CVM Explanatory Note 24/81 (Revoked)

CVM EXPLANATORY NOTE NO. 24/81.
Ref.: CMN Resolution No. 702, of 08/26/81, which defines situations of abnormal market for the purpose of Section 1 of Article 9 of Law 6.385, of 12/07/76.

Law No. 6.385, of 12/07/76, in its Article 9, Section 1, granted the Securities and Exchange Commission (CVM) the authority to prevent or correct situations of abnormal market.

As per the terms of that article, this preventive or corrective action could only be exercised through the prior definition, by the National Monetary Council (CMN), of what would be characterized as an "abnormal market situation." CMN Resolution No. 702 came to regulate the CVM's attributions, which, according to the cited Law, may adopt the following measures:

• suspend the trading of a certain security or decree the recess of a Stock Exchange;
• suspend or cancel the registrations referred to in Law No. 6.385/76;
• disclose information or recommendations, with the aim of clarifying or guiding market participants;
• prohibit market participants, under penalty of fine, from practicing acts specified by the CVM, which are detrimental to its regular functioning.

The main objective of the Resolution is to equip the government body directly responsible for the regulation and supervision of the securities market with effective mechanisms that allow it to maintain an orderly and reliable market.

Indeed, the CVM had been witnessing situations indicating possible damages, both to the investor's assets and to the market as a whole, which could not be removed or repressed due to the lack of instruments to be used on a preventive basis.

It is worth emphasizing that this preventive action is not confused with the supervisory function provided for in the same Law (Article 9, items V and VI, and Article 11), since, in the latter, the CVM's action is always "a posteriori," and presupposes the initiation of an administrative inquiry to investigate illegal acts and unfair practices by market interveners.

The preventive function, on the other hand, aims above all to prevent emerging damages from compromising the normal development of the market; in these cases, the authority should not wait for the irregularity to materialize and the damages caused by it to take hold, but rather act promptly to remove potential damages.

CVM EXPLANATORY NOTE NO. 24/81.
2

It was due to this need for immediate action that Law No. 6.385, in its Article 9, Section 1, granted powers to the CVM, when preventing or correcting abnormal market situations, to adopt measures, without prior initiation of an administrative inquiry, alongside its action as a supervisory body when, as mentioned above, all rites inherent to a formal process must be strictly observed. This is because, to efficiently discipline a market, whose transactions develop in an extremely rapid manner, the authority must use regulatory mechanisms that are also agile. Thus, in this preventive and precautionary function, the CVM would have to make immediate decisions to remove emerging distortions, not being able to wait for the course of an administrative process, under penalty of such decisions becoming ineffectual or ineffective.

And it is for no other reason that all situations provided for in the Resolution require an urgent response from the authority, without which third parties involved could be prejudiced.

The absence of an administrative inquiry does not mean that the CVM will exercise its powers arbitrarily when preventing abnormal situations, since its preventive action is delimited by parameters defined by law and regulatory norms.

Thus, CVM Instruction No. 08, of 10/08/79, defines the configuration of the irregularities provided for in item a of the Resolution; Laws No. 6.404 and 6.385 stipulate the obligations of administrators of open companies or persons equated to them, regarding the duty to provide relevant information from these companies (item b); the same Laws also determine the obligation for intermediaries to obtain registrations and authorizations from the CVM to exercise activity in the market (items c and d).

In addition, the experience accumulated by the CVM, in acting in the direct regulation of the market in recent years, allied with the technical-operational infrastructure it has to monitor and supervise this market, will be used in the sense that any preventive measure is only taken in a precise manner and within circumstances considered serious. In this way, we observe that the terms "indications" and "at its discretion," used in the Resolution, do not mean doubts or assumptions by the CVM, but constitute facts that, although investigated in a summary manner, characterize the emergence of irregularities, which may cause damages or risks for the various market participants, mainly investors.

Below, the content of Resolution No. 702 is analyzed, identifying, through each of its provisions, the reasons for its adoption.

The situations provided for in item a translate possible acts by the various market participants (administrators and shareholders of open companies, intermediaries, and investors), acts that, by causing unjustified alterations in the flow of trading of securities or by artificially modifying the quotation of titles, can affect the efficient formation of prices, insofar as they interfere with the natural trends of demand and/or supply of securities. Similarly, the obtaining by such participants of undue advantages, whether through fraudulent operations or through the use of unfair practices, would cause considerable damages to third parties in good faith.

CVM EXPLANATORY NOTE NO. 24/81.
3

Item b identifies the situations in which the lack of full availability, to the public, of relevant information from open companies can compromise the reliability of the market, insofar as the non-disclosure of this information or, even, its disclosure in an incomplete or biased manner, places the administrators and major shareholders of the company in a privileged position compared to other market participants. In this regard, we emphasize that the CVM has long been concerned with such occurrences, emphasizing, in its "Fundamentals and Principles for the Regulation of the Securities Market," already approved by the CMN, that the allocation of resources in the economy can only be efficient if the market has a reliable information system, which allows the entire universe of investors equal, timely, and non-privileged access to any important data from open companies.

The situations provided for in items c and d have as their main reason to guarantee that the most representative segment for the preservation of reliability in the market, namely that constituted by intermediaries, acts in an orderly and regular manner. The CVM itself, in the cited "Fundamentals and Principles," already recognized the need to establish qualification criteria for the exercise of activities in the market, through the institution of registrations or authorizations for intermediaries, as a way to ensure the presence of honest, capable, and experienced professionals, and companies endowed with financial stability. Thus, the action of natural or legal persons in the market, without the necessary authorization of this Commission, or the existence of intermediaries who, although accredited, act in disagreement with this authorization or registration, would affect the safety and protection of investors and prejudice the other members of the market, regularly constituted.

Item e identifies the peculiar situations in which the action of a participant or a group of market participants may eventually cause damage to the entire community.

Item f, unlike the previously cited ones, deals with situations resulting not from acts of market participants, but from external factors that affect the regular practice of business. Thus, events occurring in national life, or even situations caused by international events, may cause disturbances in the economy; in these cases, the CVM must act promptly to restore the necessary order for the development of the market.

Finally, it is worth remembering that the Resolution does not expressly list the measures that can be adopted by the CVM to prevent or correct abnormal market situations, as they are already enumerated in law (Article 9, Section 1 of Law No. 6.385/76), and that the fact of providing for the possibility of the Commission issuing complementary norms to this legal document (Article II) does not invalidate its full validity, since such a provision does not mean an obligation, but rather a faculty of the regulatory body, which may be exercised if the needs of the market so require.

Rio de Janeiro, November 27, 1981.
Signed original by
HERCULANO BORGES DA FONSECA
President