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  1. 1. PATTON, MORENO & ASVAT PM&A Journal on Corporate and Structured Finance July 2001 PANAMA'S NEW SECURITIES LAW IN A NUTSHELL Index By: Francisco Pérez Ferreira Email: P A. National Securities Commission B. Financial Market Participants A. NATIONAL SECURITIES 1. Brokerage Firms and Investment COMMISSION Advisors The Law-Decree No. 1 dated July 8, 1999,1 1.1 Securities Brokerage Firms mainly rules the Panamanian securities 1.2 Investment Advisors industry. The mentioned Decree creates the 2. Securities Brokers and Analysts National Securities Commission (“Comisión 3. Securities Exchanges and Clearing Nacional de Valores”, hereinafter “CNV” or Houses “Commission”), as an autonomous State C. Registry of Securities and Public entity and the official institution in charge of Offerings the authorization and supervision of the D. Investment Funds public offering of securities, securities 1. Investment Managers trading and the constitution and management E. Trading Practices, Derivatives and of mutual funds, as well as the granting of licenses to the different financial market Securitization agents or participants.2 The F. Securities Custody, Clearance and Commission is composed of three members Liquidation G. Prohibited Activities, Civil 1 Published in the Official Gazette No. Liability and Enforcement 23,837 of July 10, 1999. Although under H. Dissolution, Intervention and Panamanian constitutional provisions in Liquidation force, this Law-Decree is subject to the ratification of the Legislative Assembly, I do I. Anti-Money Laundering Provisions not believe such legislative action would J. Tax Incentives in Connection with take place, as had happened in the past with Registered Securities similar technical legal topics approved by law-decrees. Hereinafter, I will refer to the Decree also as “Law”. 1
  2. 2. (a Chairman, a Vice-president and the other granted by the CVN. The license for Commissioner acts as spokesman for the brokerage firms allows the exercise of CNV) and has the authority to appoint staff activities as investment advisors. (i.e., attorneys, accountants, economists) and retain experts in order to fulfill its duties. Both are obliged to file at the CNV periodical reports, as well as audited and The Commission has broad powers to internal financial statements. supervise the industry participants for the protection of investors, including its right 1.1. Securities Brokerage Firms (standing) to file class actions to enforce the provisions of the new securities law. Securities Brokerage firms may be dedicated to incidental businesses such as the B. FINANCIAL MARKET management of custodian accounts, PARTICIPANTS investment advisory, asset management for investment funds, the grant of securities and The Law-Decree rules the granting of cash loans for the acquisition of securities licenses to the different participants of the and are subject to net capital and liquidity capital markets, to wit: brokerage firms, requirements, as determined by the CNV. investment advisors, investment managers, stock exchanges, clearing houses, sales The shares of a securities brokerage firm agents, brokers, dealers, securities exchange must be exclusively in registered form and seats, and mutual funds.3 We now the CNV must be advised on any changes in summarize each: the share composition thereof. 1. Brokerage Firms and Investment Foreign securities brokerage firms Advisors (organizations constituted or domiciled abroad or that have a license to operate, Broker-dealer firms are organizations which was granted by another State) may be dedicated to the purchase/sale of securities, exempted from compliance with certain on their own or in the name of third parties legal provisions, as determined by the CNV, (customers). Investment advisors, for their provided investors are not affected. part, are persons who in exchange for consideration, advise others in regards to the In order to manage customers’ funds and determination of the securities prices, the securities, brokerage firms must open convenience to invest, the purchase and sale investment accounts.4 of securities or prepare market reports. 1.2. Investment Advisors Securities brokerage firms and investment advisors must have a mandatory license Investment advisors, for their part, may manage custodian accounts, securities and 2 The CNV was previously established as an monies at their discretion or not, but they are agency by Cabinet Decree 247 of 1970 as part of not authorized to offer investment accounts. the Ministry of Commerce and Industry and, therefore, lacked of independence or autonomy. 2. Securities Brokers and Analysts 3 Rating agencies were left out of this new The functions of the senior executive, regulation. Prior to this law, Law-Decree No. 5 broker/dealer and securities brokerage firm of 1997, which amended the Commercial Code 4 and modernized some provisions regarding Although used in practice in the Panamanian capital markets, allowed rating agencies as capital market, the use of investment accounts market participants. was not clearly mandatory under previous law. 2
  3. 3. analyst or investment advisory company will b) shares of issuers domiciled in only be held by persons that have the Panama that, on the last day of the respective license granted by the CNV. In fiscal year, have fifty or more order to obtain a license, the interested shareholders domiciled in Panama parties should approve exams on the content that are the “effective owners”5 of no of the securities law and its regulations, on less than 10% of the paid in capital the practice and customs of the securities of said issuer (excluding for the industry, stock exchanges and securities estimate affiliates and employees, firms’ rules and on general accounting and directors and officers thereof). financing principles. c) securities listed in any Panamanian 3. Securities Exchanges and Stock Exchange. Clearing Houses The interested party shall file a registration In order to exercise a stock exchange or request through a qualified lawyer, that clearing house business, the interested party consists in two parts: the first shall contain must obtain the respective license from the the information that should be evident in the CNV, which shall be granted provided that prospectus (including the financial data), the technical, administrative and financial and the second, shall contain the information capacity to provide the service is proven. and the documents that should be evident in the Files of CNV, such as material contracts, As “self-regulated organizations” (“SROs”) incorporation documents, etc. they are obliged to protect the interests of investors, to promote the cooperation of the Each securities offering is the subject of a market agents, report on any violations to separate registration request; however, the the securities law, not to unreasonably limit CNV may authorize the offer of different or discriminate regarding membership, nor types of securities from the same issuer in a affect free competition, to avoid deceitful prospectus if this is allowed by the and manipulating actions that may affect the circumstances and if this does not create market’s transparency and investors. confusion among investors. Likewise, stock exchanges shall monitor Registered issuers are obliged to file at the their members’ compliance with the internal CNV interim reports and audited financial rules and the securities law. statements, as determined by this government agency. As well as securities brokerage firms, both are in the obligation to file at the CNV Foreign issuers may register their securities periodical reports, as well as audited and before the CNV and their public offerings internal financial statements. would not imply per se the conduct of business in Panama. Foreign issuers are C. REGISTRY OF SECURITIES obliged to maintain in Panama an attorney- AND PUBLIC OFFERINGS in-fact in order to represent them before the Panamanian authorities, including judicial Pursuant to the Law-Decree, the following authorities and the CNV. securities are subject to registration with the Commission: 5 The persons directly or indirectly a) securities that are the subject of a entitled to the economic benefits of the public offering, subject to the security, to exercise voting power or to approval of CNV; dispose of the security. 3
  4. 4. On the other hand, the Law regulates in 4) Offers, sales, distributions, transfer detail the public offering or sale of securities and exchange of securities between made by issuers (or affiliated persons) in the issuer and securities holders of Panama. These offerings/sales are required said issuer due to: to be registered before the Commission unless there is an exemption available. 4.1 the offer of shares to Under the Law, is deemed as an offer done increase the issuer’s capital, in Panama, any offer made to persons directed to existing domiciled in Panama, regardless that the shareholders; same is done from the Republic of Panama or abroad, unless the CNV determines 4.2 the issuer’s declaration of otherwise.6 stock dividends or other securities of; The Law-Decree establishes the following offerings or sales as exempted from 4.3 issuer’s restructuring, registration: dissolution, liquidation, merger or consolidation; 1) The offer and sale of exempted securities (bonds issued or 4.4 the exercise of rights or guaranteed by the State or by options previously granted international organizations where by the issuer. the State participates or any securities exempted by 5) the offer and sale made by the determination of the Commission). issuer, exclusively to its employees, directors, and officers or to 2) Private placements: offers made by employees, directors, and officers of an issuer (or any of its affiliate) or affiliated companies. an offeror in its name, to no more than 25 persons and which jointly 6) any other offers or sales or results in the sale of said securities transactions in securities that are to no more than 10 persons, within a exempted as per a ruling from the 1 year term. CNV. 3) Offers and sales made to The issuer interested in the public offering institutional investors.7 of its securities shall cause a securities registry application/filing. 6 Prior to the date of the approval from the The CNV has powers to qualify whether an e- offering is effected in Panama and, therefore, CNV, which authorizes the public offering, pursuant to registration, unless there is an the issuer may not negotiate the securities exemption available. subject to the offering.8 As from the filing date of the registration statement,9 the issuer 7 Although the Law-Decree has no definition may offer securities to sales agents and the for this term, the exemption provision latter, the issuer and the existing subscribers establishes that these are persons whose may request purchase orders, provided that experience, knowledge, sophistication and these activities do not constitute a firm financial net worth allow them to examine and 8 assume the risks of investing in securities The violation of this prohibition is generally without the need of the protection of the law. known as “gun-jumping”. This matter is subject to regulation from the 9 Commission. The “waiting period”. 4
  5. 5. obligation to purchase or sell said securities. After the public offering has been D. INVESTMENT FUNDS authorized, offers may be made in any manner, provided that they are accompanied The Law-Decree regulates investment funds, by the final/statutory prospectus authorized in their open as well as in the close version, by the CNV. according to the redemption offer and empowers the CNV to establish investment On the other hand, Title VIII of the Law- funds categories based on the type of risk, Decree establishes the obligation to notify portfolio and assets, level of indebtedness or the CNV of any tender offer from an issuer liquidity and other guidelines deemed for more than 25% or more of the issued and convenient. outstanding stock of said issuer or for an amount of shares that causes the purchase In the same manner, the Law regulates thereof to imply the acquisition by the “foreign” investment funds, which are those offeror of the same of over 50% of the constituted pursuant to the laws of a foreign issuer’s issued and outstanding stock. Said State or those which main investment notice shall also be delivered to the issuer manager has his/her/its main domicile and the stock exchanges in Panama, where outside Panama and manages the goods or the shares subject to the tender offer are assets of the investment fund outside listed.10 Panama. Public offerings for the acquisition of shares Likewise, current legislation authorizes the shall have a term no less than 30 days, as registration of investment funds with only from the date of the offer and shall occur one kind of share participation and one under equal conditions for all holders of the investment portfolio (simple version), shares subject to the offer. In the same umbrella funds, investment funds of manner the offer may be revoked, provided different classes and funds of funds. that the term of the offer has not expired. The contents of the notice of the offer and Investment funds that publicly offer their the replies shall be ruled by the CNV.11 participation shares/units/quotas in Panama must register with the CNV, provided that The Commission may recognize the validity said offering is deemed as a public offer as of registration statements declared effective provided for by the Law-Decree; and those by foreign “recognized jurisdictions” and managed in or from the Republic of Panama. therefore allow the public offering and listing in a local exchange of the securities An investment fund is deemed managed in covered by such registrations.12 or from Panama if any of the following 10 circumstances occurs: Title VII in turn provides for notice to the Commission of proxy solicitations. See CNV Regulation 16-00 of 2000. a) if an investment manager is appointed in Panama; 11 See CNV Regulation 04-00 of 2000, modified by Regulation 09-00 of 2000. b) if its main domicile is Panama or the prospectus or other advertising 12 A recognized jurisdiction is the one, which material indicates that the same is has laws and regulations in force, which provide located in Panama; with similar or better legal standards for investors protection. Up to this date among the jurisdictions recognized by the CNV are the ones participating in IOSCO (i.e., US, France, Spain, UK, Japan, Switzerland, Germany, Hong Kong, Quebec and Ontario [Canada]). Australia, Mexico, Italy, the Netherlands, 5
  6. 6. c) if a custodian is appointed in Panama; a) The investment manager, the investment advisor, the custodian d) if the amount of directors necessary and the offeror that distributes to adopt a resolution of the board of shares quotas; directors has its domicile in Panama. b) the investment corporation’s On the contrary, an investment fund is not external (independent) auditors; deemed as managed in or from Panama due to the sole occurrence of one of the c) any person that directly or indirectly following circumstances: is the owner of over 10% of the shares issued and outstanding of any a) that it is constituted pursuant to the of the persons mentioned in laws of Panama; foregoing separate paragraphs. b) that it is domiciled in Panama, if this d) directors, officers, employees, is not its main domicile and the brokers, dealers and analysts from prospectus or advertising material any of the persons mentioned in the does not infer otherwise; foregoing paragraphs; c) that one or more of its directors, e) the person that has any family officers, attorneys or employees has relationship within the second level their domicile in Panama, provided of kinship or relationship with any that the amount thereof is not the of the aforementioned persons. necessary number to adopt the decisions for the investment fund; Investment funds should keep their accounts, books and accounting according to d) that administrative services (for the standards and practices determined by example, accounting, secretarial, the CNV13 and should have their books and registry or bookkeeping, and registries available for inspection by the transference and similar services) CNV’ staff, as well as submit reports and are provided to the investment fund financial statements (interim and audited) in or from Panama. before the CNV. The prospectus of these companies must On the other hand, the Law foresees the so contain a detailed description of the called “private” investment fund, which are objectives and investment policies, levels of managed in or from Panama, which share indebtedness, mechanism for the quotas are not offered in Panama and which subscription or redemption of participation constitution document has one the following shares, manners in which the net value per limitations: participation share, commissions and charges is estimated, dividend and a) a 50 person limit as “effective distribution policy, investment and owners”14 of their share quotas or custodian manager, and any other that mandates that the offering of information established by the CNV. their quotas be communicated No less than 20% of the directors (or 13 May be under US GAAP. See CNV persons with similar powers) shall be Regulation 02-00 of 2000. independent from the investment fund. The following are not deemed as independent 14 See note 5 supra. persons from the investment fund: 6
  7. 7. privately and not through public Foreign investment managers should have a communication means, license granted by a foreign jurisdiction. b) a provision that establishes that their Foreign managers are those that manage, quotas may only be offered to administer, invest and in general, perform qualified investors15 in minimum their obligations as investment managers initial investment amounts of outside Panama. In specific cases for US$100,000.00 foreign investment managers, the CNV is authorized to grant exemptions to These investment funds must appoint a compliance with the requirements of the representative in Panama, who should have Law. sufficient powers to represent the fund before the CNV and to receive Investment managers are obliged to file administrative and judicial notices (service reports and financial statements before the of process). CNV, which must also be provided to their investors. The representative has the duty of maintaining in his/her files the constitutional E. TRADING PRACTICES, documents of the investment fund, the DERIVATIVES AND prospectus used for the offer of the SECURITIZATION participation units/shares, documents crediting their appointment, a certificate The Law authorizes the granting of credit for crediting the existence of the investment the purchase of or to hold registered fund, the names and addresses of the securities in a portfolio.16 Likewise, it is investment manager, the offeror and the viable for broker-dealers to incur debt by custodian, as well as the main executive pledging proprietary securities as collateral. thereof. These documents and information On the other hand, it is acceptable to give or should be delivered by the investment fund take securities in loan and repurchase of before commencing operations. securities.17 1. Investment Managers Lastly, the Law empowers the CNV to establish rules for options, futures and other To act as investment manager it is derivatives markets. mandatory to have a license regardless that services are rendered to investment funds For the first time, the Law expressly allows registered or not before the CNV. In the the assignment of credits and other future same manner, those companies that manage incorporeal rights for purposes of funds for State employees’ Savings and securitization. Pensions Capitalization System (“SIACAP”, in Spanish) should obtain a license. F. SECURITIES CUSTODY, CLEARANCE AND LIQUIDATION Under the provisions of the Law-Decree, the outsourcing of investment management The Law foresees a complete title that rules services is viable. in detail the issuance of securities represented by account writings and the creation and operation of an indirect holding 15 regime for financial assets through custodian A qualified investor is an investor accounts, which conveys the whose business includes the trading of 16 securities or that has a patrimony or net Usually known as “margin”. worth of no less than one million US 17 dollars. “Short selling” is allowed. 7
  8. 8. dematerialization of the securities.18 This of registered entities (market agents; i.e., registration/annotation system do not affect broker-dealers). the possibility of constituting liens (such as pledges) over the securities. I. ANTI-MONEY LAUNDERING PROVISIONS G. PROHIBITED ACTIVITIES, CIVIL LIABILITY AND ENFORCEMENT By means of Law No. 42 of October 2, 2000, the Republic of Panama imposed for Civil liability for any person found the first time as a formal obligation on responsible for the loss or damage caused by capital markets participants (i.e., brokerage the use of fraudulent or deceitful devices in firms, clearing houses, investment connection with the sale or purchase of managers) the duty to exercise the “know securities is established by the Law. Besides, your client” policy. The law establishes the insider trading, as well as the use of any duty for all market participants to exercise fraudulent or deceitful act or market due diligence when operating in order to manipulation (i.e., wash sales) that may avoid their activities to be used for money affect the purchase or sale of securities is laundering. Brokerage firms, the exchanges, prohibited. clearing houses and investment managers have the duty to keep records of their A treble damage sanction is established for activities and to keep such information insider trading and the CNV is empowered available for inspection from and even to to impose administrative fines for up to report suspicious activities to the Financial US$300,000.00 for violations of the Law- Analysis Unit. Decree. J. TAX INCENTIVES IN As a very particular provision of the Law- CONNECTION WITH REGISTERED Decree, a class action is recognized in favor SECURITIES of the CNV, which has standing to file complaints in its name to enforce the For income tax and dividends tax purposes, provisions of the new securities law. Any profits resulting from the alienation or amounts recovered by the Commission disposal of securities issued or guaranteed through a class action shall be transferred to by the State shall not be deemed as taxable a trust19 which beneficiaries are the investors and losses shall not be deductible. The same conforming the class. treatment applies to loss and profit derived from the transfer of securities issued or The statute of limitations for civil remedies traded by persons registered in the CNV, are up to three years. provided that said negotiations occur: H. DISSOLUTION, INTERVENTION A. Through an exchange or an AND LIQUIDATION organized market; or B. As purchases in a public The Law establishes a complete regime for offering of the securities, or the intervention (receivership), C. Is the result of a corporate reorganization, dissolution and liquidation merger, consolidation or reorganization. 18 See US Uniform Commercial Code (UCC) On the other hand, interests paid or credited article 8, as amended. on securities or debt instruments registered 19 Which trustee must be the National Bank of in the CNV cause an income tax based on a Panama (state-owned banking institution). sole 5% tariff, which must be withheld by the person paying or crediting the same. 8
  9. 9. This income is not deemed as part of the investors’ (taxpayers) gross income, therefore they are not obliged to book it in their respective tax statements. Interest accrued from securities registered in the CNV and traded in an exchange or an organized market are exempted from the payment of income tax. The underwriting of such securities does not affect these tax benefits. Securities registered before the CNV, and any act, contract, agreement or document pertaining in any manner to said securities or their issue, sale, subscription, payment, transfer, exchange or redemption are exempted from paying stamp taxes. Pursuant to Law No. 24 of 1992, all profits derived from bonds, shares and securities issued by companies dedicated to reforestation and related and similar activities, and profits obtained in the transfer of these securities shall be exempted from income tax. On the other hand, according to Law No. 25 of 1992 all income derived from dividends or interests generated by shares, bonds, and other securities traded in the national or international capital markets by companies established in export processing zones authorized in Panama is tax free. PATTON, MORENO & ASVAT HSBC Bank Building, Sixth Floor Samuel Lewis Avenue P.O. Box 6-4298 El Dorado Panama, Republic of Panama. E-mail: Webpage: Teléfonos: (507) 264-8044 (507) 264-8359 Faxes: (507) 263-7887 (507) 263-7038 9