Guatemala

Eduardo A Mayora

Mayora & Mayora SC

  1. 1.Which laws, regulations and administrative rulings govern the offering and trading of securities and how are they proposed, adopted and amended?

    The main piece of legislation concerning the offering and trading of securities is the Securities and Commodities Markets Act of 1996 (the LMVM) and its regulations. Article 24 thereof regulates the exchanges as self-regulatory organisations. As such, the organised exchanges have the legal powers and faculties to regulate their administration, organisation, operations and markets within the rules of the LMVM. The only existing exchange, Bolsa De Valores Nacional SA (the BVN) has promulgated a general statute, one statute for the registration of securities offerings, and several other statutes concerning the provision and updating of information.

  2. 2.What is the rationale behind this legislation?

    The rationale behind this legislation is, first, to provide investors and the market with relevant and reliable information concerning the securities that are offered publicly and the issuers of such securities; secondly, the regulation of the several kinds of transactions concerning the exchange of securities over the counter or within the framework of organised exchanges or both.

  3. 3.Which regulatory authorities oversee capital markets and what is the scope of their jurisdiction?

    The main public authority concerning capital markets is the Securities and Commodities Registry (the SCR). Since the LMVM conceives the exchanges as self-regulatory organisations, the SCR has the main responsibility to supervise that the exchanges do comply with their responsibilities under the LMVM to issue adequate regulations and to enforce them efficiently and fairly. Additionally, the SCR registers every securities issue and also investment funds, mutual funds, investment trusts and other like vehicles. The SCR has powers and jurisdiction over the over the counter market and the organised exchanges.

  4. 4.How is financial fraud and price manipulation in capital markets regulated?

    The Penal Code, the LMVM and the Code of Criminal Procedure contain the main provisions in order to prosecute and convict individuals involved in financial fraud, unregistered securities offerings or dealings with them, deliberate manipulation of accounting records and other similar criminal offences.

  5. 5.What sanctions and remedies can the regulatory authorities impose?

    There are basically three levels for the application of sanctions and remedies:

    • at the level of the exchange, mainly concerning brokers and dealers and securities issuers, and consisting mostly of fines or the termination of their rights to operate in the exchange or both;

    • at the SCR level, concerning the compliance with the LMVM and its regulations or the regulations issued by the exchanges, or both, consisting of fines, the suspension or termination of the registration of securities, securities brokers and issuers, petitioning the competent courts to appoint receivers, to enjoin operations or dealings in the securities or commodities markets or all of these; and

    • at the criminal justice level, where any individual or organisation to offer or trade in unregistered securities, takes money from the public to deal in unregistered securities or commodities, or appears to be a registered broker without the corresponding licence.

  6. 6.What are the private remedies an investor may pursue?

    Private remedies include the possibility of investors to:

    • sue in civil or commercial courts to seek payment or the compliance, or both, by the issuer with any rights concerned with the securities held by the investor;

    • promote, through its broker, the instauration of arbitration proceedings within the exchange, in case the other party’s broker might have violated rules of the exchange’s statutes;

    • request the administration of the exchange to pursue any disciplinary proceedings against brokers or issuers, or both that might have infringed the exchange’s rules or statutes; and

    • in general, petition the SCR or the competent courts, or both, to enforce at administrative, civil, or criminal law levels the applicable legal provisions.

    More specifically, remedies depend on the kind of right that might be trespassed:

    • rights created and existing on the basis of the securities purchased by the investor, which are usually enforced through civil and commercial courts;

    • rights concerning the application of the rules of the exchange to the offering or negotiation of securities, which are enforced either through arbitration proceedings before panels organised by the exchange or before the SCR; and

    • rights concerned with the protection against fraud, theft, usurpations, etc, which are generally enforced through the Prosecutor’s Office before the criminal courts.

  7. 7.Give details of the frequency and nature of enforcement actions or private actions.

    Since a financial crisis that took place in 1998, after which there have been no other major infringements, fraud, or defaults, there have been about six criminal investigations and three or four prosecutions. Two arbitrations and five private civil actions also been instituted and most of them date to the 1998 crisis.

  8. 8.What is the legal definition of a ‘security’ and which types of securities are commonly traded?

    Article 2(a) of the LMVM provides for a very ample definition of ‘security’, which may incorporate or represent any property, credit or equity rights and can be devised and defined by the issuer to circulate as desired within the basic rules of law. Thus, securities may grant, at the same time, a right to participate in pool accounts receivables and the proceeds thereof and the ability to swap them for other types of securities.

    Securities may be issued through physical certificates or through electronic book entries, a mechanism that has become the preferable way to handle the offerings and dealings with securities because of the lower costs and greater security.

  9. 9.How are securities offered and sold to the public?

    In general terms, securities are offered to the public through registered securities issues. The registration may take place:

    • through a petition only to the SCR, where the offering does not take place within an organised exchange but over the counter; or

    • through a filing with the BVN and subsequently with the SCR, where the offering or negotiation, or both, of the securities takes place within the framework of an organised exchange.

    The process requires the submission of several documents the most important of which are the draft instruments for the issue of securities (such as, for example, the indenture agreement), the draft securities (if physical) or the contents of the rights (if through electronic book-entries), and the draft prospectus. Provided all of the documents and forms are submitted in adequate form and complete, the review process may take three to five weeks at the level of the exchange. With the BVN’s approval in principle (in case of offerings or negotiations through the exchange) the application and file are remitted to the SCR for final review and registration. This may take an additional two to three weeks provided everything is in order.

    In all cases regarding offerings and negotiations through the exchange, it is necessary that a registered broker be retained to take the process to completion. Once the securities are definitely registered with the SCR, the exchange will proceed with the official listing of the securities and trading may begin. This should not take more than a few days.

  10. 10.What are the disclosure requirements for securities issuers for both public and private offerings?

    Disclosure requirements for public or private issuers generally cover two different aspects:

    • the legal and financial status or situation of the issuer in general; and

    • the nature of the risks specific to the particular issue (including, where applicable, whether there are any collateral, security interests, etc).

    Financial information has to be certified by an independent CPA at least once a year and, additionally, debt securities issues require the opinion of an independent rating agency. (This is not applicable to the central government’s or the Central Bank’s securities issues.).

    The LMVM limits the publication of promotional information of any securities offered on the market without previous review and approval by the SCR and requires that reference be made to the technical sources backing any claims in such advertisements.

    Failure to disclose relevant information with intent to commit fraud is a criminal offence.

  11. 11.Are there exemptions from securities registration?

    There are subjective and objective exemptions. The former include the cases of offerings made only to those who are already shareholders of the issuer and to institutional investors. The latter refer to the number of people to whom the offering is directed, making it a public offering for both debt and equity securities once the offer is addressed to more than 35 people.

  12. 12.Do your accounting standards differ in significant ways from other jurisdictions’ generally accepted accounting principles?

    The Guatemalan Institute of Certified Public Accountants has adopted international accounting and reporting standards for almost every type of activity or line of business. There are some cases, as in the banking business, for example, where the law requires that books are kept on the basis of actually perceived income (rather than only accrued).

  13. 13.If the International Accounting Standards Committee’s International Financial Reporting Standards have not been fully implemented, is full convergence planned?

    There is no planned convergence to the International Accounting Standards Committee’s International Financial Reporting Standards, but the Guatemalan Institute of Certified Public Accountants has, in fact, followed those standards substantially.

    There is a policy on behalf of the Auditors Board to try to follow and adapt, where necessary International Financial Reporting Standards.

  14. 14.Does your jurisdiction offer policy and tax incentives to invest in the capital markets?

    In general, there are no specific tax incentives to invest in the capital markets. However, there are a few aspects concerning the investment in publicly registered debt securities that are advantageous from a tax point of view. These include that interest paid to issuers of securities (as well as to supervised financial institutions) is deductible for income tax purposes, while interest paid to other creditors (non-registered issuers of securities or non financial institutions) is not deductible.

  15. 15.Please describe the applicable tax withholding regime, the customary exceptions and the commonly used standard tax-planning devices.

    As mentioned above, the tax regime for the issuance, trading of, investing in, or dealing in securities registered with the SCR does not provide for any exceptions or exemptions not applicable to non registered securities, the most notable exception being the one mentioned above.

    In general the dividends paid by stock companies are tax exempt, provided the payer of the dividends has paid its own income tax. While dividends are not deductible for the company (as is usually the case) interest paid to debt securities holders is deductible.

    Those issuers who pay interest to non-supervised financial institutions must withhold a 10 per cent financial products tax (FPT). which substitutes the income tax for their beneficiaries. Supervised financial institutions are not subject to this withholding but have to pay ordinary income tax on the interest paid to them derived from securities registered with the SCR.

    Neither debt securities nor stock are subject to value added tax charges or to stamp tax.

  16. 16.Where and how are securities traded?

    Securities are traded mainly on the BVN’s various electronic systems and on an electronic closed system where only the banking institutions can participate. There are some registered securities traded over the counter by a few issuers, but their volume is rather modest in comparison to the former.

    The most important types of transactions for their volume are repurchase transactions and open market operations by the Bank of Guatemala (for up to date information as to the trading volumes on the exchange please refer to www.bvnsa.com.gt). The Central Bank uses the electronic facilities of the exchange extensively, but deals directly with the banking system member banks as well.

  17. 17.Where and how do securities clear?

    Securities traded on the exchange are cleared, generally, through the Central de Valores SA. This is a related entity but it is functionally independent and has developed its relations and procedures on a delivery versus payment basis.

  18. 18.Please provide a general description of securities settlement systems in your jurisdiction.

    The settlement of securities takes place, mostly, through the Securities Settlement System, which has been developed by the BVN, who very recently created a ‘spin off’ under the corporate name of Central Depository Corporation (CDC). The CDC holds, in deposit, the vast majority of physical securities certificates and is in charge of the most important and largest issues of securities represented by electronic book entry. This has allowed for most of the transactions to the settled on ‘delivery versus payment’ terms.

    Generally, brokerage houses transfer readily available funds to their CDC accounts and from those accounts the funds are transferred by CDC to the accounts of the seller brokerage house by the close of business of the same day against the transfer of the securities from the account of the seller brokerage house within the CDC system to the account of the buyer broker. This is done by simple credit and debit electronic entries, as provided for by the LMVM.

    In the near future, all transactions among banks, including repurchase transactions, will be settled by the real time facility gross settlement facility that the central bank has recently implemented. Banks, at their turn, will be in position to offer their services to third parties using this facility.

  19. 19.What are the distinguishing characteristics of your debt and equity capital markets?

    Organised securities markets in Guatemala are only about a couple of decades old (the first exchange was founded in 1986). Just as in any other developing market and economy, the Guatemalan securities market has developed initially as a debt securities market rather than an equity one. There are issues of private debt securities among which, those of credit card companies and investment banks are the most liquid and important. Concerning public debt securities, that is, those issued by the Republic of Guatemala or by the Bank of Guatemala, a very important part of the initial offerings takes place within or through the exchange itself. In terms of a secondary market, there is a very liquid short term repurchase market mostly, but not exclusively, among commercial banks (mainly to handle their reserves requirements).

    There are a few stocks publicly traded in the BVN, mostly issued by local commercial banks.

  20. 20.Where and how are derivatives traded?

    The BVN has issued regulations and organised futures markets for currency and for interest rates uniform contracts, however neither are liquid markets mostly due to the generalised perception that monetary conditions may vary substantially due more to political reasons than to market forces and long term trends. Apart from this type of derivative products, no others have become developed, although local banks frequently enter into interest rates swaps or currency exchange rates swaps with foreign banks. This is done through direct contracting.

  21. 21.Can you explain development of structured finance instruments in your country?

    Concerning structured finance instruments, by far the most important and widely used is the mortgage backed note. This instrument, usually insured by the Institute for the Promotion of Insured Mortgage Backed Notes is widely demanded by banks and other supervised institutions because the banking regulations rank them very highly as financial assets and because there are also some Income Tax benefits (regardless of whether the notes are created or traded, or both, in the capital markets or not). Additionally, there are some other structured financial instruments which use the ‘trust’ as a special purpose vehicle. However, tax rules remain a high transaction cost for this type of instruments for which reason there is a bill pending in congress in order to lower the costs and in order to provide a wider and more detailed legal regulation of structured financial instruments and securitisation processes.

  22. 22.How are institutional investors defined and regulated?

    Institutional investors are scarcely regulated in the Guatemalan legislation. They are defined as institutions or corporations whose corporate purpose is principally directed with the financial industry. More specifically, the LMVM provides that supervised financial institutions, the Social Security Institute, other entities related with social security, and collective investment vehicles (such as mutual and investment funds) are deemed institutional investors and thus securities offered solely to them need not be registered with the SCR.

    As a self regulatory organisation, the BVN has also issued some regulations concerning institutional investors who, for example, can be direct customers of the CDC (and do not have to go through a brokerage house).

  23. 23.What is the definition of ‘insider trading’? Outline the major developments in insider trading law giving details of any recent cases.

    The issue of insider trading is dealt with in the LMVM under the heading of ‘privileged information’. Privileged information means concrete information concerning securities, commodities or standard traded contracts that have not yet been disclosed but that if disclosed would have an impact on the investment choices of the investing public. Board members, officers, management or any insider with access to privileged information is forbidden to trade on this basis under the penalty of a fine of up to US$5 million. This does not exclude civil liability or criminal liability, where applicable.

    There are no recent cases concerning insider trading.

  24. 24.What are the roles of the authorities when a foreign issuer makes a public offering? Who has jurisdiction over the public offering?

    The authorities more directly concerned with public offerings are the SCR and the BVN, the latter as a self regulatory organisation. The SCR is mainly responsible for ensuring that public offerings over the counter or through means other than organised markets, comply with disclosure and reporting requirements. Concerning securities issues within the exchanges (the BVN for practical purposes) it is their competent administrative corporate bodies who are responsible for enforcing the rules of the LMVM and the regulations of the exchange to the offering of and trading in securities listed in the exchange.

  25. 25.Is there a formal understanding with other jurisdictions to share information and provide reciprocal assistance in enforcement matters? If so, which jurisdictions?

    There is no formal understanding with other jurisdictions for the sharing or exchange of information, although the BVN have some cooperation agreements with the other exchanges of the Central American countries that cover some of these matters.

  26. 26.Please describe the framework for corporate governance

    Corporate governance is regulated by the Code of Commerce as it is the main source of corporate law. There has been no major updating of the main corporate law of Guatemala since the early 1970s, and, therefore, the rules applicable to corporations for stocks not publicly traded are equally applicable to those few that are publicly traded. Whether the issuer of debt securities or of stocks, corporations are required to appoint independent auditors, but there are no legal regulations as to executive compensation, a code of conduct, or internal control systems. Transparency and duties or care and loyalty are dealt with in terms of disclosing conflicts of interest and corporations must abstain from participating in deliberations or decisions where the director may have any personal interest. Transactions with related companies are regulated only in terms of the general prohibition to enter into transactions in fraud of third parties, and more specifically and in much greater detail, concerning transactions with banks and other financial institutions.

  27. 27.Which governing bodies must public companies have and what are their main duties?

    As explained in question 26, there are no specific regulations on this matter other than the general corporate law.

  28. 28.Are there any laws governing capital markets that are unique to your jurisdiction?

    No, there are no laws unique to our jurisdiction.

  29. 29.How do authorities and issuers resolve matters that are not expressly provided for in the securities laws and regulations?

    As a matter of a general principle of law, legal issues can only arise out of some source of legal obligation (law, contract, regulation, etc). Therefore, strictly speaking, there should be no issues arising between issuers and authorities that are not related to some legal source of obligation. On a level of issues that may not be strictly legal or regulatory, but administrative or akin to the smooth and uninterrupted functioning of the markets, the BVN maintains a constant and very open rapport with issuers and its members

  30. 30.Which types of companies may make public offerings in your jurisdiction?

    In our jurisdiction there are no specific legal distinctions as to which companies may make public offerings, as long as the issuer complies with the legal rules and the regulations of the SCR or of the exchange where the issue may be listed.

  31. 31.Which economic activities or segments are the most active in the capital markets in your jurisdiction?

    In our jurisdiction the most active economic activities in the capital markets remain the financial industry and other related activities. It has been mostly the banking system, the credit card issuers, insurance companies and the central bank itself that have been the most active in the Guatemalan capital markets. With the introduction of amendments to the LMVM concerning the types of investments that investment funds are allowed to make and if the securitisation bill is approved by congress in the near future, it is very probable that the real estate industry and sectors such as energy may become more dynamic.

  32. 32.Describe the main stock exchanges and OTC networks.

    As mentioned above, there are only the Bolsa de Valores Nacional, SA, a full securities and commodities exchange and a network among the members of the banking system. This latter network has been organised in order to trade bank reserves mainly through repurchase operations. There are some companies who have listed securities and some who have listed stocks.

  33. 33.Describe recent initiatives undertaken by the government to improve the regulation and efficiency of its capital markets.

    In practical terms, the present administration has done very little to improve the Guatemalan capital markets; however, there are several bills pending in Congress aimed at regulating the securitisation processes, factoring through public offerings of securities, and providing a better framework for issuing and handling securities represented through electronic book entries. There is additionally a task force at the Central Bank which is working on a set of major amendments to the LMDM that have not yet been made available and therefore it is not possible to give an opinion as to their potential benefits.

  34. 34.Describe the main obstacles that a company may confront in your jurisdiction when it is trying to become public.

    There are two kinds of considerations made by companies who wish to become public; one has to do with the nature and level of disclosure requirements and the other with tax implications. However, these are not, strictly speaking, ‘obstacles’ but natural implications of the changes in corporate and financial culture that usually take place when a company becomes public.

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