CVM Explanatory Note 28/84

CVM EXPLANATORY NOTE NO. 28/84.
Ref.: CVM INSTRUCTION NO. 31/84, which provides for the disclosure and use of information regarding material acts or facts related to open companies.

The development of the securities market is conditioned by the confidence that its functioning may inspire in the investing public. The element of confidence will be stimulated by the guarantee that information available to one party when trading securities must also be known by the other party. This objective can only be achieved through the immediate, complete, and precise disclosure of material acts or facts occurring in the business of the open company.

The information disclosure policy established by corporate law and LAW NO. 6.385, of December 7, 1976, comprises the provision of periodic and occasional information. The Securities and Exchange Commission (CVM), responsible for implementing legal guidelines using its competence, regulates, through this Instruction, the disclosure to the market of relevant information, whether periodic or occasional, and its use by persons who have privileged access to it.

The relevance of information results from the effect that the act or fact giving it content may have on the market and on investors operating within it. Thus, the criteria to be used to measure the relevance of information were established in the Instruction based on its potential to influence the quotation of securities issued by the company, or the decision of investors to trade those securities, or the determination of investors to exercise any rights inherent to the status of holder of securities issued by the company.

With a view to facilitating the immediate recognition of situations that may constitute a material act or fact, the CVM has resolved to list, exemplarily, as occurs in the legislation of other countries, certain events that may generate the aforementioned effects.

Once the relevance of the act or fact occurring in the company's business is determined, its immediate disclosure to the market is required.

The disclosure of relevant information constitutes a legal duty imposed on the administrator of an open company (art. 157 of LAW NO. 6.404/76). The duty to inform breaks down into three modalities: the duty to declare, upon taking office, information of a personal nature of the administrator; the duty to reveal to the Ordinary General Assembly, data of a personal and corporate nature, and the duty to disclose to the market material acts or facts occurring in the company's business.

In this Instruction, the CVM regulates the provision of information regarding material acts or facts, indicating the form of disclosure and determining that it is the responsibility of the Director of Market Relations to promote it. The responsibility of the other administrators of the company persists if the bylaws do not expressly provide that it is the exclusive duty of the Director of Market Relations to promote such disclosure. Even if such a bylaw provision exists, the other administrators will be considered equally responsible for non-disclosure whenever, having knowledge of the Director of Market Relations' failure to fulfill this duty, they fail to communicate the fact to the General Assembly.

Although the responsibility for disseminating relevant information lies with the company's administrators, the Instruction provides for the possibility of accelerating a convention with Stock Exchanges to promote the disclosure, via the press, of such information. In practice, the Stock Exchange must observe the same duties and procedures attributed to administrators.

Until information regarding a material act or fact is widely disseminated in the market, it must be kept confidential. The general principle guiding this entire Instruction is the prompt disclosure of information concerning a material act or fact. However, exceptionally, when administrators believe that its revelation poses a risk to the legitimate interest of the company, non-disclosure becomes lawful.

In the event that an administrator has doubts regarding the disclosure of relevant information, they may consult the CVM regarding the maintenance of confidentiality over such information. The CVM's approval of non-disclosure does not, however, exempt administrators from the duties to maintain confidentiality and to ensure that subordinates or trusted third parties do the same.

If the CVM considers that prompt disclosure is convenient, it may, based on art. 9, § 1, IV of LAW NO. 6.385/76 c/c item I, b and c of Resolution No. 702/81 of the National Monetary Council, order the open company to publish the information, under penalty of a daily fine for delay in compliance. The CVM may also, on its own initiative or at the request of any shareholder, determine the disclosure of relevant information not yet communicated to the public.

While relevant information has not been disclosed to the market, there is a danger of its improper use. To avoid this possibility, it is essential to maintain the confidentiality of the information.

When there are rumors or gossip in the market affecting the trading of the company's securities, a frank and clear statement must be given, whether to deny or confirm the news. If the rumors or gossip indicate a leak of information regarding a material act or fact, the only way to correct the situation is through its rapid clarification.

LAW NO. 6.404/76 assigns administrators the duty not only to maintain confidentiality but also to ensure that persons under their orders or enjoying their confidence (for example: any person who, in the exercise of their professional activities, has access to information regarding the technical, commercial, or financial circumstances of the company) also maintain confidentiality and do not use information regarding material acts or facts of which they become aware, in order to obtain for themselves or others, advantage through trading with securities issued by the company.

The basis for assigning such duties is expressed in paragraphs 1 and 2 of article 155 of LAW NO. 6.404, of December 15, 1976, in whose Chapter XII, Section IV, the duties and responsibilities of the administrators of the open company are listed. The same law, in its article 160, determines that the norms of that section, regarding the duties and responsibilities of administrators, apply to members of any bodies created by the bylaws, with technical functions or intended to advise administrators.

The Instruction extends to the controlling shareholder the duty to maintain confidentiality regarding material acts or facts of which they have knowledge due to the position they occupy within the company. Given that corporate law determines that they have duties and responsibilities towards other shareholders of the company and towards the community in which they operate (art. 116, Sole Paragraph of LAW NO. 6.404/76), it is only logical to expressly assign them the duty to maintain confidentiality regarding relevant information not yet disclosed to the market.

Information must always be disclosed in a precise and complete manner. Administrators must not excessively emphasize favorable news, nor under-evaluate unfavorable news. Imprecise, incomplete, or untrue disclosure will result in an order to republish based on art. 9, IV and § 1, IV of LAW NO. 6.385/76 c/c item I, b and e of RESOLUTION NO. 702/81 of the National Monetary Council, with the application of a coercive fine per day of delay in compliance.

Whenever there are doubts regarding the availability of information to the investing public, Stock Exchanges, without prejudice to the exercise of identical power by the CVM, may suspend trading of the company's securities in order to preserve the orderly functioning of the market.

The primary objective of the disclosure system articulated above is to provide the investor with a conscious decision, based on a wide range of information that faithfully reflects the company's situation. Ensuring the effectiveness of the information system, it is additionally intended to guarantee to the investor that persons closely linked to the company's business will not be able to use information not yet disseminated to the public. Only thus will investor confidence in the securities market be promoted.

The legal basis for regulating the use of privileged information by administrators and controlling shareholders is found in articles 155, § 1, 116, Sole Paragraph, and 117, of LAW NO. 6.404/76 and 18, item II, a, of LAW NO. 6.385/76.

The Commission, in the exercise of its competence, for the purpose of prohibiting trading based on privileged information by persons not covered by the aforementioned legal provisions, resolved, based on its legal prerogative to curb unfair practices, to equate the administrator with all those who, by virtue of their position or role within the company, or due to their professional function, come to know confidential information. Similarly, persons who, although not falling within the aforementioned categories, come to know information of this nature, knowing that it is privileged information not yet disclosed to the market, are prohibited from trading.

It is not intended to prevent the aforementioned persons from trading securities issued by open companies. What is aimed at is to prevent them from doing so under superior conditions to the common investor, that is, having knowledge of information that the latter does not know.

Given the provisions of article 157 of LAW NO. 6.404/76 and article 22, Sole Paragraph, item V, article 13 of the Instruction determines that administrators and controlling shareholders of open companies must communicate to the company itself which securities they own, issued by it and by its subsidiaries and holding companies, that are open companies. Any and all changes in the portfolio must also be communicated to the company within the period established in the Instruction.

This duty refers not only to securities directly owned by the administrator and the controlling shareholder, but also to those owned by the persons indicated in article 15 of the Instruction, as prescribed by article 157, § 1, "a", of LAW NO. 6.404/76.

A longer period has been established for the entry into force of articles 13 and 14 of the Instruction, in order to provide for the adoption of own operational methods for the procedure by the companies.

As a form of collaboration, the CVM attaches to this Explanatory Note two forms that may be used by companies with the adaptations they deem necessary, to comply with articles 13, 14, and 15 of this Instruction.

Since the law aimed only to curb the improper use of privileged information, the Instruction recognizes and supports regular transactions carried out by administrators of open companies. So much so that it provides for the adoption, by companies, of an internal self-regulation policy, as an optional measure intended to safeguard the interests of administrators, controlling shareholders, and senior employees. If such a policy is adopted, declarations made by these persons will be presumed true for the purpose of proof before the CVM. This presumption, however, may be rebutted by contrary proof.

For such policies to produce the desired effects, they must be adopted through a decision taken in a meeting of the General Assembly, or the Board of Directors, or the Executive Board, and such decision must appear in the respective minutes and be communicated to the CVM. The internal self-regulation policy must cover, at a minimum, the measures listed in the items of article 17, but the company may adopt additional measures it deems appropriate.

The decision to adhere to the policy suggested in the Instruction would corroborate the maturity and integrity of the company, consolidating its reliability before the investing public.

The objective of curbing the use of privileged information, which allows some persons to obtain benefits to the detriment of others, would not be fully achieved if severe penalties could not be applied to violators of the Instruction's norms. For this reason, its transgression constitutes a serious offense for the purposes provided in LAW NO. 6.385/76.