Real time issuer disclosures: the Colombian situation

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Nicolás Bonilla
Posse Herrera Ruiz, Bogotá
nicolas.bonilla@phrlegal.com

Sebastián Echeverri
Posse Herrera Ruiz, Bogotá
sebastian.echeverri@phrlegal.com

Introduction

Colombian regulation on real time issuer disclosures has not been amended since Decree 3139 of 2006 and by its compilation in Decree 2555 of 2010 (the ‘Decree’). Such activity strongly involves the Colombian Financial Superintendency (‘CFS’), either through the supervision of such entity or by establishing conditions and channels to disclose specific information. The main concern of such regulation is the lack of certainty of all the circumstances where the issuer shall disclose information. For that reason, as explained below, a project decree has been published for public knowledge; such decree intends to modify issuer disclosures under the Colombian legal regime. The dilemma is whether such amendment envisages positive results for issuers in Colombia.

Colombian issuer disclosures regulation

Colombia’s current regulation on issuer disclosures is contained in article 5.2.4.1.5 (the ‘Article’) of the Decree issued by the Ministry of Finance and Public Credit of Colombia. The Article establishes two criteria that need to be complied with by securities issuers under Colombian regulation. The first is a subjective – and thereby residual – criterion, where the issuer must report to the market, through the scheduled channels foreseen by the CFS, any situation related to such issuer or to its issuance that would be considered by a prudent expert in the process of buying, selling or conserving such security or even in the process of executing political rights derived from such security. Therefore, such criterion relies solely upon the issuer’s judgement. Despite that, the CFS is entitled to impose sanctions when issuer disclosure previsions are breached.

On the other hand, the second criterion of the same Article poses different scenarios under various categories (legal situations; accountable and financial situations; commercial and labour situations; company crisis-related situations; issuance of securities; and even securitisation processes (the ‘Category’ or ‘Categories’)) where the issuer must disclose specific circumstances to the market. The main difficulty regarding such legal disposition is that issuers may rely exclusively on the scenarios mentioned under each Category, denigrating other possible situations where disclosing of information is needed. In practice, such scenarios constitute restrictive lists, therefore issuers usually do not disclose any situation that is not included in a Category.

It is clear that, in the current Colombian regulation, there is no legal certainty of all the situations that may require issuer disclosures. There is a blend of subjective and objective criteria regarding disclosure situations for issuers. This may result in the over-disclosure of events or even the under-disclosure of situations that may be subject to monetary sanctions imposed by the CFS.

Decree project issued by the Financial Regulation Unit (‘FRU’)

The FRU is a governmental entity with a mission to propound legal standards designed to assure a stable and inclusive financial system in Colombia. In this case, the FRU published a decree project intended to modify specific dispositions of the Decree (note: said decree project is not binding until the Ministry of Finance and Public Credit of Colombia approves and issue such decree). Among other modifications, such decree project envisages a specific amendment to the Article based on the following general terms:

• the disclosure of information must be executed with foresight or on a historic basis for the investors to utilise such information; and

• the situations that must be disclosed by issuers shall be determined by the CFS and must be related to legal, accounting,financial, commercial and labour situations, company crisis-related matters and issuance of new securities.

It must be highlighted that all specific scenarios of the Categories are to be removed under the amendment of the Article. Therefore, under the amendment, the CFS has the responsibility to determine through circular letters – or any other legal instrument available – the situations/information that issuers must disclose.

An additional aspect must be regulated by the CFS: by incorporating a historic or foresight element in the issuer’s liabilities towards the disclosure of information, a wide range for interpretation remains. The CFS must specify or establish the boundaries that shall limit the historic or foresight element for Colombian issuers. Examples of these boundaries might be time limits for the historic element or even a specific scope for foresight of information.

Contrast with real time issue disclosures in the United States

When a legal amendment is proposed by the FRU it is usually followed by a technical document where motives and conditions for the amendment are shown to the public. In this case, the FRU briefly mentions the US regulation applicable for real time issuer disclosures, specifically under Section 409 of the Sarbanes-Oxley Act (SOX Act). The criterion for the disclosure of information in this case is limited to ‘material changes in the financial condition or operation of the issuer’.^[1]

The intention of the FRU, as stated in the technical document,^[2] is to eliminate restrictive scenarios where issuer’s disclosures shall occur, as the quality of the information reported to the market must be the key aspect behind such regulation. Clearly there is an intention to assimilate to the model of the United States for real time issuer disclosure. Nevertheless, in practice, results may vary, because the subjective criterion would still be applicable, and given the possibility of circular letters being issued by the CFS, where restrictive reporting scenarios may be included.

The Article’s modification clearly assimilates to the US legal disposition, where a wide range of categories is established but no possible scenarios are mentioned under each category. Therefore, per the US legal disposition, the issuer must report any modification that corresponds to changes in its financial condition or operations; while, in accordance with the proposed amendment to the Colombian rule, the issuer must report any circumstances related to legal; accountable; financial; commercial and labour situations; company crisis-related matters and issuance of new securities. As is evidenced, the Colombian regulation is trying to establish a general criterion, but the results in practice may vary.

Conclusions

It is evident that Colombia’s regulator intends that the amendment should cover all possible situations where issuers’ disclosure may be required. By establishing two different criteria, as aforementioned, the scenarios where disclosure is applicable remain unclear. Breaches of such dispositions may therefore materialise, affecting negatively and economically Colombian issuers, which will, in the long term, reduce the number of issuers and thus the liquidity of the stock exchange market.

The fact that the CFS must determine the situations where the disclosure of information is applicable may result in the same current, applicable Colombian regulation as foreseen in the Article. Thus, if the project of the FRU results in an amendment to the Decree, the circular letter that the CFS will issue in connection with the disclosure of information should be carefully reviewed. An over-regulation of scenarios where the disclosure of information shall be executed by issuers is a possibility, in which case, it is unlikely that such amendment will have a positive effect.

The idea of adapting US legal previsions to the Colombian financial system is indeed a good initiative. Nevertheless, the compatibility of both legal systems is far from being an easy matter to achieve. If the decree project issued by the FRU is duly approved, the spotlight will point towards the CFS. Such entity will have the final call to determine if the US approach to real time issuer disclosure is implemented formally and materially under the Colombian legal system; or, if this amendment will have no effect, thus resulting in the same initial regulation as foreseen in the Article.

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