CVM Explanatory Note 27

Ref.: CVM INSTRUCTION NO. 28, of 11/23/83, which provides for the exercise of the function of Fiduciary Agent of Debenture Holders.

Based on the general competence attributed to it by LAW NO. 6.385, of December 7, 1976, to regulate the securities market with a view to promoting its development and efficient and regular functioning, and on the specific competence contained in LAW NO. 6.404, of December 15, 1976, to supervise the exercise of the function of fiduciary agent, as a means to ensure effective protection for investors in that market, the Securities and Exchange Commission - CVM - decided to issue this Instruction.

The CVM understands that the development of the securities market, in its broadest sense, depends, above all, on the confidence that investors place in it. It is therefore intended that the principles set forth in the Instruction constitute instruments capable of generating, safeguarding, and enhancing the reliability of these investors in the market.

Aiming to achieve these objectives, the Instruction dictates to the fiduciary agent, representative of the community of debenture holders before the issuing company, an active and responsible performance, based on technically honest procedures and of high ethical content.

The prescribed norms consolidate provisions of LAW NO. 6.404/76, which establish specific requirements for the exercise of the function of fiduciary agent of debenture holders, with rules extracted from experience - both Brazilian and foreign - in dealing with the problem of debentures.

The Instruction establishes, in accordance with the law, initially, that the obligation to appoint a fiduciary agent only arises in the case of a public issuance of debentures to be distributed in the securities market (art. 1). Consequently, in private issuances, the indication of a fiduciary agent is optional.

The presence of the fiduciary agent in public issuances of debentures must be continuous, so as to provide for a permanent and uninterrupted performance, aiming at the continued protection of the rights of those it represents. To achieve this purpose, the Instruction determines, in its art. 2, that the issuance deed must expressly establish the procedure to be observed for the substitution of the fiduciary agent. Thus, in the event of facts that prevent the fiduciary from continuing to exercise its functions, a meeting of the debenture holders must be convened for the purpose of choosing and appointing a new fiduciary agent. It also provides that in no case may the function of fiduciary agent remain vacant for a period exceeding 30 days (§ 1 of art. 2). Competent to convene the meeting are both the fiduciary agent to be replaced, the issuing company of the debentures, debenture holders representing 10% (ten percent), at minimum, of the debentures in circulation, as well as the Securities and Exchange Commission itself. However, if the meeting is not convened until 8 (eight) days before the end of the 30-day period established above, it will be incumbent upon the issuing company to convene it (§ 2 of art. 2). As an additional mechanism for investor protection, it provides, in § 3 of art. 2, that the CVM may appoint a provisional substitute for the fiduciary agent, while the process of choosing the new representative of the community of debenture holders is not consummated.

As, by the legal system implemented by LAW NO. 6.404/ (ART. 66), the fiduciary agent is originally appointed by the issuing company in the issuance deed, without any participation of the debenture holders, art. 3 of the Instruction allows the latter, as soon as the community of debenture holders is constituted, to indicate a new fiduciary agent that effectively congregates their confidence, for the purpose of defending their rights and interests. Therefore, in addition to the provision for the substitution of the fiduciary agent in cases where this agent is prevented from exercising its functions (art. 2), the Instruction also admits the possibility of substitution of the agent by option of the debenture holders. Thus, after the deadline for the distribution of debentures in the market has expired and the community of debenture holders has already been constituted, if they do not manifest themselves contrary to the appointment of the fiduciary agent made by the issuing company in the issuance deed, the said appointment remains intact and valid. However, if the debenture holders wish to replace the fiduciary agent, they may do so, by resolution in a meeting of the debenture holders, specially convened for this purpose (art. 3).

Once the substitution of the fiduciary agent has been resolved, its indication must be submitted to the CVM so that it can express itself regarding compliance with the requirements, listed in art. 8 of this Instruction, referring to the qualification of the new fiduciary agent to exercise its functions. This requirement aims to maintain the same technical and ethical standard for both the fiduciary agent originally appointed in the issuance deed and for its successor (art. 4).

The substitution of the fiduciary agent that has been deliberated by the meeting of the debenture holders and that has obtained CVM approval, thus assuming a character of permanence, must be the subject of an amendment to the issuance deed (art. 5). This alteration, in accordance with art. 62, § 3 of LAW NO. 6.404/76, must be recorded in the commercial registry and in the real estate registry in which the issuance deed was registered.

With the aim of clearly delimiting the period during which the responsibility of each fiduciary agent is configured, art. 6 of the Instruction establishes the starting date for the exercise of its functions: - the date of the issuance deed, or, where applicable, the date on which the amendment to the deed was effected, regarding the substitution of the agent. From this moment, until its effective substitution, that is, until another fiduciary agent begins the exercise of its functions, he will be responsible for the acts he practices.

To avoid interpretations tending to exempt the fiduciary agent from responsibility during the interval that mediates between the negotiations for the choice of a new agent and the assumption of functions by the chosen fiduciary agent, the Instruction imposes on the fiduciary agent the duty to remain in the exercise of its functions until its effective substitution.

Art. 7 of the Instruction, based on the norms contained in arts. 60, §§ 1 and 2 of art. 66 and 147, all of LAW NO. 6.404/76, establishes specific requirements, indispensable for natural persons and financial institutions to be considered qualified to exercise the functions of fiduciary agent.

Art. 7, II, of the Instruction, based on art. 66, § 1, of LAW NO. 6.404/76, conditions the exercise of the functions of fiduciary agent by a financial institution on the fact that these have as their corporate object the administration or custody of third-party assets.

The Instruction clarifies that institutions aiming to perform the functions of fiduciary agent must obtain, for each issuance of debentures in which they act as fiduciary agent, prior and specific authorization from the Central Bank of Brazil. This requirement, by providing a more effective means of supervising the performance of the fiduciary agent, results in an additional factor of security for the investor in debentures.

Art. 8 establishes the current parameters, determinants of the obligation that the fiduciary agent be a financial institution. In the situation described in item I - issuance guaranteed by pledge - it was considered, in view of the rule exposed in art. 768 of the Brazilian Civil Code, which provides that the object of the pledge guarantee must be delivered, by effective tradition, to the creditor or to whom he represents, that the debenture holders would enjoy greater protection, if the depositary of the guarantee were a financial institution. This understanding is based on the presumption that it must be more adequately equipped to keep under its custody and security the securities pledged. The hypothesis provided for in item II - issuance that exceeds social capital, provided that it is not a subordinate debenture - arises from the norm contained in art. 60 of LAW NO. 6.404/76, which provides about the total value allowed for the issuance of debentures, as well as about the exceptions admitted to that limit (caput and §§ 1, 3 and 4 of art. 60). § 2 of the same article sets specific rules for determining the base for calculating the quantum that may exceed the total value allowed, and prescribes that resources that exceed this value must be under the control of the fiduciary agent, to be delivered by it to the company, as the value of the guarantees is increased, for the purpose of compliance with the limits fixed in § 1 of the aforementioned art. 60. It was considered, as in the case of item I, that also in this hypothesis, with the determination that the fiduciary agent be a financial institution, the debenture holders would be endowed with more effective protection.

Art. 9 lists which documents, regarding the capacity of the fiduciary agent to perform the functions it proposes to exercise, must be submitted to the CVM. Only after the examination of the documentation in question, proving the potential of the fiduciary agent to provide efficient and independent protection to the rights and interests of the debenture holders, will the CVM grant the registration of the issuance of the debentures or its approval of the amendment to the issuance deed regarding the substitution of the fiduciary agent.

LAW NO. 6.404/76, by introducing into the system of the Law of corporations the innovative presence of the fiduciary agent, had as its purpose "the efficient protection of the rights and interests of debenture holders" which "requires permanent and attentive supervision by a qualified person, with the responsibilities of administrator of third-party assets, independent of the debtor company and other interested parties in the distribution of debentures, and who has no conflicting interests with those of the debenture holders, whose rights and interests it must protect". (Statement of Reasons of the Law). Thus, for the function of fiduciary agent to be exercised with total impartiality, the law listed situations capable of configuring conflicts of interest between the fiduciary agent and the debenture holders it represents, prohibiting the assumption of functions by anyone who finds themselves in those situations (art. 66, §§ 3 and 4). Following the guideline traced by the law, the Instruction (art. 10) lists exemplarily the hypotheses that may be contained in the broad spectrum of the category of conflicting interests. Among these, there is that of a person who provides advisory services of any nature to the issuing company, and that of one who is associated with another that already exercises the functions of fiduciary agent in an issuance of debentures of the same company (art. 10, I, "b" and "c"). The expression "provide advisory services of any nature" in this context, encompasses the exercise of advisory activity, under any title, whether as legal, economic, financial advisor, consultant, analyst, and others, regardless of the qualification given to them, but the nature of their link with the issuing company. This link, whether permanent or occasional, presents itself as characterizing interdependence, incompatible with the position of "independent of the issuing company" intended by the legislator of LAW NO. 6.404/76. As for the word "associated" mentioned in art. 10, I, "c", it refers to the partner, the member of a society, the person who joined a society. Therefore, persons who are part, as a member, as a partner, of the same organization, of which another member or partner is already exercising the function of fiduciary agent of debentures issued by the same company or by a company affiliated with it, controlled by it, or controlling it, or even, integrating the same corporate group, in fact or in law, are included here. The objective of the rule was to prohibit the exercise of the functions of fiduciary agent by offices or professional societies in each of the partners individually assumes the position of fiduciary agent in more than one issuance of debentures of the same company or of an affiliated, controlled, controlling, or integrated company in the same corporate group. In reality, it is the office or professional society that is acting as fiduciary agent; only the name of the agent changes in each issuance or in each series,
thereby obviating the express prohibition contained in art. 66, § 3, "a" of LAW NO. 6.404/76.

With the enunciation of the incompatibilities and restrictions contained in art. 10 of the Instruction, it was intended to remove the possibility of occurrence of conflicts of interest. This expression, however, is capable of encompassing situations that could hardly be taxatively listed, due to the diversity of hypotheses susceptible to configuring it. Thus, the determination of what are conflicting interests does not end within the scope of the list presented in art. 10, but will depend on the analysis of the possibility of occurrence of circumstances in which the fiduciary agent's own interests - natural person or financial institution - may oppose the interests of the debenture holders. It is to these interests that it is incumbent, primarily, for the fiduciary agent to defend and protect, employing in this task the care and diligence that "every active and honest man" applies in the administration of his own assets.

Since the performance of the fiduciary agent extends over time, lasting until the maturity or redemption of all debentures of an issuance, and considering, furthermore, the possibility of substitution of the fiduciary agent, the Instruction dictates that the issuance deed must stipulate not only the global amount of remuneration for the exercise of the functions of fiduciary agent, but also specify clearly the form and conditions by which the company will make the payment of those stipends (art. 11).

The Instruction adopted, in its art. 12, the policy of listing the basic duties that it considers indispensable to the faithful and effective performance of the function of fiduciary agent. Such duties aggregate those found in LAW NO. 6.404/76 with others that the experience of the matter indicates as necessary for a positive and efficient performance. This list, however, does not intend to exhaust the list of attributions that the fiduciary agent may be requested to execute, aiming to achieve its main objective: the defense of the rights and interests of the debenture holders.

It is expected that, whenever peculiar circumstances or unforeseen situations require its performance, the fiduciary agent will act promptly and effectively so as to safeguard and protect the interests of the community of debenture holders.

The Instruction, as the law does, sanctions the non-observance and negligence of the fiduciary agent in fulfilling the duties attributed to it with liability for the damages that, due to its culpable or fraudulent performance, may cause to the debenture holders (art. 17).

For this reason, the responsibility of the fiduciary agent manifests itself when, in the event of default by the issuing company vis-à-vis the obligations assumed towards the debenture holders, it omits itself at the moment when its performance becomes necessary. Art. 13 of the Instruction, transcribing the norm contained in art. 68, § 3 of LAW NO. 6.404/76, grants the fiduciary agent procedural capacity to use all and any action aiming to protect the rights to the defense of the interests of the debenture holders. Thus, configuring any of the hypotheses provided for in the law (art. 68, § 3) and in the Instruction (art. 13), the default of the company generates, for the fiduciary agent, the obligation to act, under penalty of being held liable for the damages that, by fault or fraud in the exercise of its functions, it causes to the debenture holders (art. 68, § 4 of LAW NO. 6.404/76). Its performance must be prompt and efficient, in the sense of implementing the measures provided for in the law and the Instruction for the safeguarding of the credits of the debenture holders. The obligation to diligently pursue them cannot be postponed or waived by the fiduciary agent, nor does it depend on the authorization of the debenture holders. What is required of the fiduciary agent is a positive performance; its inertia or omission will result in its liability for the damages resulting therefrom.

However, the fiduciary agent may be exempted from responsibility for not adopting the measures provided for in items I to IV of the aforementioned art. 13 of the Instruction if, a meeting of the debenture holders is convened, it authorizes so by resolution taken by the unanimity of the holders of the debentures in circulation (Sole paragraph of art. 13). The requirement for the unanimous consent of the holders of the debentures in circulation is explained, setting aside the majority principle adopted by Law No. 6.404/76 for assembly decisions, due to the very nature of the object of the resolution to be taken. In reality, the credit of each debenture holder has a personal and autonomous character; consequently, the decision not to enforce it, when due, can only be made by the creditor himself. Thus, in order for each debenture holder to decide on the convenience of taking measures that directly concern the realization of their personal credits, the Instruction imposed that such decisions can only be made by the unanimity of the holders of the debentures in circulation.

However, in the hypothesis provided for in item V of the same article - to represent the debenture holders in bankruptcy, restructuring, intervention, or extrajudicial liquidation proceedings of the issuing company - the fiduciary agent, as ex lege representative of the debenture holders, must exercise those duties, unless, as stated in art. 68, § 3, "d" of LAW NO. 6.404/76, the meeting of the debenture holders, by simple majority, resolves otherwise.

Art. 14 of the Instruction provides that the expenses incurred by the fiduciary agent for the safeguarding of the rights and interests of the debenture holders, that is, all those related to the fulfillment of the duties attributed to it in articles 12 and 13, are borne by the issuing company. It is unnecessary to emphasize, by virtue of general accounting principles, that such expenses must be estimated, in monetary terms, by the issuing company, so that they can be the object of sufficient accounting provision for their coverage. The fiduciary agent will render accounts of the aforementioned expenses to the issuing company, for the purpose of being reimbursed by it immediately. If this does not occur, the fiduciary agent must then judicially qualify its credit in accordance with art. 68, § 5 of LAW NO. 6.404/76, so that it is added to the debt of the issuing company and enjoys the same guarantees as the debentures to which it refers, preferring, even, to these, in the order of payment.

Complementary functions may be attributed to the fiduciary agent by the issuance deed. However, due to the nature and complexity inherent in the exercise of some of them, the Instruction specified those that may only be attributed to a fiduciary agent that is a financial institution (art. 15).

The Instruction makes it clear that the issuance deed may not contain clauses that restrict the duties, attributions, and responsibilities that belong to the fiduciary agent, by virtue of the legal provisions contained in LAW NO. 6.404/76 and the regulatory provisions specified therein (art. 16).

The civil liability of the fiduciary agent, provided for in art. 68, § 4 of LAW NO. 6.404/76, is transcribed in the Instruction (art. 17): since the system of regulatory policy adopted in this normative act was to list the duties that are obligatory for the fiduciary agent.

The CVM will monitor and supervise the exercise of the functions of the fiduciary agent, and may, if necessary, suspend, precautionarily, the fiduciary agent, from its functions and give it a substitute if it fails to fulfill its duties (art. 18). Likewise, non-compliance with the provisions contained in the Instruction will entail the action of the CVM for the purpose of investigating it through the institution of an administrative inquiry. Non-compliance with any of the norms contained in the Instruction will, moreover, be considered a serious infraction for the purpose of applying the corresponding penalties (art. 19).

Finally, the normative text provides for the entry into force of the Instruction, 45 (forty-five) days after its publication in the Official Gazette of the Union (art. 20). The granting of this period aims to allow the issuing companies of debentures to adapt to these regulatory norms, incorporating them into the clauses of their future issuances of debentures. This period will also serve for the fiduciary agents - main recipients of the function and to consciously assume the responsibilities attributed to them.

RIO DE JANEIRO, NOVEMBER 23, 1983.

Signed Original
HERCULANO BORGES DA FONSECA
President