Brazilian capital markets are undergoing a technology-led revolution. Disruptive new products and services emerge on a daily basis creating an increasingly vibrant and friendly investment environment and reducing information asymmetry between unsophisticated investors and companies. This revolution of sorts demands modernization of business models; those not taking part in the transformations may soon become outdated. However, innovation often gets inhibited by the necessary caution of players acting in regulated sectors.
For that reason, the Brazilian Securities Commission (CVM) issued in May 2020 the Normative Ruling No. 626, implementing a “regulatory sandbox” for capital markets. A regulatory sandbox is a controlled environment supervised by a public authority in which startups and incumbent players are allowed to test innovative products and services and face less risk of punishment for non-compliance with regulation in exchange for certain safeguards – such as accepting a limited number of clients or intermediating a limited amount of transactions.
All products and services subject to CVM’s jurisdiction are eligible to the sandbox. This includes innovative products and services that otherwise would not fulfill all requirements for authorization set forth in the applicable regulations. The regulatory sandbox is thus also an instrument for public authorities to enhance regulation.
The application process for adhering to the sandbox will start with an online announcement to the market to be issued by CVM. The announcement will set forth deadlines for submission and analysis of innovative project proposals, as well as certain selection criteria. A “Sandbox Committee” formed by CVM staff will be responsible for selecting the projects to be implemented under the sandbox rules.
In order to be eligible, participants must demonstrate financial and technical ability to carry out the presented projects. Foreign entities are expressly allowed to apply and must comply with the same requirements applicable to national applicants.
In addition to being under CVM’s regulatory scope, products or services submitted to the Sandbox Committee cannot be in early development stages, and applicants need to present satisfactory evidence of feasibility of their projects, such as through a prototype. Moreover, projects need to meet any of the following requirements: they must exploit innovative technology; use existing technology in an innovative manner; or develop products or services currently unavailable or structured differently in the Brazilian capital markets. Lastly, projects need to result in efficiency gains or cost reductions, or promote consumer participation in capital markets.
CVM should be wary of potential misuse of the sandbox environment. Because applicants are not required to prove their need for this softly-regulated framework, there is a risk that projects capable of being authorized under normal processes may take advantage of more lenient standards. CVM should consider this when selecting projects to the sandbox.
After the application is approved, participants are granted with a temporary authorization to conduct their projects, which will be overseen by the Sandbox Committee. A participant can have its temporary authorization suspended or cancelled at any time in case the Sandbox Committee ascertains gross operational flaws in the relevant product, excessive risks to consumers or non-compliance with the eligibility criteria, among other irregularities.
Once the sandbox period expires, the participant may apply for a permanent authorization. Although the sandbox Normative Ruling does not provide for the concession of permanent authorizations that differ from those established under current rules, the great volume of disruptive activities expected to be performed within the sandbox is likely to stimulate the CVM to enact new regulations that are more adequate to innovative products and services.
The regulatory sandbox launched by CVM shall foster innovation and is itself an innovation. If wisely used, it may contribute to accelerated evolution of Brazilian capital markets and full exploitation of its potential.
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L&S Authors
Isaac Cattan
