LATIN LAWYER. Capital Markets 2011 Argentina. Reference. Carolina Zang, Gabriela Bindi, Carolina Arroyo Zang, Bergel & Viñes Abogados

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1 LATIN LAWYER THE BUSINESS L AW RESOURCE FOR LATIN AMERICA Reference Carolina Zang, Gabriela Bindi, Carolina Arroyo Zang, Bergel & Viñes Abogados 1. which laws, regulations and administrative rulings govern the offering and trading of securities and how are they proposed, adopted and amended? The domestic markets are governed generally by: Law No. 17,811, as amended, enacted on 16 July 1968 (the Public Offering of Securities Law); Decree No. 677/2001 enacted on 22 May 2001 concerning the transparency within the public offering (the Decree); Argentine National Security Commission s Resolutions (CNV) which are published regularly and are binding to all individuals under its regulatory supervision; Rules and regulations (including listing requirements) issued by self-regulated organisations that need to be observed by the issuers. The most relevant are Bolsa de Comercio de Buenos Aires (BCBA) Listing Rules and Mercado Abierto Electrónico S.A. (MAE) Listing Rules. In Argentina, laws are enacted by the Congress and published by the Executive Branch. They can be proposed in several ways, as for example, by: a parliament member of one of the two chambers (Chamber of Deputies and Upper Chamber); the Executive Branch; or citizens through an initiative that needs to be filed in the Chamber of Deputies. For a law to be approved, its project will have to meet the required quorum and votes, and will need to not be vetoed by the Executive Branch. Regarding decrees, usually they are legal instruments issued by the Executive Branch and their main function is to complement the regulation of an existing law. Consequently, they are proposed, adopted and amended by the Executive Branch. In the case of the Decree, it has the particularity that it was issued in accordance with the faculties delegated by the Congress to the Executive Branch during the 2001 Argentine crisis. As a result, this Decree is mostly considered to have the same status as a law. In accordance with the Public Offering of Securities Law the CNV has the authority to issue the rules to which the individuals and legal entities that participate in securities public offerings are subject. The Resolutions are issued by the Board of Directors of the CNV, which is appointed by the Executive Branch. Finally, the rules and regulations of the self-regulated organisations are issued by such organisations and approved by the CNV. In relation with the proposition, adoption and amendment of a self-regulated organisation rules and regulations, they are subject to the terms of the by-laws and rules and regulations of each organisation. 2. what is the rationale behind this legislation? The rationale behind capital markets related laws, decrees and rules follow several principles that aim to increase efficiency and transparency in the offering and trading of securities in order to protect the rights and interest of the investors. So as to perform capital markets main targets (such as liquidity, stability, solvency and transparency) the guaranty of a stable legal scheme and investor confidence is a key question. Argentine legal framework aims to protect both investors and financial consumers based on adequate corporate governance practices, which is achieved through the transparency regime, stated under the Decree, in the following manner: further disclosure requirements are placed to listed companies, intermediaries and other participants; individuals or legal entities with inside information shall keep it reserved under stronger penalties; certain standards of conduct are expected from intermediaries; stricter obligations are imposed to self-regulated organisations; and typification of conducts as contrary to transparency. 3. which regulatory authorities oversee capital markets and what is the scope of their jurisdiction? The CNV is a governmental entity with jurisdiction over Argentine territory. Its main purpose is to rule the securities public offerings, ensure transparency of Argentina s securities markets, watch over the discovery price process and protect investors. The CNV, among other duties, authorise, suspend and cancel public offering of securities; assess the Executive Branch regarding authorisation requests filed by stock exchanges; keep records of stock agents and of persons or entities authorised to make public offering of securities; approve stock exchanges and stock markets rulings regarding public offering; oversee the regular performance of enforceable public offerings laws, statutes or rulings; and request to the Executive Branch the withdrawal of authorisation to non complying stock markets and exchanges. 4. How is financial fraud and price manipulation in capital markets regulated? Financial fraud and price manipulation is regulated by the Decree, and also by the CNV Resolutions. This regulations established that the market participants (issuers, intermediaries, investors, or any other person or entity taking part in the markets of securities or forward contracts, futures and options of any type whatsoever), shall abstain from: making, per se or through an intermediary, in initial offerings or secondary markets, practices or behaviours that may intend or allow the manipulation of prices or volumes of the securities, rights or forward contracts, futures and options, modifying the normal development of the supply and demand; and deceitful practices or behaviours that may induce any party taking part

2 in said markets to make an error pertaining to the purchase or sale of any negotiable security in the public offering or of forward contracts, futures and options of any type, either through the use of false, insufficient or inaccurate statements omitting essential events, or through any act, practice or course of action that may have deceitful and detrimental effects on any person in the market. 5. What sanctions and remedies can the regulatory authorities impose? The Public Offering of Securities Law, amended by the Decree, establishes that the CNV may impose the following penalties, in the event of an infringement to its dispositions: Warnings; Fines from 1,000 to 1,500,000 Argentine pesos that may be increased up to five times of the amount of the benefit obtained or the damage suffered as a result of the illegal action, if any of them is higher; Disqualification of up to five years from performing functions as director, manager, auditor, member of the supervisory committee, certifying accountants, external auditors of issuers authorised to make public offering, or to act as such in investment or depositary companies of investment funds, rating agencies or companies acting as financial trustees, or to act as intermediaries in public offerings or in any other manner which may be under the control of the CNV; Suspension of upto a two-year term to make public offerings, or, as the case may be, to act in the sphere of public offerings. In the case of mutual funds, only common administrative acts may be performed and attend redemption requests, being only able to sell for that purpose under the supervision of the CNV; and Prohibition to make public offerings of securities or, to act in public offering of securities or forward contracts, futures or options of any nature whatsoever. For the purposes of establishing the above mentioned penalties, the CNV shall especially take into account: the damage to the capital market s confidence; the scale of the infraction; the generated benefits or the damages caused by the defaulting party; the operating volume of the defaulting party; the individual performance of the members of the board of directors and other supervision bodies and their relation with the controlling shareholders, especially, the nature of independent or external member of said bodies; and the circumstance of having been previous penalised in the six previous years by the application of the Public Offering of Securities Law. In the case of the legal entities the following shall be joint and severally liable: the directors, administrators, auditors or members of the supervisory boards and, in its case, the managers and members of the qualification board, whose individual responsibility was determined in the commitment of the penalised behaviours. 6. what are the private remedies an investor may pursue? The Decree established that the self-regulated entities should create a permanent arbitration court to which all entities under the public offering regime shall be subject in a binding way in their relations with the shareholders and investors. The actions derived from Law No. 19,550, as amended (the Corporation Law), shall be subject to the arbitration jurisdiction, including claims objecting corporate bodies resolutions and liability actions against its members or other shareholders, as well as nullity of by-laws or regulations. Self-regulated entities shall proceed in the same way with regards to issues set by the shareholders and investors regarding the brokers acting in their scope, except for the discipline power. Shareholders and investors in conflict with the entity or the agent shall have the right to make an option between arbitration or judiciary courts. In the cases where law establishes the aggregation of claims brought with the same purpose before one court, the aggregation shall be on arbitration court. 7. what is the legal definition of a security and which types of securities are commonly traded? The term security was originally defined by the Public Offering of Securities Law as securities that are issued in mass, that as a result of having the same characteristics and rights within their class are offered generally to the public. The term security under this law was linked to the instrument (the paper ). In 2001, with the approval of the Decree the definition of security was modified. The new concept abandoned the idea related to the linkage with the instrument itself. As a result of the above mentioned, securities is defined by the Decree as the securities mentioned in section 17 of the Public Offering of Securities Law and its amendments, either held in certificate form or those securities filed in a book entry registry, specially including those credit instruments or instruments representing credit rights, shares, unit shares of investment funds, debt bonds or financial trust certificates or certificates of other collective investment tools and, in general, any security or investment contract or homogeneous and fungible credit rights, issued or grouped in series and equally negotiable and with similar effects to securities. The securities more commonly traded in Argentina are common stocks, corporate bonds (simple and convertible into shares), public bonds, asset backed securities, investment funds, (closed-end funds), short-term securities, deferred cheques, among others. 8. How are securities offered and sold to the public? In accordance with the terms of the Public Offering of Securities Law a public offering is an invitation made to the general public or to specific groups or sectors to do any kind of legal act with securities, by the issuers or by sole proprietorships, firms or companies either exclusively or partly engaged in the trading thereof, by means of personal offers, newspapers and periodicals, radio or television broadcasts, films, posters, placards or billboards, programs, circulars and printed communications or any other means of public dissemination. The Decree modified the scope of the definition including any invitation with regard to legal acts with other financial instruments, whichever their nature may be, traded on an authorised market, such as forward contracts or options. The public companies must obtain first the authorisation of the CNV and, if desired, the authorisation for listing at a stock exchange. An issuer might be also able to do private offerings of securities, which do not require the previous authorisation of the CNV. 9. what are the disclosure requirements for securities issuers for both public and private offerings? Public offering in Argentina requires that, an issuer meet certain regulatory requirements of CNV regarding assets, operating history, management and other matters, and only securities for which an application for a public offering has been approved by the CNV may be listed on the BCBA. This approval does not imply any kind of certification or assurance related to the merits or the quality of the securities, or the issuer s solvency. Filings of unaudited quarterly financial statements and audited annual financial statements are required for public companies, as well as other periodic reports, with the CNV and the BCBA. With regard to private offerings, there are no disclosure requirements and as previously explained this kind of offerings are not under the supervision of the CNV. 10. Are there exemptions from securities registration? The only exemption is public bonds. If the state, a province or municipality decides to go public, it will only have to require the authorisation for listing at the exchange. Although it is not an exception, short term corporate bonds have a smoother process of registration, as issuers of this type of securities have a simpler disclosure regime. 2

3 11. Do your accounting standards differ in significant ways from other jurisdictions generally accepted accounting principles? In December 2009 the CNV issue Resolution No.562, as amended, by virtue of which since the fiscal period initiated after 1 January 2012, the public companies will have to adopt the IFRS (as defined below). For more information, please see question is there a planned convergence to the International Accounting Standards Committee s International Financial Reporting Standards? The CNV issued Resolution No. 562, as amended, pursuant to which such regulatory authority modified the rules and regulations applicable to the presentation and valuation of the financial statements, in accordance with the International Accounting Standards Committee s International Financial Reporting Standards (IFRS). Such Resolution established that the companies that have their shares or corporate bonds listed shall prepare their financial statements in accordance with the IFRS since the fiscal period initiated after 1 January The small and medium business (SMBsz) and the companies that are regulated also by other regulatory authorities, as banks and insurance companies, are excluded from the obligation to adopt the IFRS. 13. Does your jurisdiction offer policy and tax incentives to invest in the capital markets? Argentina offers policy and tax incentives to invest in capital markets. Nonargentine investors holding financial instruments that meet the public offering requirement are tax exempted either on the purchase, holding and sale of the debt security. Interests are also tax exempted. As far as equity products are concerned, distribution of dividends of Argentine companies to non argentine shareholders, are not subject to withholding taxes. Additionally, income derived by a foreign beneficiary from the transfer of shares is tax exempted. 14. Please describe the applicable tax withholding regime, the customary exceptions and the commonly used standard tax-planning devices. Income other than dividends, deemed to be of an Argentine source, paid to a foreign beneficiary, is subject to argentine income tax withholding by the Argentine payer. The Argentine Income Tax Law imposes different rates of withholding taxes depending on the type of income, applicable on presumed net income. Argentina is a party to double taxation treaties which impose ceilings on the withholding rates imposed by the Argentine income tax law. 15. where and how are securities traded? The securities market in Argentina is composed of 12 stock exchanges, which are located in the City of Buenos Aires, Bahía Blanca, Corrientes, Córdoba, La Plata, La Rioja, Mendoza, Rosario, Santa Fe and Tucumán. Five of these exchanges (the BASE, Rosario, Córdoba, Mendoza and Santa Fe) have affiliated stock markets and, accordingly, are authorised to quote publicly offered securities. Securities listed on these exchanges include stocks, corporate and public bonds. The BASE, which began operating in 1854, is the main and traditional exchange in Argentina. Bonds listed on the BASE may simultaneously be listed on the Argentine over-the-counter market (MAE), pursuant to an agreement between BASE and MAE, that stipulates that equity securities are to be traded exclusively on the BASE, while debt securities (both public and private) may be traded on both the MAE and the BASE. In addition, through separate agreements with the BASE, all of the securities listed on the BASE may be listed and subsequently traded on the Córdoba, Rosario, Mendoza, La Plata and Santa Fe exchanges. Most securities are traded within Mercado de Valores SA (Merval), a corporation whose 183 shareholder members are the only individuals and entities authorized to trade, either as principal or as agent, in the securities listed on the BASE. Trading on the BASE is conducted by continuous open outcry, or the traditional auction system, from 11 am to 5 pm each business trading day of the year. Trading on the BASE is also conducted through SINAC, which is a computer trading system for debt and equity securities. SINAC is accessed by brokers directly from workstations located at their offices. 16. Please provide a general description of securities settlement systems in your jurisdiction. There are commonly two groups of transactions: spot transactions; and forward transactions. The spot transactions allow investors to buy or sell certain securities (as stocks, public bonds, and corporate bonds) at an agreed price are settled on T+3 basis. The forward transactions are conveyed to be settled after T+3. This extended term of liquidation implies more risk and as a result; the participants will require to set up guaranties. The Merval uses a settlement system that complies with the G-30 report on Clearing and Settlement in global Securities Markets and the subsequent reports of the Technical Commitee of the International Organization of Securities Commissions (IOSCO) and the Iberoamerican Federation of Stock Exchanges (FIAB). The settlement system ensures the compliance of the delivery versus payment (DVP). 17. what are the distinguishing characteristics of your debt and equity capital markets? Both debt and equity capital markets have very similar regulation and have to accomplish with very similar disclosure requirements. Notwithstanding the foregoing, most of the market participants prefer to issue debt, as corporate bonds, instead of stocks. Among the principal reasons for this, we find that on the shareholders side, they are not comfortable with receiving new investor that can interfere in the decision making of the company. On the investor side, investors feel more comfortable acquiring bonds than stocks, as bond holders have a better position than shareholders at the time of turbulence in the economic conditions of the issuer. From the January 2000 to February 2011, the companies have obtained funds principally through the issuance of corporate bonds (49.3 per cent), secondly, through the structuring asset backed securities (42.4 per cent), and thirdly, through issuance of shares (8.4 per cent). (Source: Instituto Argentino de Mercado de Capitales (IAMC)). 18. where and how are derivatives traded? Derivatives are traded in the Mercado a Término de Rosario (Rofex), MAE and Mercado a Término de Buenos Aires (MATBA). They are all exchanges organised under the laws of Argentina, which operate as self-regulatory organisations under the supervision of the CNV. Regarding Rofex, transactions can be performed through their e-rofex platform. Typical products of this market are: soy; wheat; corn; dollar currency; euro currency; real currency; and gold. Concerning MAE, it is an electronic platform that process over-the-counter transactions. It is an electronic exchange where both government securities and corporate bonds are traded through spot and forward contracts. The MAE has 90 brokers or dealers members, which include national banks, provincial banks, municipal banks, private national banks, foreign banks, cooperative banks, financial institutions, foreign exchange entities and pure brokers/dealers (exclusively engaged in brokerage activities). Both Argentine or foreign capital banks and financial institutions may be the MAE s brokers or dealers. Securities to be traded must be registered with the pertinent supervising authorities and may be traded in the MAE, in other exchanges or in both of them concurrently. Typical products of this market are: 3

4 dollar currency futures; different rates; and index futures. Last, MATBA is also a self-regulated exchange, with a participation of the Agriculture, Livestock, Fishing and Food Secretary. Transactions can be performed by any registered agent via outcry system through MATBA net. Typical products of this market are futures and options related to agribusiness. 19. Can you explain development of structured finance instruments in your country? Structured finance products are very used in Argentina. Of such instruments, the more frequently issued and traded are the asset-backed securities. The asset backed securities are generally issued through financial trusts, also supervised by CNV. At the beginning financial trusts were subject to certain tax exemptions and less requirements of information. In 2008 the tax exemptions were removed and harder and stricter obligations were imposed to the trustor and trustee. Nevertheless, the figures show that the investors are very deeply involved with these structured securities as they consider them secure and cost effective (the trading volume of financial trust was 4.4 million Argentine pesos in 2008, 9.2 million Argentine pesos in 2009 and 3.5 million Argentine pesos in Source: IAMC). 20. How are institutional investors defined and regulated? The institutional investors are regulated by CNV Rules. There are certain securities, as short term bonds and shares and corporate bonds of SMBs that can only be acquired and traded by institutional investors, as they accomplish with simpler information requirements. The institutional investors are: The state, provinces, municipalities, their self-regulated entities, banks and financial institutions of the state, state entities, state enterprises, legal entities subject to public law; Limited liability companies and corporations; Cooperatives, mutual benefit associations, health insurance (mandatory affiliation through trade unions), civil associations, foundations and labour organisations; Brokers; Investment funds; Individual with residence in the country, with a net worth above 700,000 Argentine pesos; Legal entities with residence in the country with a net worth above 1.5 million Argentine pesos; Foreign legal entities and individuals with residence outside of the country; National Security Social Administration. 21. what is the definition of insider trading? Outline the major developments in insider trading law? Insider trading has been defined by Resolution No. 227 of the CNV. This Resolution forbids controlling stockholders, directors and managers to use non public material information in order to gain whatsoever advantage for them or for a third party. Also, the Decree states the duty of confidentiality concerning directors, managers, trustees, supervisory board, controlling stockholders and professionals involved regarding information not yet release to the public and that, for the nature of its importance, it may affect the underwriting or trading of securities subject to public offering regulation. In re Comisión Nacional de Valores v Establecimiento Modelo Terrabusi SA, the Commercial Court revoked the monetary sanction rendered by the CNV against the directors of a listed company for trading securities based on inside information, but in a further stage, the Supreme Court confirmed the sanction against the implicated subjects. This case turned to be the first leading case in Argentina concerning insider trading practices. Under our local legislation, insider trading is not considered as a crime but as a very important administrative infraction. 22. what are the roles of the authorities when a foreign issuer makes a public offering? Who has jurisdiction over the public offering? Public offering of securities is under jurisdiction of the CNV. In the event that a foreign issuer decides to make a public offering of its shares in Argentina, it will have to accomplish with all the procedures and requirements of local companies. If the country of incorporation of the foreign issuer has an agreement with the CNV, as described in question 23, the process will be easier and smoother. 23. is there a formal understanding with other jurisdictions to share information and provide reciprocal assistance in enforcement matters? If so, which jurisdictions? The CNV has entered in several Memorandums of Understanding with Securities and Exchange Commission of different jurisdictions as Germany, Bolivia, Brasil, Chile, China, Colombia, Republic of Costa Rica, Ecuador, Salvador, Spain, United States, France, Israel, Italy, Malaysia, Mexico, Panama, Paraguay, Peru, Poland, Portugal, Quebec, United Kingdom, Dominican Republic, South Africa, Thailand and Taipei. 24. Please describe the framework for corporate governance. Corporate governance is regulated by the Decree, denominated as Public Offering Transparency Regimen. The scope of this rule is to strengthen the level of protection of the capital market investor ( financial consumer ). In such a manner, it states obligations to inform certain relevant facts that may affect the collocation of securities or its trading, certain statements on publicity and on the information contained in the prospect, sanctions for false news, conditions to public offering voluntary retirement and describe the actions that affect public offering transparency. Most of its reforms introduced by the Decree are in line with world trends pertaining to corporate governance practices that have already been adopted by many emerging markets. 25. which governing bodies must public companies have and what are their main duties? Governing bodies for a public company are stated by the Corporation Law, and the Decree. The Corporation Law, section 255 enforces public companies to have at least three directors on their boards. Their main duty concerns the management of the company. Section 268 states that the president of the board of director shall be the one that legally represents the company among third parties. Section 269 enables the constitution of an executive committee subject to its approval by the company s by-laws; their main duty shall only include the execution of ordinary business. Pursuant to section 270, the board of directors can designate general or especial managers, qualifying as directors or not, in order to delegate the executive matters of the administration of the company. Pursuant to section 284, a public company must have a supervisory committee with at least three members and odd numbered. Also, pursuant to sections 233, 234 and 235, shareholders meetings are essential having as their main duties to: consider the company s financial statements; directors and managers appointments; consider an increase of capital stock; consider a merger or acquisition; and issuance of bonds, among other tasks. Section 15 of the Decree set that public companies to have an audit committee with a minimum of three members, with most members responding to an independent condition, having as their main duties to: grant an opinion regarding the designation of the external audit committee; oversee the internal control systems and accountable and administrative systems; and oversee information policy regarding the company s risk management. In order to comply with this same section, the company will need to appoint an external audit committee with independent members which will audit the financial statements. 4

5 26. Are there any laws governing capital markets that are unique to your jurisdiction? Although it is not unique the Corporation Law establishes that in the event that a corporation decides to increase its capital stock, the pre-emptive rights of the shareholders are mandatory and can only be suspended in certain and limited cases. The scope of this right is to protect the currents shareholders of a company from dilutive practices of the controlling shareholders (friendly dispute arrangers). The decree may also be considered unique for the varieties of issues covered by it. 27. How do authorities and issuers resolve matters that are not expressly provided for in the securities laws and regulations? In the case arbitration disputes they may be solved based on equity principles and using the reasonable and just fair criteria, a form of arbitration known as amigables componedores. 28. which types of companies may make public offerings in your jurisdiction? The only type of company that can trade its shares are corporations. With regards to corporate bonds, they can be issued by corporations, cooperatives and civic associations. 29. which economic activities or segments are the most active in the capital markets in your jurisdiction? The most active segments of our economy in capital market are: oil and gas; banks; telecommunications; metallurgical industry; energy; retail; and consumer financing. 30. Describe the main stock exchanges and OTC networks. The most relevant stock exchanges and OTC markets are the Merval and MAE. As of February 2011, Merval had an average volume of US$722 million, including US$60.8 million regarding stocks and US$431.5 million of government debt bonds; it had a total capitalisation of US$1.900 billion and an average free float in relation to argentine companies of around 31.2 per cent. Concerning MAE, for the period of 2010, it had 65, floating government bonds in its market and 437,916 notes from private companies. 31. Describe recent initiatives undertaken by the government to improve the regulation and efficiency of its capital markets. The latest governmental initiative refers to money laundering and terrorism funding. The Financial Information Unit (UIF) issued several resolutions, being relevant for this matter General Resolution 33/11 and 34/11, both referred to agents and brokerage houses, common funds managers, OTC agents, and all intermediaries regarding buying, leasing or loan on securities. The resolutions state a number of duties referred to systematical reports based on unusual and suspicious operations. As an example, obligated subjects will have to inform: amounts, frequency and nature of an operation which has no proportion between the client s background and its economical activity; and unusual amounts or complex schemes for the performance of a transaction, among others. Another initiative was the adoption of the IFRS for the listed companies. Such initiative will facilitate the analysis of the local companies by foreign investor and also will allow an easier access for such companies to the foreign markets. See question Describe the main obstacles that a company may confront in your jurisdiction when it is trying to become public. The common beliefs include: public companies have to accomplish with several requisites and requirements of information and additional paper work that increase their fixed costs, turning their operations more costly; a cultural problem of local major shareholders that are afraid of losing the control of the decision making of the company, as in the exchanges the stocks are acquired by unknown investors; and a lack of substantial tax incentives. Zang, Bergel & Viñes Abogados Carolina Zang c.zang@zbv.com.ar Florida 537 Piso 18 C1005AAK Buenos Aires Argentina Tel: Fax: