Circular Letter CVM/SRE 05/24: Interpretation Regarding the Public Distribution of Development Credit Notes (LCD)

SECURITIES COMMISSION OF BRAZIL
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Dear Director,

1. This Circular Letter aims to guide the market regarding the interpretation of the Superintendency of Securities Registration - SRE concerning the public distribution of Development Credit Notes ("LCDs"), with respect to aspects regulated by the CVM.

2. Specifically, through this Circular Letter, the SRE indicates the applicability of the regime established by CVM Resolution No. 8/2020 ("RCVM 8"), clarifying the foundations of its understanding on the matter, and further highlighting certain aspects that must be considered when applying the aforementioned norm, aiming for better adaptation to public distributions of LCDs.

3. It is further emphasized that this instrument does not have a normative character[1], but rather aims to give publicity to the interpretation of this SRE regarding the possibility of using the procedure provided for in RCVM 8 for the purpose of the public distribution of LCDs, with a view to providing support for the provision contained in Article 7 of Law No. 14,937/2024.

4. Indeed, this Circular Letter aims to reconcile what the technical area considers to be the best utilization of the current normative framework, in the context in which CVM regulation was attracted to the matter by virtue of the Law that created the instrument in question, until the regulation is updated, for the benefit of the regulatory effort of the Autarchy.

I – On the Development Credit Note and its normative similarity to other banking instruments

5. The Development Credit Note is a debt instrument established by Law No. 14,937 of July 2024, in the following terms:

Article 1. The Development Credit Note (LCD) is hereby instituted, a nominative, transferable, and freely negotiable credit title, representing a promise of payment in money.

Paragraph 1. The LCD will be issued exclusively by development banks authorized to operate by the Central Bank of Brazil or by the National Bank for Economic and Social Development (BNDES), starting from the fiscal year 2024.

[...]

Article 7. The public distribution of the LCD will observe the provisions of the Securities Commission.

6. For its part, the National Monetary Council issued in August last year Resolution CMN No. 5,169, which regulates the issuance of such titles, in light of its competence to regulate the National Financial System.

7. This is, therefore, a banking product, which now becomes part of the list of financing options for development banks and BNDES, for which the respective Law attracted CVM regulation, with respect to its public distribution, similar to other banking products such as the Financial Note and the Guaranteed Real Estate Note, as shown below:

LAW NO. 13,097, OF JANUARY 19, 2015

Article 63. The Guaranteed Real Estate Note - LIG is a nominative, transferable, and freely negotiable credit title, guaranteed by an Asset Portfolio subject to the fiduciary regime regulated by this Law.

Sole Paragraph. The issuing institution is responsible for the fulfillment of all obligations arising from the LIG, regardless of the sufficiency of the Asset Portfolio.

Article 64. The LIG consists of a promise of payment in money and will be issued by financial institutions, exclusively in book-entry form, through registration in a depository authorized by the Central Bank of Brazil,

[...]

Article 93. The distribution and public offering of the LIG will observe the provisions of the regulation of the Securities Commission.

LAW NO. 12,249, OF JUNE 11, 2010

Article 37. Financial institutions and other institutions authorized to operate by the Central Bank of Brazil may issue Financial Notes, nominative, transferable, and freely negotiable credit titles.

Article 38. The Financial Note will be issued exclusively in book-entry form, through registration in a system for the registration and financial settlement of assets authorized by the Central Bank of Brazil

[...]

Article 39. The public distribution of Financial Notes will observe the provisions of the Securities Commission.

8. It is also worth remembering that, although the Specific Laws cited above attract the CVM to the moment of public distribution of such titles, Law No. 6,385/76, which, among other things, regulates the scope of the CVM, provides for banking instruments as follows:

Article 2. Securities subject to the regime of this Law are:

[...]

Paragraph 1. The following are excluded from the regime of this Law:

[...]

II - negotiable instruments issued by financial institutions, except debentures.

9. It is further highlighted that all 3 of the above-cited instruments (LCD, LF, and LIG, collectively "Letters") are executive titles issued extrajudicially and in book-entry form. However, despite sharing structural characteristics, LCDs are issued exclusively by development banks and BNDES, an aspect relevant for the purposes of the CVM's statement regarding them.

II – CVM Regulation on public distribution offers of LIG and LF

10. In the context where the Autarchy's action, with respect to the regulation of public offers of such instruments, derives from the Laws that instituted them, the CVM recognizes the specificities of such titles, whose issuance and distribution present a significantly different dynamic when compared to securities listed in Law No. 6,385/76. In this sense, it is worth highlighting the characteristic of recurrence of issuances by banking institutions, which is inherent to the very activity of such institutions, implying the difficult compatibility with rules and concepts that govern the norm regulating public offers of securities. For example, in the case of options among the range of banking financing possibilities, therefore potentially issued depending on immediate market conditions, it is difficult to delimit a moment in which the sales effort to investors in general is realized, an aspect that underpins a series of rules of the norm governing public offers of securities.

11. Seeking to adapt the regulation to this fact, CVM Instruction No. 488/10 was issued in the past, inserting into the then-in-force CVM Instruction No. 400/09 the Continuous Distribution Program for public offers of LF. Subsequently, in an attempt to stimulate the use of the procedure, CVM Instruction No. 546/14 was issued, flexibilizing certain characteristics for offers of Financial Notes. However, this effort proved ineffective, with no history of use of this procedure, so that in 2020 CVM Resolution No. 8/20 ("RCVM 8") was issued, amending CVM Instruction No. 569/15, bringing offers of LF and LIG into the regime then provided exclusively for offers of Structured Operation Certificates, an instrument that also presents the characteristic of recurrence of issuances.

12. Thus, the framework that currently regulates the public distributions of COE, LIG, and LF, as contained in RCVM 8, provides for the inapplicability, for the public distribution of such titles, of the general provisions defined in specific regulation on public offers of securities. It provides, according to Article 2, that the public distribution offer of COE, LF, or LIG is not subject to registration with the CVM and will be carried out by intermediary institutions qualified to act as members of the securities distribution system, or the issuer itself, when it is, itself, a member of the Distribution System.

13. It is worth noting that, as recorded in the Public Hearing Report SDM No. 04/19, which culminated in the issuance of RCVM 8, the new regulatory approach was very well received by the market, with the regulation remaining stable since then.

III - On the possibility of using RCVM 8 in public offers of LCDs

14. Like LIG and LF, the Development Credit Note is a banking financing title whose issuance depends on immediate market conditions, characterizing itself as a "shelf" instrument, in this case, in the dynamics of operation of development banks and BNDES. Therefore, the public offer of such titles passes through the same issues addressed in the previous section, which, in the view of this technical area, suggests the convenience of adopting RCVM 8 also as the regulation for the public distribution of LCDs.

15. However, notwithstanding the structural similarities shared by LCD, LIG, and LF, the application of RCVM 8 to public offers of Development Credit Notes must be considered in light of a central aspect within the scope of the CVM's competence, the participation of a member of the Distribution System.

16. This is because the LCD is a title issued exclusively by development banks or BNDES and, on the one hand, BNDES is a member of the Securities Distribution System[2], development banks are regulated through Resolution CMN No. 394/76, which expressly, in its Article 15, provides:

Article 15. Development Banks are prohibited from:

[...]

II - Operating in acceptances of negotiable instruments for placement in the capital market;

17. In this sense, although the CVM has legal mandate to admit institutions qualified to act in the distribution of issuances in the market, the above-mentioned device, smj, imposes an obstacle to the possibility that development banks could, themselves, publicly distribute LCDs of their own issuance.

18. Thus, even though the common structural characteristics of the Letters indicate that the adoption of RCVM 8 is coherent, for the purposes of regulation by the CVM, of public offers of such instruments, as demanded by Law No. 14,937/24, it must be pointed out that development banks cannot do without an institution that is a member of the Distribution System for the execution of the public offer of Development Credit Notes.

19. Finally, this technical area understands that for the adequate utilization of the norm in question for the end proposed in this Circular Letter, there must be an adaptation of the Essential Information Document prepared by the issuer, provided for in Articles 5 and 6 of RCVM 8, given the conditions for the issuance of LCDs as stipulated by the CMN in its Resolution No. 5,169, of August 2024. In this sense, in light of the CVM's competence to regulate the informational content provided to investors for the purposes of their investment decision within the scope of a public offer, it is included as an annex to this Circular Letter a document that, in the view of this technical area, must be used as the Essential Information Document of the LCD, supported also by the minimum informational content provided for in Article 10, sole paragraph, of the aforementioned Resolution.

IV - Conclusion

20. In light of having been instructed to regulate public offers of Development Credit Notes, by virtue of Article 7 of Law No. 14,937, the Superintendency of Securities Registration presents to the market its understanding that such offers must proceed observing the provisions of CVM Resolution No. 8/2020.

21. In this sense, the technical area reserves that the public placement of such instruments, when issued by development banks, cannot do without the participation of an institution that is a member of the Distribution System, since that type of financial institution does not compose the list qualified to act in the securities market, when the offer involves titles of its own issuance. Furthermore, the SRE presents the Essential Information Document of the LCD ("DIE - LCD"), according to the model attached to this Circular Letter, which must be prepared by the issuer in accordance with Articles 5 and 6 of RCVM 8.

[1] As provided by CVM Resolution No. 1/2020, the objective of a Circular Letter is: “to embody the acts by means of which the CVM superintendencies give orientations, recommendations, and guidelines, whose non-compliance does not imply to the recipients legal consequences, effective or potential, regarding the form of fulfilling the obligations imposed by Law No. 6,385, of 1976, by Law No. 6,404, of 1976, by CVM Resolutions, as well as regarding the orientations contained in the Normative Instructions, observing the precedents of the Collegiate, if any.”

[2] In accordance with Declaratory Act No. 18.791 of 05/28/2021, issued by the CVM using the competence attributed to it based on Article 18, item I, letter 'a', c/c Article 16, item I, both of Law No. 6,385/76,

Sincerely,

ELAINE MOREIRA M DE LA ROCQUE
Superintendent of Securities Registration in exercise

ANNEXES:
Annex 1 - Essential Information Document - Development Credit Note ("DIE-LCD")

Document electronically signed by Elaine Moreira Martins de La Rocque, Substitute Superintendent, on 12/19/2024, at 11:07, based on Article 6 of Decree No. 8.539, of October 8, 2015.

The authenticity of the document can be verified on the site https://sei.cvm.gov.br/conferir_autenticidade, by providing the verification code 2212055 and the CRC code 14CE9F2F.
This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Verification Code" 2212055 and the "CRC Code" 14CE9F2F.
Reference: Process No. SRE Circular Letters 2024 SEI Document No. 2212055