Portugal's answer to Sarbanes-Oxley

Author: | Published: 25 Apr 2003
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Portuguese law has made several efforts to keep the country's legislative system abreast of recent developments in the securities laws of the world's most advanced capital markets and in particular of those arising from the scandal surrounding the collapse of Enron. It therefore useful to compare the most recent US regulations with those of Portugal, one of the European Union's (EU) smallest capital markets.

In 2002 the Sarbanes-Oxley Act enacted a number of statutory conditions in the US capital market. As a result, the SEC has adopted final rules for matters that the Act did not regulate in detail. These most important of these were:

  • Final rules regarding attorneys' obligation to report evidence of violations of securities law and fiduciary duty
  • Strengthening the Commission's requirements regarding auditor independence
  • Disclosure of off-balance-sheet arrangements and aggregate contractual obligations
  • Auditor communication with audit committees
  • Prohibition on insider trades during pension fund blackout periods
  • Disclosures with respect to audit committee financial specialists
  • Code of ethics for principal executive officer and senior financial officers
  • Use of financial measures that do not correspond with US generally accepted accounting principles (Gaap)
  • Retention of records relevant to audits and reviews
  • Disclosure of management's evaluation of internal controls
  • Improper influence on conduct of audits

A new Capital Market Act was enacted in Portugal on November 13 1999 which comprises one of the most advanced regulations of capital markets in Europe, including the latest EU Commission directives and recommendations. But, of course, the impact of the Enron case is not directly reflected in that Code because it was published before the Enron case emerged so that it is also useful to know which rules have been implemented since 2001 and how the market is absorbing them.

The Portuguese capital market, or that of any of the other EU member states, has its own specific profile, characteristics and self-defence weapons which do not have much to do with the US capital market and corporate laws and regulations. But it is true that the Enron case brought to the attention of the authorities within the EU member states the perils that an apparently relaxed attitude and quasi-blind confidence in the reputation and independence of auditors brought to the US capital market and the damage it wrought there.

There are not in Portugal, or in any other EU member state, any rules concerning duties of attorneys, lawyers, in-house or external counsels appearing and practising before the capital market regulatory authorities, to disclose violations of securities laws and fiduciary duty. Recent EU Directives on the duty of disclosure by professionals, including lawyers, of any transaction that is suspected of involving money laundering has a different scope and purpose.

Auditor independence in Portugal is largely provided for in the new Act and other recommendations by the Portuguese capital market regulator the Comissão do Mercado de Valores Mobiliários (CMVM). These recommendations follow the publication of the International Organization of Securities Commissions (IOSCO)'s Principles of Auditor Independence and the Role of Corporate Governance in Monitoring an Auditor's Independence as well as recommendations made by the European Commission.

The SEC sees an off-balance-sheet arrangement as any transaction, agreement or other contractual arrangement to which an entity that is not consolidated with the issuer is a party and under which the issuer, whether or not a party to the arrangement, has (or in the future may have) certain obligations or a retained or contingent interest in assets transferred that have or are reasonably likely to have a current or future effect on the issuer's financial condition. Such off-balance-sheet arrangements in listed corporations must be disclosed to the public.

Section 248 of the new Portuguese Securities Act contains a general duty of the issuer to disclose to the public any fact (facto relevante) which has or may have an impact on its assets or financial condition or on its ongoing business and may have an effect on the share value. Infringement may be punished with escalating fines depending upon the degree of seriousness.

The relationship between the external auditor and the internal auditing committee is also covered in Portuguese legislation. The external auditor must notify the issuer and the internal auditing committee of any fact which may have an influence on the economic and financial situation of the audited listed company. The external auditor must also disclose information to the CMVM on the same subject.

Auditors registered with the CMVM are under its supervision and control and may be deregistered if any serious violation of their obligation occurs.

Portugal has yet to adopt a Code of Ethics for principal executive officers and senior financial officers. The Code has not been considered a priority because of the small size of the market and the number of rules laid down both in the new Capitals Market Act. The CMVM has also published executive rules which define in some detail officers' statutory obligations and has implemented EU rules on this matter.

Insider trading is punished with a criminal sanction of up to 3 years imprisonment for directors, supervising board members and employees and 2 years when committed by any other person. In all cases insider trading is understood to be the use of privileged information about a company where based on that information, the insider has negotiated or advised someone to negotiate securities in the capital market. It is not a requisite for the application of sanctions that there should be a materialization of any transaction or the existence of any profit as a result of the infringement arising from the insider trading.

Disclosure and transparency in general are assured by the registration of a company's articles of association (there is no distinction between memoranda and articles of association in Portugal) with the Company Registration Office. The publication of the articles of association and any further amendment in the Official Gazette is also a mandatory requirement.

A listed company must publish its annual report and annual audited accounts, public offering prospects and any notifiable event that is or may be material for the public concerning the economic and financial situation of the listed company or its business. Notification is made with the CMVM and followed by its publication in a newspaper.

Publication and notification of annual reports and accounts as well as prospectuses include among other things a business description, a description of material legal proceedings, disclosure of the risk associated with the business, and a detailed description of the envisaged transaction and the purpose of prospectus as well as the contractual and legal conditions associated with the transaction.

Other information includes publication of the project for the amendment of the articles of association and summary of the minutes where the resolution was passed.

A board member's principal responsibility to the company, its shareholders, the company's creditors and its employees means that the board of directors are not allowed to delegate managerial powers to any person who is not a board member. Allowing delegation would undermine that responsibility.

The positions of board chairman and chief executive officer may be held jointly or separately. Joint exercise of the respective functions is not forbidden.

The Portuguese Company Act allows a public company to adopt either the format of a board of directors or a supervisory board and direction (similar in this second option to the German law system), in addition in both cases to the shareholders' meeting.

Employees have no co-determination right, but they are entitled to ask for some information about the company's accounts and other managerial information.

This is a rough outline of Corporate Governance rules contained in Portuguese laws in connection with the main issues resulting from the significant events occurred in 2001 and 2002 that have so dramatically affected international capital markets. Despite being a small market, Portugual has the instruments necessary to control and avoid the erosion of confidence.