Insider Trading on the Paraguay Stock Exchange

There are several myths and legends about the stock market. Many of these stories are associated with the famous New York Stock Exchange, also known as “Wall Street,” which is considered the historic center and headquarters of the U.S. financial market. Wall Street is actually the name of a narrow New York street located in Lower Manhattan, between Broadway and the East River, where the New York Stock Exchange operates on a permanent basis. Interestingly, today, most financial institutions in New York are not listed on Wall Street, but rather on other, smaller, more specialized markets in Manhattan.

Hollywood movies have also helped popularize some of these myths, such as the classic film “Wall Street” (1987), directed by Oliver Stone, which exposes the dark side of American consumerism and capitalism at the time. In the film, the main character is the unforgettable Gordon Gekko (played by Michael Douglas, who won the Oscar for Best Actor). Gordon is charismatic, intelligent, and skilled in all matters of finance. But Gordon also embodies the archetype of boundless ambition, as he uses all manner of manipulations and unscrupulous tactics to build his fortune—a reputation that earned him the title of a true “financial shark.”.

Without going into further detail, the movie revolves around the “inside information” (insider trading (in English) that the “big shots” of the U.S. stock markets at the time used to amass vast fortunes. It is believed that the character of Gordon is based on the real-life figure of Ivan Boesky, a prominent stockbroker and financier who was implicated in a tax evasion and insider trading scandal during the 1980s.

Given the negative experience of the fictional character Gordon (or Ivan Boesky in real life), which led to his imprisonment for many years, this article focuses on financial information, investors, brokerage firms, and the entities that regulate the securities market in Paraguay. More specifically, this article focuses particularly on the use of insider information under the new Law No. 5810/17, which regulates public offerings of securities and their issuers, publicly offered securities, stock exchanges, brokerage firms, and, in general, other participants in the securities market, as well as the National Securities Commission, hereinafter “CNV.”.

The Stock Market in Paraguay

In our country, it could be said with certainty that there is still no financial market comparable to Wall Street. However, significant progress has been made compared to the situation a couple of decades ago. This is largely due to historical factors. The Paraguay Stock Exchange was founded in 1977 and began operations a year later. However, in the early 1980s, the exchange closed due to a lack of trading activity and because the political regime at the time did not favor free trade. It was not until 1992 that the Stock Exchange’s shareholders decided to reopen it, and it has been operating continuously since 1993.

Investing in the stock market in Paraguay is really just like investing in any other market, with its own risks and benefits. The only difference is that on the stock market, people buy and sell shares o securities companies rather than products. In this case, individuals and entities gather at the stock exchange, where so-called securities or shares are publicly offered to investors who wish to invest in them to make a profit.

In Paraguay, there is only one stock exchange, known as the Asunción Stock and Commodities Exchange, S.A. (BVPASA), which is the physical venue where stock market transactions take place. At this facility, suppliers and seekers of financing interact, trading public or private securities at predetermined prices. Trading takes place on an electronic platform; however, some transactions are still conducted using traditional methods.

Securities are settled daily through the banking system. Securities denominated in a foreign currency are accepted and can also be settled using the same procedure. BVPASA operates a payment and settlement system through Banco Itaú Paraguay S.A. Payments are made in both local and foreign currencies, depending on the currency specified in the issued bond. According to a BVPASA report, a total of 6,319 stock market transactions were recorded throughout 2017, with a total value of USD 527 million.

The Stock Exchange is basically divided into two distinct markets: 1) the primary market for issuance and placement; and 2) the secondary market for resale. In the primary market, the operating mechanism is as follows: a party interested in offering securities in a public offering must first register as an issuer with the CNV and must also register the securities to be offered for trading. Generally, guidance and assistance from a stockbroker is advisable to ensure proper compliance with all regulatory requirements. Subsequently, the same process is carried out on the Stock Exchange. Once the securities to be traded are issued and registered, trading begins through your brokerage firm. Trading of the securities takes place on the stock exchange under the conditions and within the timeframes established in the trading rules.

In the secondary market, the process works as follows: investors buy and sell securities they already own by instructing their brokerage firm to place a buy or sell order on the stock exchange. An interested investor, through their brokerage firm, can buy or sell the securities being offered, and the trade is executed. In the stock market, the development of a secondary market is very important because it provides a mechanism for selling or buying securities or for generating cash or working capital if any of the parties involved require it.

To achieve this objective, issuers and entities must disclose to the CNV, the Stock Exchange, and the public all information regarding their legal, economic, and financial status, as well as any relevant data related to the issuing company, the securities to be offered, the economy, the financial market, growth potential, the country’s likely performance, and risk factors. The aforementioned information must be provided truthfully, efficiently, and in a timely manner, with the timeframe and disclosure requirements in accordance with the procedures specified by the CNV.

Insider Information Under the New Law No. 5810/17

Insider trading refers to the trading of a public company’s stock or other securities (such as bonds or financial options) by individuals with access to non-public information about that company. In several countries, as well as in the example from the movie *Wall Street* mentioned above, transactions based on insider information about companies are considered illegal. This is because it is considered an unfair and unethical practice toward other investors who do not have that information, as it could put them at a significant disadvantage when making investment decisions.

The problem of insider trading is actually an endemic issue that affects stock markets around the world. The difference is that in some countries, greater efforts are made to eradicate its misuse. For example, in the United States, the Securities and Exchange Commission (SEC (SEC), is a regulatory agency known for being very active in prosecuting investors who attempt to cheat by using insider information.

In order to improve investment in Paraguay and create greater transparency in stock market trading, the new Law No. 5810/17 regulates the issue of insider information. Although most securities issued in our country are debt instruments rather than stocks, and therefore the issue of insider information does not directly affect the market, the new Law defines in Article 26 that inside information is information not disclosed to the market that originates from an issuer and relates to the issuer, its business, or one or more securities issued or guaranteed by it, the public disclosure of which is capable of influencing the price of the issued securities.

Under the new Law, inside information shall also be understood to include information regarding securities transactions—whether acquisitions or disposals—to be carried out by an institutional investor in the securities market. It is presumed (unless proven otherwise) that persons associated with institutional investors and brokerage firms that trade in the issuer’s securities, as well as persons associated with the issuer, possess inside information. Article 28 of the new Law also lists the persons who are presumed (unless proven otherwise) to possess inside information, such as: a) directors, officers, authorized representatives, consultants, and advisors of the stock exchange; b) the partners and managers of the issuer’s external auditors; c) the partners, managers, and members of the rating committees of credit rating agencies that rate the issuer’s securities or the issuer itself; d) employees working under the direct direction or supervision of the directors or managers of the issuer or the institutional investor; e) persons providing permanent or temporary advisory services to the issuer; f) public officials employed by institutions that regulate issuers of publicly offered securities or equity funds authorized by law; and, g) the spouses or relatives up to the second degree of consanguinity or affinity of the persons listed in the preceding subparagraphs.

The purpose of Law No. 5810/17—and in particular its section on insider information—is to promote a more equitable, transparent, and efficient securities market. This aims to create a much safer and more transparent legal and regulatory framework to foster the development of the securities market in Paraguay, based on access to reliable and accurate information. Therefore, the new law aims to regulate more precisely the information that issuers and entities or companies provide regarding their legal, economic, and financial status, as well as regarding the securities they issue and the information that should be disclosed in their financial statements.

In addition, given that the CNV is the official agency responsible for promoting, supervising, and regulating the securities market in Paraguay, Law No. 5810/17 grants the CNV broader powers to carry out its functions and take corrective measures against activities that undermine the proper functioning of the stock market, while monitoring and ensuring the transparency of stock market transactions and markets. Thus, Law No. 5810/17 grants the CNV sufficient authority to impose sanctions on those who seek to disclose insider information or provide false and misleading information, or to manipulate prices, thereby violating investors’ rights. It is worth noting that the provisions of this law will not apply to securities issued by the Executive Branch through the Ministry of Finance or the Central Bank of Paraguay, unless the Executive Branch or the Central Bank decides to channel the placement of the bonds through the CNV.