has been developed in Colombia for listed investment fund securities. There is also regulation of specific types of investment fund, such as currency market, real estate, speculation and margin.
Public tender offer rules
Pursuant to Colombian law, the acquisition of the following should be made pursuant to the public tender offer rules:
- the beneficial ownership of 25 per cent or more of the outstanding shares with voting rights of a listed company; or
- the purchase of 5 per cent or more of the outstanding shares with voting rights by a shareholder or group of shareholders beneficially owning 25 per cent or more of the outstanding shares of a listed company.
Moreover, any beneficial owner included under point (b) may only make an acquisition by tendering an offer directed at all the holders of the company's shares, following the procedures established by the government. These requirements do not need to be met under certain circumstances described in Decree 2555.
II THE YEAR IN REVIEW
Between January 2018 and August 2018, the Colombian capital markets have witnessed 30 equity and debt public offerings. In the context of sustained economic growth and the collapse in 2012 of the largest broker-dealer on the market, the government has faced multiple challenges. As a consequence, for the past few years there have been many developments affecting debt and equity offerings, as described below.
i Developments affecting debt and equity offerings
The past two years have been difficult for the international market. Amid the international market conditions, Colombia has been able to sustain economic growth, representing multiple challenges for the government and its agencies. Regardless of the surprising economic conditions, Colombian capital markets have been affected and have not been as active as in the past.
During the year in review (August 2017 to August 2018), there have not been many developments affecting debt and equity offerings, as will be seen below. However, the Colombian stock exchange market has seen a new kind of issuance of debt – the green note.
In this regard, since 2017, some Colombian companies have begun to issue green notes in the Colombian stock exchange market. Green notes are defined as debt securities that are issued to raise capital specifically to support projects that contribute to environmental sustainability. The resources obtained by means of the issuance of green notes must be used only in productive projects that have environmental impact. Entities such as Banco de Comercio del Exterior de Colombia (Bancóldex), Bancolombia, Epsa, ISA and Davivienda, among others, have been pioneers in venturing into this market.
In order for a green note to be issued and labelled as such, the potential issuer must face an international certification process. In this process, an assessment is made to verify (1) the ability of the potential issuer to issue a green note, (2) if there are green projects in the region and (3) if there is a robust environmental policy within the potential issuer.
Finally, green notes are a growing market in Colombia that will continue to be relevant in terms of financing sustainable development of the country.
The fund management company investment regime
In 2012,2 Congress adopted the use of public-private partnerships (PPPs), mainly in public infrastructure contracts. Since then, the government has put its best efforts into promoting this framework.
In this vein, Decree 816 of 2014 modifies the investment regime for fund management companies. According to Articles 2, 3 and 4, funds with 'moderate', 'major' and 'long-term' risk profiles are able to invest 5, 7 and 5 per cent, respectively, of their assets in private equity funds in the event that these funds allocate 66 per cent of their resources to PPP infrastructure projects.
The same permission, mutatis mutandis, is given to private equity funds managed by stockbrokers registered in the public market, and to trust and life insurance companies.3
The government has developed and established a plan to develop infrastructure known as 4G (fourth-generation roads).
Inscription of securities in the secondary market
Inspired by Rule 144A in the United States, some years ago the government adopted a secondary market as a way of facilitating and encouraging distribution to 'authorised' investors of securities inscribed in a certain way in the National Registry of Securities and Issuers (RNVE).
Nevertheless, there has been a poor response within the market to this institution. Accordingly, Decree 1019 of 2014 introduced the following changes to the registration and operation of the secondary market: (1) securities do not have to be graded by a ratings agency to register in the RNVE; (2) securities registration in the RNVE is automatic, provided the issuers submit some basic information to the Superintendency of Finance; and (3) with certain minor restrictions, the promotion of issuances directly or through professional brokers is allowed. Finally, disclosure duties, after issuance, are limited to the requests of the holders.
Regulation on leveraged operations in collective portfolio management
According to Decree 2555, joint portfolios can only be managed by stockbroker companies, trust companies or investment management companies. Before Decree 1068 of 2014, these collective funds were able to carry out leveraged operations up to the value of 100 per cent of their assets.
The new rule allows collective portfolio managers to make leveraged operations above this amount provided that they are accepted by a central counterparty (CCP) clearing house, and are encompassed by the by-laws of the clearing house.
Decree 1068 also sets out a revised term (until 14 December 2014) for managers of joint funds to accomplish the requirements established in Decree 1242 of 2013.4
Price stabilisation for initial public offerings
The government issued Decree 2510 on 4 December 2014, updating Decree 2555 of 2010 by introducing some modifications and new chapters. With these amendments, it intends to establish a price stabilisation mechanism for initial public offerings of notes and shares. As defined, the main purpose is that of preventing or slowing down any fall in the market value of the security issued.
Only a previously contracted brokerage firm is allowed to act as a 'price stabiliser'. There are two mechanisms under which brokers can operate as stabilisers in the Colombian markets: through the temporal transfer of the securities or by adjudication of the securities with the possibility of reacquiring them.
This same legal disposition provides a definition of 'short sale' and prescribes that the principles of the International Organization of Securities Commission determined for this kind of operation shall be observed. Even though this legal provision is vague regarding the terms and conditions applicable for the execution of a short sale operation, as it delegates this responsibility to the Superintendency of Finance, it does propose that the Colombian stock market regulations determine which securities can be considered as short sale operations and that those operations will always have to be indicated as such.
ii Developments affecting derivatives, securitisations and other structured products
The derivatives market was officially established in 2008. Since then, it has experienced accelerated growth, and the trading volume is growing exponentially each year. This dynamic growth has also been observed in securitisations and other structured products.
External Circular DODM-144
On 27 March 2014, the Central Bank released External Circular DODM-144 regarding derivatives operations. The changes introduced thereby consist of the modification of the requirements for external agents authorised to carry out derivatives operations with Colombian residents; a new format for reporting derivatives operations related to basic products and made between residents and external agents; and the variation of the term to report the derivatives operations to the Central Bank.
Under this regulation, 'external agents' are those that have previously completed agreements with currency exchange market intermediaries, and those that have completed transactions on derivatives in the past year with net values over US$1 billion.
Simultaneous or temporary transfer of securities operations
Decree 2878 of 2013, which came into force on 11 May 2013, introduced two major changes to the regulation of the temporary purchase of assets or 'repos'.5
The first consists of the creation of a guarantee scheme for the benefit of the stock market, the trading system or the clearing houses depending on the mechanism used for the transaction. The guarantees admissible to back up these transactions are treasury securities, certain stocks quoted on the public market, cash or fixed-income securities.
The second is a limitation on the number of shares on which repo transactions can be made. In fact, according to Article 7 of Decree 2878, the maximum percentage of shares that may be the object of a repo operation is 25 per cent of the total available in the market.
iii Cases and dispute settlement
There are no recent disputes relating to cross-border financial market activity. However, this situation is subject to change as a result of the establishment of the Latin American Integrated Market (MILA).6 In view of this, there are four issues that should be taken into account.
Limits on share purchases
In Article 88 of the Organic Statute of the Financial System, the Superintendency of Finance consolidated its position regarding the quantitative and substantial limits to the purchase of shares in the public market. According to Article 88, any transaction by foreign or national investors purchasing 10 per cent or more of the shares issued by a financial institution under the surveillance of the Superintendency must have the prior approval of the Superintendent of Finance.7
Requirements for advertising financial products or services
The Concept of 28 March 2014 issued by the Superintendency of Finance contains the official interpretation of the rules governing the promotion and issuance of financial products and services by foreign nationals in Colombia. It sets out that all financial institutions and stock markets located outside the country must establish a representative office or undertake a correspondent agreement with a national broker-dealer to promote or advertise financial products and services within Colombia.8 However, this general rule does not apply in the event that the interest in establishing a commercial relationship with a foreign institution comes from a Colombian resident, and this relationship is not a consequence of promotional activity in Colombia or targeted at its residents.
Offerings outside Colombian territory
Article 220.127.116.11.1 of Decree 2555 specifically establishes that securities offerings made abroad will be submitted to foreign law. In recent years, many Colombian companies have successfully entered foreign markets seeking fresh resources for their activities.
Protection for security holders in the insolvency processes
Notwithstanding the foregoing, Colombian law gives special protection to Colombian investors in the national market or abroad, as was proven in the insolvency process of a national company that issued notes in Luxembourg.9 Article 50 of Law 1116 of 2006 excludes from the insolvency regime any acts or contracts related to the issuance of securities in Colombia or abroad.
Colombia's interest in joining the OECD and this entity's recommendations
On 25 May 2018, Colombia became the 37th country to join the OECD. Pursuant to the recommendations made by the OECD, Colombia has reformed its judicial and legislative system, reduced informality in the labour market and reformed its corporate liability regimen, among other measures adopted.
Following the recommendations made by the OECD, the government intends to reinforce some of its legal dispositions, such as the independence of the financial supervisor (the Superintendency of Finance), to grant more protection to the authority or supervisor, and to provide the supervisor with the appropriate tools so that he or she would be able to control financial conglomerates. This innovation regime has already begun with the implementation of Law 1870 of 2017, which defines a financial conglomerate as a set of institutions with a common parent company that includes two or more domestic or foreign entities involved in an activity regulated by the Superintendency of Finance.
Law 1870 grants the Superintendency of Finance several powers to improve the regulation and supervision of financial conglomerates in Colombia, and the controlling entities of financial entities domiciled in Colombia. This is a great innovation as, before Law 1870, the Superintendency of Finance could only supervise and control activities over financial entities incorporated in Colombia. Following the enactment of Law 1870, regulations applicable to financial conglomerates have been included in Decree 2555 through Decree 246 of 2018 and Decree 774 of 2018.
Moreover, Colombian Congress enacted Law No. 1735 of 2014, which created a new type of financial institution with the sole purpose of offering electronic deposits and payments – companies specialising in electronic deposits and payments (SEDPEs).10 Regulation of the operations of SEDPEs, as well as know-your-customer requirements, were included by the Colombian government in Decree 1491 of 2015 and in Decree 2076 of 2017.
Corporate Governance Code
The Superintendency of Finance, in an alliance with the Latin American Development Bank, presented a new Corporate Governance Code (Código País) to be implemented by companies from 2016. All Colombian issuers, such as Bancolombia, Porvenir, Nutresa, have now implemented it. The Code seeks to create sustainability to stimulate growth in the capital market and access to more resources. This corporate guideline consists of 33 measures that group 148 recommendations related to the rights and equitable treatment of shareholders, the general meeting of shareholders, the board of directors, control architecture, conflicts of interest, and the transparency of financial and non-financial information.
iv Relevant tax and insolvency law
Law 1739 of 2014 established a temporary surcharge for 'income tax for equity' or CREE, which taxes domestic corporations and legal entities. The surcharge rates are 6 per cent in 2016, 8 per cent in 2017 and 9 per cent in 2018, resulting in a statutory income tax rate for corporations of up to 40, 42 and 43 per cent in each of those years.
Law 1739 introduced an exception to the tax rules regarding the 'place of effective management', under which a foreign entity would not be deemed as a domestic entity for income tax purposes. Under this new exception, foreign entities that have issued stock or notes on the Colombian public market (or a foreign public market recognised by the Colombian tax administration) would not be considered as having their place of effective management in Colombia. This rule, which also covers entities subordinated to the notes or stock issuer, can be voluntarily waived by the subordinated entities, which in such a case will be treated as a domestic entity for income tax purposes.
Insolvency law has not undergone any substantial change since 2006, when Law 1116 was enacted, regarding which the following should be noted. Under Law 1116, cross-border insolvency procedures are recognised in Colombia in four situations:
- a a foreign tribunal or foreign representative requests the assistance of Colombia in an insolvency procedure undertaken abroad;
- b assistance is requested in a foreign country regarding an insolvency procedure that is being undertaken according to Colombian law;
- c insolvency procedures of one debtor are being undertaken simultaneously in Colombia and in a foreign country; and
- d creditors or any other interested parties abroad have the intention of requesting a new insolvency procedure or participating in a current insolvency procedure under Colombian law.
v Role of exchanges, central counterparties and rating agencies
A Latin American exchange is the most significant recent project to improve local capital markets. MILA is a project that seeks to unify the stock markets of Colombia, Chile, Mexico and Peru by creating a single stock market that allows the trading of shares of the most representative companies in the region. It is the result of an agreement signed between the aforementioned exchanges that is more an alliance than a merger, and its most important feature is that none of the exchanges of entry compromises its autonomy or independence in regulatory or administrative matters as a result of the agreement. Instead, investors can benefit from MILA through an intermediary by using the local platform in local currency, but reach the companies listed in any of the exchanges involved.
As providers of infrastructure for the securities market, companies that take on counterparty credit risk are regulated by Decree 2555 and supervised by the Financial Superintendency. A central counterparty (CCP) is a company that exclusively performs activities related to transactions between investors, intermediaries and issuers. However, a CCP is authorised to provide its services to exchange transactions, and to effect transactions outside the stock market. Each time a CCP performs an operation, the regulation automatically assigns a zero credit risk exposure value to the operation; the same occurs when the CCP grants security over the operation.
The credit rating agencies also have a specific regulatory chapter under Decree 2555. This regulation has been made as an attempt to protect the market from non-independent ratings that could lead investors to take those ratings into account in their decision-making. As a result, Decree 2555 includes a complete set of rules applicable to credit rating agencies in terms of the professionalism of their analysts, isolated personnel structures of issuers and intermediaries, and codes of ethics and conduct that must be implemented within the credit rating agencies towards the conservation of very high standards of independence. Qualification procedures must follow the internal regulations issued by each credit rating agency, but previously approved by the Superintendency of Finance. Credit rating committees must also be created within each credit rating agency, and decisions are rigorously supervised by the Superintendency of Finance.
Pursuant to the commitments that Colombia has assumed by MILA, and to develop the integration of Colombian financial and securities markets, through Decree 2241 of 2015 and Decree 1756 of 2017, certain initiatives have been implemented by the authorities during the past three years to increase the range of securities that can be listed and traded on the Colombian Stock Exchange.
vi Other strategic considerations
Consistent with recent experience, since the Interbolsa case,11 the Superintendency of Finance has been reluctant to authorise the issuance of derivatives and other structured products.
Given this position, it is important that the issuer be a renowned participant in the market and show the authorities enough guarantees and experience to obtain approval for these operations.
It is also important to highlight that MILA represents an important and unprecedented opportunity to make successful issuances of securities, as has recently been demonstrated by several Peruvian companies.12
III OUTLOOK AND CONCLUSIONS
As previously stated, MILA provides an unprecedented opportunity for participants in the Colombian capital markets. In that regard, the government issued Decree 2241 of 24 November 2015, by means of which it establishes the list of securities that may be quoted on foreign trading systems and sets forth the rules that modify the current exchange regime to promote its operation in an integrated market.
As stated by the Superintendency of Finance, the outlook for Colombia's market regulation is a strengthening of the 'risk-based' supervision model. This model focuses on activities that pose major risks for each entity and its management.
From this perspective, and inspired by the Canadian model, the authorities periodically produce a risk profile for each entity and, based on the outlook, establish a set of prompt corrective actions. The seven risks that are evaluated periodically by the Superintendency of Finance are debt risk, market risk, liquidity risk, operational risk, laundering risk, insurance risk and reputational risk.
Even if the main advantage of this regulatory model is that it takes into account the special characteristics of each regulated entity and permits the development of new products in the market, a declaration by the Superintendency of Finance in 2014, paraphrasing Thomas Paine, remains pertinent: regulation is but a necessary evil for the market.
Finally, and taking into account the current sociopolitical context of Colombia, it is worth highlighting two proposals by the new Colombian government to strengthen the capital markets sector.13 The first is to amend Law 964 of 2005, which regulates activities related to the use, management and investment of resources obtained from the public, through securities. This modification is based on the desire to adapt Colombian securities and financial regulations to the changes that have occurred in capital markets around the world, and to the technological developments within the securities and trading sectors in other countries. A second proposal is to introduce other financial instruments and securities, in such a way that more companies can access the Colombian stock exchange market as a financing instrument.
It is expected that these proposals will be submitted by the government for approval by the Colombian Congress, by means of the amendment of Law 964 of 2005 and other main Laws pertaining to the financial and securities exchange sector.
1 Camilo Martínez Beltrán is a partner and Sebastián Celis Rodríguez is an associate at DLA Piper Martínez Beltrán.
2 Law 1508 of 2012.
3 Decree 816, Articles 5 and 6.
4 Relating to the entities authorised to manage joint funds (i.e., only stockbroker companies, trust companies and investment companies) and their denomination as 'mutual investment management companies'.
5 Operations for the simultaneous or temporary transfer of securities.
6 The MILA exchange was launched on 30 May 2011 by Chile, Colombia and Peru.
7 The Concept of 5 February 2014 issued by the Superintendency of Finance.
9 Superintendency of Corporations Act No. 405-001770, 2 September 2014.
10 Sociedades especializadas en depósitos y pagos electrónicos.
11 Until November 2012, Interbolsa was the largest operator in the local capital markets; in fact, prior to its liquidation, the company was involved in approximately 30 per cent (by volume) of the brokerage activities in the Colombian capital markets. Nevertheless, in the three years prior to the forced intervention of the government in its operations, the company carved out temporary transfer operations over specific stock that affected its solvency indicators in a major and unexpected way. As a result, in November 2012, Interbolsa was unable to pay a short-term loan of US$10 million.
12 Namely, Vg ICBC Peru Bank SA, Aseguradora Magallanes, Financiera Nueva Visión, Compañía de Seguros de Vida Cámara and Rigel Perú SA.