CVM Explanatory Note 22/80

CVM EXPLANATORY NOTE NO. 22/80.
Ref.: CVM INSTRUCTION NO. 16/80, of November 10, 1980, which alters the system for collecting and distributing the annual fees paid by companies benefiting from the Regional and Sectoral Investment Funds (FINOR, FINAM, FISET and FUNRES).

The current system of applying tax incentives for legal entities was established by Decree-Law No. 1,376, of December 12, 1974, which created the Regional and Sectoral Investment Funds FINOR, FINAM and FISET, administered respectively by the Bank of the Northeast of Brazil, the Bank of the Amazon and the Bank of Brazil.

Resolution CMN No. 381 of June 24, 1976, regulating the aforementioned Decree-Law, established that the Fund shares (Investment Certificates-CI) would be traded on Stock Exchanges and could be converted into securities that compose the Funds' portfolios, in special auctions, held in the premises of those entities.

More recently, by virtue of CMN Resolution No. 616 of May 8, 1980, the system instituted by Resolution No. 381 was extended to the Development Fund of the State of Espírito Santo FUNRES, operated by the Espírito Santo Development Bank BANDES.

In addition to the form of negotiation and conversion of CIs into securities, Resolution No. 381, in its art. 22, also determined that the beneficiary societies of the Funds would pay an annual fee to the Exchanges, established by the Central Bank upon proposal of the Operating Banks and Stock Exchanges. In the sole paragraph of the same art. 22 it was characterized that the annual fees would be distributed among the Exchanges, proportionally to the volume converted in the special auctions, and art. 17 provided that, in conversion operations, brokerage societies would charge their clients half of the brokerage fee in force for operations with securities or securities.

As observed, the current policy of regional and sectoral tax incentives also has repercussions on the securities market and for this reason, it has been the subject of studies by this Commission.

In the analyses carried out on the matter, hearing opinions from interested parties (Operating Banks, Stock Exchanges and Abrasca), it was found that the system for collecting and distributing the annual fees paid by societies whose securities are part of the Funds' portfolios, instituted by CMN Resolution No. 381, was not meeting in practice the objective for which it was created, namely, to remunerate the Stock Exchanges for the services provided to the system, since the revenue generated did not allow them to cover the costs incurred in the administration of the system.

Also, the collection of only 50% of the brokerage rates for the exercise of the intermediation activity in the special auctions was not adequately remunerating the brokerage societies,

CVM EXPLANATORY NOTE NO. 22/80.
2 mainly because, on these occasions, the Fund, as seller, was already exempt from brokerage, and the sales offers were announced by the Stock Exchange itself.

Considering that both the Stock Exchanges and the brokerage societies play a relevant role in the development of the system, Resolution No. 635, approved by the National Monetary Council on August 27, 1980, provided intermediaries and Stock Exchanges with a resource contribution compatible with the services provided to the regional and sectoral tax incentive system.

This Instruction, which regulates the collection of annual fees, does not innovate, meaning it is merely an improvement of the previous system, provided for since 1977, but which proved ineffective, given the difficulty in requiring the operating banks to pay these annual fees, with respect to companies that no longer depended on resources to be released. The Instruction now issued, therefore, only promotes the update of a previously stipulated value and facilitates the operationalization of the collection, that is, at the same time that the resources are released.

The annual contribution will be equivalent to 10 Reference Values at the beginning of each year, collected at the time of resource release, maintaining, as in the previous system, the 10% increase in the value of the contribution for each additional afforestation and/or reforestation project, from the second one onwards. Note that such contribution, in terms of Reference Values, is approximately equal to the annual fee fixed by BACEN Circular 344/77, which was Cr$ 6,000.00, when, at that time, the MVR was worth Cr$ 638.30.

Furthermore, the collection in Reference Values eliminates the need to adjust the value of the contribution every year, which will now be automatic, according to the variation of those indices.

The decision to charge a contribution from the company only from a minimum release (100 MVR) is based on the fact that, below this amount, the value of the contribution would be proportionally very high, with respect to the potential for additional work generated to the Stock Exchanges by the issuance of the CIs corresponding to the release.

The revenue from companies whose shares make up the portfolio of each Fund will be distributed among the Exchanges, proportionally to the volume of CI of the respective Fund, traded in the auction, in the previous year, that is, the contributions paid by societies that have FINOR participation, for example, will be apportioned according to the trading volume of CI-FINOR in the various Stock Exchanges.

This measure aims to stimulate competition between Exchanges for the negotiation of these papers, aiming to offer investors of these titles greater liquidity and visibility.

The choice of CNBV for the function of centralizing and distributing the collection among the Exchanges is due to the fact that that entity has already been performing, satisfactorily, a similar service with respect to the annual fees paid by open companies, including having a flow of information from the

CVM EXPLANATORY NOTE NO. 22/80.
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Stock Exchanges regarding the volume traded by them in their auctions and therefore, sufficient to execute this additional activity, including in that flow the volume transacted with Investment Certificates.

It is believed that, with these measures, the interest of the parties involved in this segment of the securities market will be stimulated, to the benefit of the entire regional and sectoral tax incentive system.

RIO DE JANEIRO, NOVEMBER 10, 1980.
Original signed by
JORGE HILÁRIO GOUVÊA VIEIRA
President