Francisco da Costa e Silva, chairman of Brazil’s capital markets watchdog the Comissão de Valores Mobiliarios (CVM), has established himself as a leading promoter of regulatory changes and a modernizer of the capital market’s legal framework. But in this role he has clashed with powerful local and international groups. He has angered multinationals operating in Brazil by proposing that they must publish detailed accounts of their businesses. Currently, privately held companies provide almost no public financial information on their operations in Brazil. Costa e Silva has also irritated accounting firms by cracking down on their lucrative consulting practices and ending their long-standing relationships with clients by forcing companies to rotate auditors every five years. A lawyer by training, Costa e Silva took over as CVM chairman four years ago. Prior to that he served as a director of BNDES, the government’s development bank, where he had spent most of his career. He recently discussed some of his controversial proposals with LatinFinance.

LF: What changes are you considering in the regulation of Brazil’s capital markets?
CS: We are proposing significant changes in Brazilian accounting practices. This means imposing greater controls on companies to align them more closely to internationally accepted norms. The idea is to introduce to Brazilian legislation, which dates back to 1976, a number of new and more modern concepts that in our opinion will result in more realistic, more accurate accounts. These modifications in the law will result in, among other things, better protection for minorities and the capital markets. And this could make Brazilian markets more easily understood by foreign investors. LF: How are you increasing the rights of minority shareholders?CS: The CVM has brought in a number of regulatory changes to increase investor protection. For instance, it will establish greater controls on delisting companies in a way that does not prejudice the interests of minorities. We are planning a seminar in October to discuss who is affected and what the real problems are. I want opinions on this from all of those involved to discuss how it can be resolved and how minority shareholders can increase their participation in the management of companies. Is this a relevant issue for foreign investors? Is there another way for minorities to participate in the control of companies or does it always have to be exercised by voting rights? The point is to enter this discussion with an open mind.

LF: Why have you have imposed tighter controls on audit firms?
CS: Companies must rotate their auditors every five years and there is a ban on auditors to prevent them from offering accounting and consulting services at the same time. We are one of the first countries to do this and this is why the big accounting companies have taken us to court. These rules [are intended to curb] the promiscuous relationship between accounting and consulting. The firms’ fees are tied to their success in tax planning. Even if they have different company names, if the companies are related, you cannot have an independent audit company approving a company’s accounts. There is an obvious conflict of interest. LF: You have also suggested that private companies should publish accounts like listed companies must.CS: There is a new international concept that private companies that are not listed, companies that have not issued any type of security, must be accountable to society. A company that uses the resources of a country, has a close relation with a country, hires and fires workers, imports and exports products, and interacts with the environment in a very complex way must be held accountable. This is the plan and Congress has to approve it. This law would eliminate an environment that is very often very hostile to [the interests] of listed companies and discourages companies from listing. I do not have the slightest doubt that this is controversial. I have no doubt that this will be the subject of great debate.

LF: The government wants to encourage companies in many fragmented industries to merge. How would a process of concentration of control affect the capital markets?
CS: This process is inexorable. To compete internationally you need to have scale to invest in technology, marketing and sales channels. Fragmentation is the antithesis of the tendency of globalization. Concentration is necessary from my point of view but we need to monitor this to avoid abuse of monopolies and abuse of markets. This is something the market should do by natural selection but in a country with scarce resources – though it is not for me to say this – if you can induce companies to enter a process of composition legally then it should be done. Often economic rationality is not valid. There are always questions of personal vanity and power involved that obstruct this process. We see this happening in the stock markets. They should try to concentrate. I think the São Paulo Stock Exchange should lead this process, but stock markets are private organizations and it is not for the CVM to interfere.

LF: How is the Internet affecting markets in Brazil?
CS: There is no such thing as an eternal market hegemony. We are on the brink of the beginning of a paradigm shift in markets brought about by technology. The technological change in intermediation in the capital markets is a reality and will establish a new standard. The Internet, and technology in general, have changed the role of brokers. Twenty years ago a broker was a very important individual. He brought buyer and seller together, he had a prominent role in society. But now you can access markets from your house with an unimaginable level of information at very low transaction costs. It is a new world and Brazil is moving in that direction.

LF: Should the CVM be regulating this?
CS: The traditional brokers are active in home brokering. They are the ones that started this. We are not regulating it because it has to grow and the rate of growth is astonishing in terms of the numbers of people and new investors joining the system. It is obvious that looking ahead five years, open outcry will no longer exist. It is not cheap and is less transparent than electronic trading systems. This is the future because the advantages are so obvious. The difficulty is that you can imagine someone in Turkey offering stocks in a Chinese company to be paid by credit card in Luxembourg. Who has jurisdiction in a case like this? Who are the counterparties if money laundering is involved? The regulators are very worried and perplexed. This will continue as long as there are tax havens and this has to change and I think it will.

LF: What does the government hope to achieve from recent changes in commodity market regulations?
CS: Many Brazilian producers, when they want to hedge cotton or coffee, have to go and operate on the Chicago markets. The idea is to open space for these products here by giving them greater liquidity and encourage foreign brokers to trade here with settling done outside Brazil.

LF: How concerned are you over the decline in liquidity in Brazilian equity markets?
CS: It is a process that is happening in many markets and I think that this is a consequence of globalization. But I must say that issuance of debentures and commercial paper by Brazilian companies has been especially strong this year. The market is lower than in 1998 but I am absolutely certain that this is due to the troubled domestic and international context and not to the products available here. Investors have reduced inflows to the country and it is undoubtedly true that portfolio investments are less significant than before. There are things that we can do, such as reorganizing privatization. Why not privatize electricity companies by selling shares to retail investors as has happened in the UK and Argentina? The government should move the emphasis away from the maximization of price and find ways of increasing the base of domestic capital markets.