CVM Explanatory Note No. 10/78 — CVM — BR

CVM EXPLANATORY NOTE NO. 10/78.

Reformulation of the system for collecting and distributing the annual fees paid by publicly-held companies to Stock Exchanges, for the admission of their securities to trading.

Publicly-held companies pay an annual contribution to Stock Exchanges in order to have their securities admitted to trading on these entities.

These annual fees represent an important portion of the total revenues of Stock Exchanges and aim to provide resources to these entities, allowing them to maintain and even increase the quantity and quality of services provided to participants in capital market negotiations.

On the other hand, regarding the companies, these annual fees should not be so high as to invalidate the benefits derived from the trading of their shares on the Stock Exchange.

The current collection system, instituted in 1973, has been inducing some distortions, the main ones being the following:

a) A company, even if it does not increase its capital from one year to the next, will pay higher annual fees, because the capital brackets are not monetarily corrected, whereas the fixed portion of the annual fee value increases due to the annual correction of the reference value, established by Law No. 6,205/75.

Thus, the relationship between the value of the annual fees and the value of the social capital is not kept constant over time.

b) Constant regressivity in percentage terms of the annual fee relative to capital is not maintained for all capital levels, with cases occurring where companies, in percentage terms, pay less in annual fees than others with higher capital.

c) The discount granted in the calculation of annual fees paid by mixed-economy societies, companies whose shares, in a proportion equal to or greater than 50%, belong to entities with foundation characteristics, and public service concession companies.

The granting of this discount is based on the fact that part of the shares of these companies are not traded on the exchange floor, due to belonging to the Government or Foundations.

However, it occurs that the shares of these companies subject to trading on the Stock Exchange, as a rule, possess high liquidity and are responsible for the largest portion of the trading volume on Stock Exchanges.

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On the other hand, if the reasons for this discount were to prevail, it should also be extended to companies that have part of their shares unavailable, as occurs, for example, with some located in the Northeast, or to the portion of capital of private companies held by majority shareholders, practically not traded on Stock Exchanges.

The main changes introduced were the following:

a) The capital brackets and the fixed part of the annual fees are expressed in terms of reference values, both thus monetarily corrected at the beginning of each fiscal year.

b) The discount in the calculation of annual fees due by mixed-economy societies, by companies whose shares, in a proportion equal to or greater than 50%, belong to entities with foundation characteristics, and by public service concession companies is eliminated.

c) The initial bracket for collecting the annual fee is expanded, on which a fixed rate of 0.2% will be applied, with a minimum of 46 (forty-six) reference values.

d) Capital values up to Cr$ 345 million, which in the current table were distributed across 5 (five) annual fee brackets, in the proposed table were concentrated into a single bracket.

e) New annual fee brackets are created for higher capitals.

While in the current system the lower limit of the highest bracket was Cr$ 1 billion, in the proposed formulation, this limit is raised to Cr$ 22.093 billion.

The method of distributing annual fee revenue among Stock Exchanges, also instituted by Circular Number 217/73 of the Central Bank of Brazil, follows the following principles:

20% to the Stock Exchange that effected the registration of the company.
10% to the National Commission of Stock Exchanges - CNBV.
10% shared equally among all Stock Exchanges.
60% shared proportionally to the volume of spot trading verified in each Stock Exchange, in the period from July 1 to June 30 of the immediately preceding year.

The 20% portion is intended to cover the costs incurred by Stock Exchanges in the registration and maintenance of this registration, regarding companies registered with them, and being proportional to the annual fee paid by publicly-held companies, it varies according to the capital of each one.

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This criterion creates a distortion, given that the cost of registration and its maintenance is practically equal for all companies, regardless of their size. Under the current system, Stock Exchanges that have companies with high capital benefit in relation to those that have companies with relatively low capital in their registry.

The 10% portion in favor of the CNBV and the 10% share equally divided among all Stock Exchanges have already met the objective of providing resources capable of meeting the basic needs of that Commission and of small Stock Exchanges, and since these entities already have a relatively stable budgetary situation, these resources can be reduced.

The division of the 60% of annual fees, proportional to the trading volume, fundamentally favors Stock Exchanges where the largest trades of first-line shares are concentrated, which end up having a considerable weight in the global trading volume, with repercussions on the distribution of annual fees.

Thus, many companies, even without having their securities traded on the exchange floor of some Stock Exchanges, end up contributing part of their annual fees to the revenue of these Stock Exchanges.

In view of the facts listed above, it was decided to share the annual contribution paid by the publicly-held company, starting from 01.01.79, in the following way:

a) The Stock Exchange that originally admitted the securities of the publicly-held company to trading will retain from the value of the annual fee received an amount equal to 46 (forty-six) times the highest reference value in effect at the beginning of each year;

b) The balance will be shared among all Stock Exchanges as follows:

50% (fifty percent) proportional to the global volume of spot trading of each Stock Exchange.
50% (fifty percent) proportional to the volume of spot trading in each Stock Exchange with securities of each company.

The above percentages will be calculated based on the period between July 1 and June 30 of the year immediately preceding the fiscal year considered for collection.

When in this period, the securities of the publicly-held company have not been traded on any Stock Exchange, the value related to item 2 will belong entirely to the Stock Exchange where the securities of the publicly-held company were originally admitted.

From the effective gross revenue of each Stock Exchange, corresponding to the value retained by company, plus the received due to the sharing, the following will be allocated:

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a) 5% (five percent) to the National Commission of Stock Exchanges.

b) 4% (four percent) to a special fund administered by the Brazilian Association of Publicly-Held Companies - ABRASCA, for financing education programs or promotion of the stock market approved by the Capital Market Disclosure Committee - CODIMEC.

c) 1% (one percent) to the Stock Exchanges of Ceará, Rio Grande do Norte and Santos, proportionally to the global volume of spot trading of the securities issued by publicly-held companies, in the period between July 1 and June 30 of the year immediately preceding the fiscal year considered for collection.

The main changes resulting from the introduction of this system were the following:

a) The coverage of registration and maintenance costs by Stock Exchanges will be made through a criterion proportional to the number of companies registered in each Stock Exchange, and no longer to the value of the annual fee paid by the company.

The amount corresponding to 46 (forty-six) reference values was considered sufficient to meet the aforementioned expenses, and the indexing of this retention in terms of reference values will have the property of reimbursing, annually, the Stock Exchanges for the increase in those costs.

b) Regarding the division of annual fees among Stock Exchanges, a new criterion was introduced, namely the sharing proportional to the volume of spot trading of the securities of each company.

This system will provide a closer correlation between the revenue of Stock Exchanges resulting from the sharing among them and the cost incurred in the trading of shares on their exchange floors.

The adoption of this system in its entirety, however, would immediately cause a very large reduction in the revenues of entities that are currently most benefited by the distribution criterion according to the global volume of trading, and which already have their budgets adapted to this situation.

Thus, the solution was found to share the annual fees among Stock Exchanges, 50% proportional to the volume of spot trading of each company's shares and the other half according to the global volume of spot trading carried out in each Stock Exchange.

c) Stock Exchanges will allocate from their effective gross revenue, 4% for financing education and stock market promotion programs, 5% to the National Commission of Stock Exchanges and 1% to the Stock Exchanges of Ceará, Santos and Rio Grande do Norte, which, due to the adopted system, suffered a significant reduction in revenue.

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The measures adopted were backed by the understanding that Stock Exchanges must function as true "liquidity centers" and, therefore, the revenue derived from the contributions paid by publicly-held companies must be proportional to the liquidity given to the securities issued by them, in addition to covering the costs of registration and maintenance of the registries, regarding the companies admitted to trading with them.

Thus, it is believed that the system for collecting and distributing annual fees has been improved, in that a fairer criterion was adopted in the distribution of these resources to Stock Exchanges, continuing to provide them with the funds necessary for the maintenance and expansion of their activities.

On the other hand, all companies located in the capital range between Cr$ 50 million and 1.9 million will pay lower annual fees, a fact that will serve as another element of stimulus for these to direct to the capital market the search for resources for the expansion of their activities, thereby contributing to the growth of the global volume and a diversification of the securities traded on Stock Exchanges.

RIO DE JANEIRO, DECEMBER 22, 1978.

Signed original by
ROBERTO TEIXEIRA DA COSTA
President