Latin America cherry-picks from Sarbanes-Oxley

LATIN AMERICA - As the world continues to struggle with Sarbanes-Oxley (Sox), much of Latin America has adopted an approach of self-regulation and disclosure. Mexico and Brazil, the two biggest markets in the region, work within this structure although Mexico has been moving to implement piecemeal compulsory regulations.

Many Latin financial services firms see New York as the natural place to list shares, because of the market's liquidity and the key role of US investors in their markets, but have avoided the US since Sox was introduced in 2002. This is particularly the case in Brazil, where the capital markets have deepened, opening new capital-raising options. Brazilian firms that did list in the US post-Sox reported a mixed experience: they found investors favoured the strong corporate governance rules, but found implementation and maintenance costs very high, according to Joaquim de Oliveira, capital markets partner at the Sao Paulo-based law firm Souza, Cescon Avedissian, Barrieu e Flesch. Companies prefer the home market, London or a Rule 144A ruling in the US.

Brazilian regulators have been keen to avoid imposing high costs. CVM, the market regulator, and Anbid, the association of investment banks, have worked to harmonise Brazilian and international compliance rules as part of a bigger effort to align Brazil with international norms rather than have the government dictate rules. Anbid, as the voice of the banking industry, is influential in guiding the CVM.

Most of the basic concepts of Sox were already incorporated in Brazilian legislation, notes Federico Servideo, partner and head of the governance, risk and compliance group for South America at PricewaterhouseCoopers in Sao Paulo. Existing laws already mapped chief executives' and financial officers' responsibilities, and financial accounting information and disclosure was advanced. Some specific requirements, such as certification of internal controls, were not incorporated into Brazil legislation. "We don't have a lot of specific rules as they do in Sox and much of our legislation does not apply to non-financials. But there is a good level of alignment between the CVM and Sox in purpose if not in a pure written form," says Servideo.

There is also a substantial difference between Brazil and the US that makes Sox less relevant in the former. In Brazil, most companies are controlled by a majority owner or the government, whereas in the US most listed companies have no majority owner. Only as Brazilian companies move to the US model will such tight regulations become relevant, says Servideo.

Mexico, like Brazil, depends on self-regulation in many areas, such as auditing standards. The situation is slightly different because of Mexico's stronger ties with the US and the larger number of Mexican companies listed in New York. The country had enacted corporate governance reform legislation after 2000 in part because of the loss of liquidity through migration.

More recently, Mexico has been working to balance its principles-based regulatory framework with some compulsory measures. It has introduced specific prohibitions similar to Sox rules, including a requirement for the partner responsible for an audit to leave the function after five consecutive years and the need for all members of the board to be independent. Lastly, although Mexican companies work within a self-regulatory system, listing rules require companies to tell the exchange which parts of the voluntary codes they follow.