Circular Letter CVM/SRE 735/99

CIRCULAR LETTER CVM/SRE No. 735/99
Rio de Janeiro, August 16, 1999
Subject: Real Estate Investment Fund

To Mr.
CARLOS ANTONIO GUEDES VALENTE
BANCO BBM SA

Dear Sir,

This communication aims to clarify for the administrators of real estate investment funds the position and decisions of the Securities and Exchange Commission (CVM) regarding the issues listed below:

1. Revaluation of real estate

Properties intended for sale, classified in current assets or long-term receivables, must be maintained at cost. Any appreciation of these real estate investments will be reflected in the selling price and, consequently, realized at the time of alienation.

Properties intended for income, classified in permanent assets, may undergo revaluation, provided that the provisions of Law 6.404/76 are observed, specifically its articles 8, 182 (paragraph 3), and 187 (paragraph 2), as well as CVM Deliberation No. 183/95, which approved the Pronouncement of the Brazilian Institute of Accountants (IBRACON) on Asset Revaluation.

2. Distribution of income and results

Article 10, item IX, of CVM Instruction No. 205/94 determines that the fund's regulations must provide for the policy of distributing income and results.

The distribution of results is defined as that originating from the net profit calculated in the Statement of Results of the period. On the other hand, the distribution of income is that carried out in excess of the distribution of results and calculated based on cash availability.

This latter form of distribution endorses the current practice of real estate investment funds and is in accordance with the philosophy of considering such a collective investment mechanism as a long-term, but finite, investment, where at the end of its useful life, due to depreciation, there would be a residual value equal to or close to zero, so there is no problem in distributing part of its equity, provided that this distribution does not interfere with its continuity.

This distribution of cash availability will be accounted for directly to the equity account and must appear in a specific Explanatory Note, which adequately clarifies the origin of its values.

3. Recognition of results from construction projects

Circular Letter CVM/SNC/SEP No. 05/95 establishes that in the installment sale of an unfinished unit, i.e., for future delivery, the result of the sale must be recognized over the course of the construction, in the same way that contracts for the supply of goods, works, and long-term services are recognized, based on the physical progress of construction or based on costs incurred. The method used must be consistent over time and must also be disclosed in an explanatory note.

This procedure, which is technically correct and best reflects the allocation of the project's results over time, must be applied by all those who engage in this type of activity, regardless of their legal form. In the case of real estate investment funds, there is no impediment to its use under CVM Instruction No. 206/94, as can be inferred from the provisions of Article 3, paragraph 2 of the norm.

4. Independent Auditors

In May of this year, CVM issued Instruction No. 308, which deals with the rules for the registration and exercise of independent audit activity within the securities market.

The regulation, in its articles 26 to 29, establishes responsibilities for the administrators of audited entities in their relationship with independent auditors.

Consequently, we draw your attention to the diligence required of the administrator of a real estate investment fund in the choice and hiring of the auditor, as he may be held liable when it is found that the hired auditor does not meet the requirements of technical qualification and independence, does not have an organizational structure compatible with the size and complexity of the service to be performed, or is not regularly registered with CVM.

Continuation of Circular Letter CVM/SRE No. 735/99

We recommend careful reading of the provisions of the aforementioned Instruction, the text of which is available on the CVM website (www.cvm.gov.br).

5. Delay in Presentation of Financial Statements

The regulation of information disclosure for real estate investment funds established by CVM aims to ensure that the public has timely, efficient, and reasonable access to the information necessary for making investment decisions, voting, and being represented in unitholders' meetings.

After a period in which administrators were sought to be made aware of the importance of timely disclosure of information regarding the performance of real estate investment funds under their administration, the current stage of maturity of the industry no longer admits delays in the disclosure of the funds' financial statements, a practice capable of affecting market reliability.

Therefore, we inform you that CVM will henceforth use the prerogative established by Article 48 of CVM Instruction No. 205/94 to apply a daily penalty fine to the fund administrator in the amount of 69.20 UFIR, corresponding on this date to R$ 67.61, for delay in the presentation and publication of semi-annual financial statements, accompanied by the report of the administering institution and the opinion of the independent auditor.

Sincerely,

Carlos Aberto Rebello Sobrinho
Superintendent of Securities Registration