Protection of Investors and Credit Rating Agencies Regulation in Latin America

Abstract

The growth and expansion of economies of developing countries rely, in a great extension, on the access to financing sources for entrepreneur activities. Capital markets are one of the most efficient alternatives for local companies to have access to capitals, either local or foreign, and, therefore, for the boosting of the economic progress of such countries. In this sense, a legal framework of capital markets that fulfill the requirements of stability, certainty and security are essential in order to countries to compete for international capitals and investments. Indeed, such requirements are imperative to grow an environment of confidence of investors. Among other important issues in the capital markets regulation scope, there are two that have a vital importance to induce the confidence of investors and, consequently, to attract investment: the legal protection of investors and the regulation of the activities of credit rating agencies. It is vital that the legal system sets a framework for the protection of investors in the capital markets. The need of a stable, clear and secure framework does not imply an excessive intervention of the state in the ability of private economic agents to regulate their own interests. On the contrary, the state shall only provide for the minimum content of the financial services agreement and assure the compliance of the obligations taken under a contract. Furthermore, as the investment decisions made by economic agents rely mostly on the information they have on the financial instruments that are offered in the market, rules determining the full disclosure of information are essential. Concerning credit rating agencies, it is important to understand the role that such entities have undertaken in capital markets. Information about companies and financial instruments is the material economic agents use to make their investment decisions. But the cost to process and analyze the whole bunch of available data is too high for most agents, so they have to rely on the opinion of experts, such as credit rating agencies. In this context, regulation shall assure that the aforementioned agencies act in a fair and transparent way. Rules concerning conflict of interests, publicity of the criteria of rating analysis, and supervision on the activities of agencies are important to the growth of a sound capital market and an investment friendly environment. The article will focus on some of the production-centered jurisdictions—Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela. They were chosen because they are the major economies in the region.