CVM Explanatory Note 13

CVM EXPLANATORY NOTE NO. 13.
Ref.: Central Bank of Brazil Resolution No. 519 consolidating a decision of the National Monetary Council, adopted in the Meeting of March 13, 1979, and modifying the system of Decree-Law No. 1401, of May 7, 1975.

I - INTRODUCTION
The reformulation carried out in the regulation of investment societies under Decree-Law No.
1,401, had as its objective to create better conditions for the mechanism instituted in 1975 for the entry of external resources into the Brazilian securities market to present more favorable results, as well as to improve the system in force. The norms published upon the creation of the aforementioned mechanism were quite conservative, due to the Country's inexperience with this type of application and the fear that the measure then adopted might bring unknown implications, especially regarding the stock market, which was quite narrow. Therefore, a cautious and rigid system was adopted, also providing that any subsequent changes would aim at its flexibility and not at the imposition of new restrictions. Almost four years after the creation of investment societies and having acquired experience in dealing with this type of application, it was deemed appropriate to introduce some changes, with the basic objective of flexibilizing points considered critical.

II - MAIN CHANGES

1. Minimum Period of Stay of Resources in the Country
   This is, without a doubt, the main change introduced by the National Monetary Council.
   Until now, external resources raised in accordance with the norms provided by Decree-Law No. 1,401 were subject to an average stay period, in the country, of four years, resulting from a grace period of three years, after which they had to return to the country of origin, in a staggered manner: in each semester, the remittance abroad of an amount equivalent to, at most, 20% of the initial investment registered in foreign currency in the name of the shareholder was allowed. The new Resolution provides for the establishment of a minimum period of two years, dispensing with the system of partial liquidation. The adoption of this measure aims to eliminate one of the most complex points of the legislation previously in force without prejudice to the main goal of preventing the entry of short-term resources into the country.

2. Minimum Capital for the Constitution of a New Investment Society

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Prior to the new regulation, authorization for the constitution of a new investment society was only granted to the same administering institution when the already constituted society had net assets equal to or greater than Cr$ 50 million or when there was a firm commitment from subscribers to acquire shares of the new society in an amount equal to or greater than Cr$ 50 million. With the objective of allowing the entry into the country of investors who do not wish to participate jointly with other shareholders in the same investment society, the above limits were reduced to Cr$ 10 million. It is hoped, with such a measure, to expand the reach of investment societies, allowing them to attract investors who, in a first stage, would otherwise not be willing to enter the Brazilian market.

3. Subscription Agents
   The requirement for the intervention of a subscription agent for the placement of the shares of Brazilian investment societies abroad presented some inconveniences in the case of entities of this kind that had only one shareholder or a reduced number of shareholders belonging to the same group. In fact, the participation of the subscription agent in these cases aimed only at compliance with a legal formality, since no placement effort was made. Therefore, it was decided to make the intervention of this agent optional, at the discretion of the administrator of the investment society's portfolio and after prior consultation with the Central Bank of Brazil.

4. Applications of Investment Societies
   In addition to the changes noted, and which aimed to simplify and/or flexibilize the system in force, it was deemed appropriate to introduce some modifications that would allow better use of the external resources raised by investment societies. In this way, it was sought to better disseminate the applications of these entities through the reduction from 20% to 10% and from 10% to 5%, respectively, of their maximum participation in the total capital and in the voting capital of each company. It was also sought, with these modifications, to maintain coherence with the regulation of other institutional investors. The elimination of the requirement that the average application per company be 5% of the total applications of the investment society aims to suppress a rule whose effectiveness is quite debatable in terms of promoting participation in a greater number of companies. In fact, this obligation implied that the investment society maintained in its portfolio securities of at least 20 companies, but it did not prevent it from concentrating its applications in a reduced number of companies, destinating negligible volumes to other corporations just to comply with the rule.

5. Various Changes

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In addition to the measures cited above, other measures were adopted with the aim of eliminating unnecessary requirements as well as offering greater operational flexibility to investment societies. First, it was sought to give greater mobility to such entities in cases where redemption requests involve a substantial portion of the society's assets and, therefore, imply the alienation of its assets to satisfy them. While previously the institution was obliged to repurchase its shares at the price in effect on the first normal banking business day following the request, this period has now been extended to up to ten business days. In parallel, investment societies were exempted from the requirement of daily reporting of information regarding their net assets and the value of each share, information which is now to be provided weekly. The system adopted regarding surpluses resulting from the difference between the proceeds from the exchange of currencies and the invested value was also changed, which, in addition to being able to be remitted to the shareholder upon the first dividend payment, can, under the new regulation, be incorporated into the society's assets, according to what has been contracted between the investor and the administrator. In addition, a single criterion for calculating results for the purpose of distributing income was established, eliminating one of the previously in force. With this measure, it is intended to uniform procedures and make the criteria adopted in Brazil compatible with those used in the international market, namely considering as entity revenues only the receipt of dividends or cash bonuses, the interest on debentures and the yields from applications in National Treasury Bills. Therefore, the appreciation of the portfolio and the gains earned in the purchase and sale of securities are excluded. It should be noted that this measure will not imply a great adaptation effort for investment societies, given that the majority of entities of this kind already adopt the criterion now established. Finally, it was sought to expand the area of operation of investment societies, allowing them to operate with investors who have a smaller volume of resources, by reducing the minimum application value required from US$ 10,000 to US$ 1,000.

III - FINAL CONSIDERATIONS
The changes in the system created by Decree-Law 1,401 will be complemented by a review of the tax treatment currently in force for the remittance abroad of the yields produced by investment societies. The study in this sense, already carried out by the Securities and Exchange Commission and by the Central Bank of Brazil, has been forwarded to the Ministry of Finance where the suggestions for reformulation presented are being examined. Such suggestions aim, like those cited above, to flexibilize and simplify the system currently in force.