I. Securities Law Overview
In the Dominican Republic (DR) the capital markets or securities market is regulated under the Securities Markets Law 19-00, enacted on April 18th of 2000. (Hereinafter, the “Securities Law”)
The Securities Market Law 19-00, is constituent part of the financial and banking legal framework of the DR. Pursuant to the provisions established by Securities Market Law 19-00, the Superintendence of Securities (SIV) and the National Board of Securities (CNV) are the authorities in charge of regulating the securities market, being the Superintendence of Securities the supervisor.
The aim of Law 19-00 is the promotion and regulation of the securities markets, procuring that an organized, efficient and transparent market contributes with the economic and social development of the DR. The securities market comprises the supply and demand of representative values of capital, credit, debt and financial products.
Law 19-00, defines the term ‘securities’ as the right or combination of rights of economic content that are negotiable in the capital markets, which comprises, stocks, bonds, certificates, obligations, bills of exchange, representative deeds of products and the resulting instruments from the operation of securitization. As well as, derivatives contracts and buying and selling of any other movable deed of any kind.
For Law 19-00 purposes primary market is defined as the first issuing of securities by which the issuers receive financing of their activities and the secondary market is the operation that comprises the transference of securities, with the objective of gaining liquidity or leverage in favor of securities holders.
II. Public offering of Securities
According to the Securities Market Law 19-00, a ‘public offering’ is that which is addressed to the general public or specific sectors, in which by the means of a massive communication notice, a natural or legal person could acquire, transfer or negotiate financial instruments of any kind in the securities market.
Pursuant the provisions of Law, the sale of companies’ shares based on the increase of share capital and the capitalization of profits made by the shareholders of a company, are not considered to be a public offering.
The Securities Market Law 19-00 establishes that any public offering should be previously approved by the SIV. In addition, the public offering in the secondary market should be negotiated by the means of securities intermediaries which should be registered in the SIV.
In the request for approval of public offering, the concerned person should include a prospect which has to contain financial information of the last three (3) years, the company’s legal documentation, securities characteristics and the risk qualification of the securities to be offered. Pursuant the provisions established, the SIV will decide within the term of thirty (30) days whether approve or not the request of a public offering.
In the case of foreign companies that undertake a public offering in the primary market of the Dominican Republic, they are obliged to establish domicile within the country, which should be confirmed by the SIV.
III. Protection of Privileged information (Insider dealing prohibition)
Pursuant the Securities Market Law, all the information concerning acts, facts or events capable of affecting the prices subject of public offering is considered to be ‘privileged information’, if it has not been known by the public. Therefore, any person that has privileged information should refrain from undertaking activities in their benefit or third parties with securities which prices may be influenced by such information. The disclosure of privileged information is considered to be a breaching of Law 19-00, therefore, a person may be liable for criminal or civil charges.
IV. Registry of Securities and Products
It is established by Law 19-00 that the financial products and securities should be registered before the Registry of Securities Market and Product at the SIV, in which all the information regarding the securities, issuers and any other participant in the securities market will be kept.
According to Law 19-00, the registry is of public knowledge and in it the following can be registered:
- Securities subject to public offering;
- Representative deeds of products subject to public offering;
- Generic models of futures and option contracts;
- Issuers that undertake public offering, except those which by their nature could not be registered;
- Asset Management firms;
- Securitization companies;
- Stocks exchanges and intermediaries;
- Credit Rating agencies
- External auditors
- Any other participant in the securities markets approved by the SIV.
V. Participants in the Securities Markets
In the Dominican Republic’ Securities market participate the following participants: Stock exchanges, Stock Exchanges for Products, Securities intermediaries, Compensation chamber, Central securities depository, Credit Rating Agencies, Asset Management companies and securitization companies.
VI. Stock exchanges
Pursuant Law 19-00, stock exchanges are self-regulated entities whose aim is to render services to brokerage firms registered to them in order to undertake efficient transactions of securities in an organized and continuous way, as well as carrying out any other activity of securities intermediation.
According to the Securities Market Law, stock exchanges should be incorporated as a corporation (Sociedad Anonima -S.A-) in accordance to the provisions established by the Company Law. In this sense, for incorporation purposes the company’s capital requirement is fifteen million pesos (RD$ 15,000,000.00) subscribed and paid capital, plus a twenty (20%) percent of legal reserve.
VII. Stock Exchanges for the Mining, Farming and Agricultural industry (Bolsas de Productos)
According to Law 19-00, stock exchanges for the mining, farming and agricultural industry are self-regulated entities whose aim is to render services to said sectors in a way that includes the goods that those sectors may need in their normal activities, as well as securities of products and derivatives and futures contracts.
Therefore, they carry out similar functions as the other types of stock exchanges, but addressed exclusively to the previously mentioned sectors.
For incorporation purposes, the capital requirement needed is five million pesos (RD$ 5,000,000.00) subscribed and paid capital, plus a twenty (20%) percent of legal reserve.
VIII. Securities intermediaries
Pursuant the Securities Market Law 19-00, securities intermediaries are defined as any natural or legal person, national or foreign, which undertakes normally the activities of securities intermediation subject of public offering, whether in the securities market or over-the-counter market. As a result of this, those intermediaries should be previously authorized by the SIV in order to carry out their activities.
According to Law 19-00, intermediaries in the securities market are the brokerage firms, stock agents and brokers.
Pursuant the provisions established, ‘brokerage firm’ and ‘Stock Agent’ are considered to be legal persons. The former, being a member of a stock exchange, who may carry out activities in the securities market and over-the-counter market, and the latter, are those that only carry out their activities in the over-the-counter market.
On the other hand, the ‘brokers’ are those natural persons that act on behalf of brokerage firms during negotiations of securities in the securities market. Prior to carrying out activities, brokers should be accredited by the corresponding stock exchange and be registered on the registry at the SIV.
IX. Capital requirements for incorporation of Brokerage Firms and Stock Agents
As per April 2015, for incorporation purposes, brokerage firms and stock agents also should be Corporation (S.A) and require a minimum of eighteen millions one hundred thousand pesos (RD$ 18, 100, 00.00) subscribed and paid, plus a twenty (20%) percent of legal reserve.
X. Compensation chambers
The chambers of compensations are those established by Law 19-00 that should be incorporated as Corporations (S.A), with the aim of serving as counterpart of all purchases and sales of futures contracts, securities option contracts and any other similar in nature that the SIV authorizes.
In doing so, the chamber will manage, control and liquidate the operations, open positions, current accounts, margin and balances available that clients and securities market intermediaries carry out and maintain.
For incorporation purposes, compensation chambers require a minimum of five millions pesos (RD$ 5, 000, 00.00) subscribed and paid capital, plus a twenty (20%) percent of legal reserve.
XI. Central Securities Depository
According to Law 19-00, the Central Securities Depository is the group of services rendered to the participants in the securities market, with the aim of guarding, transferring, compensating and settling securities operations negotiated, as well as serve as the registry of all transactions.
For incorporation purposes, Central securities depositories require a minimum of five millions pesos (RD$ 5,000, 000) subscribed and paid capital, plus a twenty (20%) percent of legal reserve, divided in nominative and negotiable shares.
XII. Credit Rating Agencies.
According to Law 19-00, credit rating agencies are those that should be incorporated as corporations (S.A) in accordance to the Company Law, whose aim is assessing the creditworthiness of issuers, the liquidity of deeds, the quality of financial instruments, the probabilities of repayment of debts, as well as any other event that may affect the qualification of securities. Prior a Credit Rating agency undertake business, it should be authorized by the SIV and then be registered at the Securities Market Registry.
XIII. Investment Funds and Assets Management Companies
Law 19-00 also establishes provisions for the creation of investment funds, which are classified as ‘mutual or open funds’ and ‘closed investment funds’.
Pursuant the provision established by Law, ‘open or mutual investment funds’ are considered to be a variable patrimony, created by natural and legal persons with the aim of investing on public offering in the securities market. Whilst, Closed Investment funds are those that their creation involves the contribution of capital from natural and legal persons as fixed patrimony divided in quotas of participation.
As established by Law 19-00, open or mutual funds create a portfolio of investment which should be constituted in the following securities:
- Securities subject of public offering settled in the stock exchange;
- Capital deposits in entities regulated by the Central Bank and supervised by the Superintendence of Banks;
- Bonds and any other credit or debt deed issued by the Government or by the Central Bank;
- Any other securities that the SIV authorizes.
On the other hand, investments made on closed funds could be constituted in the following manner:
- Securities of Fixed and variable income;
- Securities subject of public offering;
- Real estate properties;
- Any other securities that the SIV authorizes.
XIV. Asset management companies
The above explained funds will be solely managed by assets management Companies, which shall be incorporated as a Corporation pursuant the provisions established by the Company Law. In order to an asset management company undertake its activities, it should be previously authorized by the National Board of Securities (CNV).
XV. Securitization companies
Pursuant Law 19-00, a securitization company is the one authorized by the SIV that carry out the process of putting together various types of debts such as mortgages, leasing contracts, consumer loans among other, in order to support the payment of conferred rights of holders in securities issued.
XVI. Sanctions and Infractions under Law 19-00
A natural or legal person breaching any of the provisions established by Law 19-00, could incur in an infraction that may be sanctioned according to the severity of the breach.
Pursuant Law 19-00, the sanctions are classified as administrative, criminal and civil. Administrative sanctions are those that may be imposed by the SIV to any participant of the securities market. Whilst the criminal and civil sanctions are those that will be administered by the courts in cases of felonies incurred within the securities market.
The administrative sanction imposed by the SIV can consist of fines from fifty thousand pesos (RD$ 50,000.00) pesos to one million pesos (RD$ 1,000,000.00) by the commission of the following infractions:
- Any person that undertakes the public offering of securities without complying with the requirements of registration at the registry of securities markets and products;
- The companies that without being authorized by the SIV, use the expression “Stock Exchange”, “Brokerage Firm” or “Securities Agent”.
- Any person that provide information regarding its financial condition, or the securities it issues, that induce taking erroneous decision;
- Public Servants and employees of the SIV that breach the provisions of by Law, Regulations and norms;
The sanctions that Courts in criminal cases can impose to a breaching party are from six (6) months to two (2) years of imprisonment and fines from five hundred thousand pesos (RD$ 500,000.00) to five millions pesos (RD$ 5,000,000).
If the breaching party is a legal person, the courts will apply the fines outlined above and will condemn to the payment of civil damages fines, the Manager, Director or representative of the legal person.
The most severe sanctions that Law 19-00 provides and that courts can impose to any breaching party are prison from two (2) years up to ten (10) years and fines from one million pesos (RD$1,000,000.00) to Ten million pesos (RD$ 10,000,000.00). Such sanctions can be imposed, et al, to the following:
- Any person that maliciously provides or certifies false backgrounds or facts to SIV, Stock Exchanges and the general public;
- Insider dealing of privileged information;
- Auditors, accountants that falsify financial conditions of persons subject to mandatory registration;
- Any legal person that undertakes the activities of Stock exchanges, Credit rating agencies, Securities intermediaries, compensation chamber, central security depository and any other participant in the Securities market without being authorized to do so, or when their registration has been suspended or canceled;
- Securities market participants that provide false information;
XVII. Tax treatment
According to the Securities Market Law 19-00, the incomes generated from instruments of fixed income and dividends perceived by Dominican natural person while undertaking investments are not subject to any taxes when is in relation to securities that were approved by the SIV and negotiated through the stock exchanges. Additionally, such investments made by individual foreign investors, are not subject to any taxes.
Pursuant Law 19-00, the buy and sell transactions of securities approved by the SIV, as well as their incomes, will not originate any tax of transference.
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This AC Law Publication is for informational purposes only and is not intended to be construed or used as general legal advice. Any transaction related to any of the described aspects shall require adequate legal assistance in the appropriate jurisdiction. Arthur & Castillo. © 2017. All rights reserved.