CVM Explanatory Note No. 15/79

CVM EXPLANATORY NOTE NO. 15/79.
Ref.: CVM Instruction No. 9, of October 11, 1979, approving the attached regulation which provides for the registration of companies for trading their securities on stock exchanges or in the over-the-counter market and disclosure of information corresponding to them.
For the proper understanding of Instruction No. 9, this Explanatory Note serves to detail the concepts that guided its elaboration, as well as some specific items contained therein.
The first point to address refers to the need to differentiate the concepts of Company Registration and Public Issuance Registration. It is certain that both Registrations concern themselves with ensuring the public a certain minimum volume of information for investment decision-making.
The basic difference is that Public Issuance Registration concerns itself with the specific situation where there is an effort and a characteristic selling pressure, not found in the situation where the investor directs himself, by his own initiative and at the time he deems appropriate, to the market, to buy or sell securities. Between one situation and another, therefore, there must be differences in the information process, whether regarding the content of the information, or regarding the dissemination and availability of the information. The regulation of Company Registration for trading on the Stock Exchange or in the Over-the-Counter Market aims to define the minimum flow of information (including aspects of content, form of dissemination, and its deadline) that ensures the public, over time, the possibility of rational decision-making. Under Instruction No. 9, upon registering and, therefore, assuming the status of open, the company obligates itself to generate a continuous flow of information considered the minimum necessary for decision-making by the investing public. In the future, the CVM will regulate the Public Issuance Registration of Securities. One of the Commission's concerns regarding this point is to streamline procedures. Aiming at such streamlining, the CVM designed the Company Registration in such a way that, once this is updated (which is assumed), when proceeding with a Public Issuance Registration, only the specific information of the intended issuance and the other documents pertinent to that operation should be added. In summary, the CVM understands that the Open Company, whose shares can be traded at any time, must leave available to the public, also at any time, a minimum of information about its economic-financial situation. This is the main objective of the Company Registration. On the other hand, the public issuance of securities implies additional information needs, in terms of content and availability for the investor. In the future regulation of Issuance Registration, duplication of information will be avoided, while procedures are streamlined.

CVM EXPLANATORY NOTE NO. 15/79.
2
Another general point that guided the regulation of Company Registration refers to the fact that the same minimum of information was defined regardless of the size of the Company, it being irrelevant whether these securities are admitted to trading on the Stock Exchange or Over-the-Counter Market.
Indeed, it is concluded that, from the investor's point of view, the minimum level of information necessary is the same, regardless of size or market where the shares are traded. What was done was to differentiate the dissemination aspects of such minimum information, for cases of registration on the Stock Exchange or in the Over-the-Counter Market. Furthermore, the established system did not generate any additional requirements in terms of newspaper publications, which would certainly entail additional costs for companies. On the other hand, it is verified that currently, Open Companies of the same size, operating in the same economic sectors and with securities admitted to trading in the same markets (Stock Exchange or Counter), provide information with different degrees of detail and dissemination criteria, and that the market reacts to such differences. It was thus concluded that it was necessary to establish a minimum of information, expecting that increases relative to such minimum occur, determined basically by two orders of factors:

• market forces: there will be companies that, based on the realization that more information generates greater interest from the market, as it reduces the degree of investment risk, will go beyond the minimum required;
• additional requirements established by Stock Exchanges: Stock Exchanges, under the legislation, have full autonomy to define the conditions, including those related to additional information, to be complied with by Open Companies intending to have their shares admitted to trading on their floors.
  It should be noted that the CVM, although it understands that entry into the Securities Market virtually requires companies to have a certain size, will monitor the evolution of the degree of difficulty encountered by small and medium-sized open companies, with a view to eventual improvement of the Instruction.
  The dissemination of information contemplated by the Company Registration also deserves specific considerations. As a preliminary, it should be observed that much of the information in question is ordered by the Corporation Law itself, which also establishes its dissemination through the Press. Regarding this specific point, with respect to Open Companies, attention is called to what is provided in CVM Instruction No. 02, of May 4, 1978. For such information, what Instruction No. 9 establishes, in addition to the S.A. Law, is that copies thereof be sent to the CVM and, in the case of a Company registered on the Stock Exchange, to said Exchange. All other pieces foreseen in the Instruction will be sent to the CVM and to the Exchanges, if applicable, but not necessarily published in the Press. This aspect leads us to comment on the role envisioned for the CVM and the Exchanges as disseminators of information. In truth, what lies behind the obligation to send the information piece to the CVM is not the idea of informing the CVM, but rather, of informing the investing public. The CVM will place at

CVM EXPLANATORY NOTE NO. 15/79.
3 the disposal of any interested party, efficiently and at minimal cost, the information it receives within the scope of the Company Registration.
A similar role is expected from the Stock Exchanges, noting that their action as information disseminators dates back years and has been developing significantly.
In any case, Instruction No. 9 should correspond to an improvement in the information disseminating function by the Exchanges.
We now proceed to treat some specific items of the Instruction, giving special emphasis mainly to those that, with greater extent and frequency, were the subject of comments from the market during the public hearing to which the draft of the Instruction was submitted.
In Art. 3rd, the definition of what constitutes the Over-the-Counter Market is reinforced, as treated in Law No. 6.385/76. By doing so, the CVM intends to make clear that private negotiation, where buyer and seller, in direct contact and without the assistance of any market instrument, seek to finalize an operation, this operation not subject to the legal mechanisms that regulate the Securities Market, should not be confused with those operations where, by contrast and although not carried out on the Stock Exchange, they involve the assistance of market instruments and agents and which constitute the Over-the-Counter Market and which are, indeed and in their entirety, subject to legal requirements. The sole paragraph of Art. 4th introduces the possibility for the CVM to contemplate cases of closed companies that, under special legislation or by adequate use of private placement mechanisms for securities, have achieved a sufficient degree of share dispersion, without prior Registration with the Commission. Art. 6th embodies the concept that, regarding the obligation to inform, primary responsibility lies exclusively with the Administration of the company. The intermediary only assumes co-responsibility for the information provided by the company at the moment when the public issuance of Securities, object of the Issuance Registration, occurs. Regarding the provision in Art. 10, it should be taken into account that all CVM decisions are subject to a double degree of jurisdiction, that is, in the specific case, once the Registration is denied by the Superintendence responsible, an appeal may be filed to the higher body, which is the Board of Directors of the CVM. The repeated references that, like those contained in Article 12 of the Instruction, are made to the applicability of the provisions of Article 157 of Law No. 6.404 of December 15, 1976, aim to make clear that the provision of this article is independent of any manifestation by the CVM. That is, even before the effective adaptation to Instruction No. 9 and since the enforcement of Law No. 6.404, the Administrator must give immediate publicity to any relevant fact occurring in the Company's business, as provided by said Article 157. In the specific case of Article 12 of the Instruction, it is clarified that the designation of a Director with the function of investor relations does not exempt any Administrator (including the referred Director) from the duty to inform.

CVM EXPLANATORY NOTE NO. 15/79.
4
Article 14, in its final version adopted in the Instruction, appears less restrictive than what the project submitted to the public hearing provided. Specifically, the initially foreseen necessity for the Open Company, once having provided projections, to continue providing them, i.e., updating them over successive fiscal years, was eliminated. Accepting, based on the arguments raised in the public hearing, that there will be a year in which, due to circumstances beyond the Company's control, it will not be possible to provide new sufficiently reliable projections. In this situation, it is accepted that the Company discontinue the process, provided that the reasons for such interruption are detailed. On the other hand, the need to comply with the provisions of item II of Article 14 is emphasized, and the market is alerted to the fact that the CVM considers projections as extremely sensitive information, due to the importance investors attach to them, especially when originating from the Company's own administration. Still regarding this point, it should be clarified that the situations in which projections are necessary will be defined in future norms relating to the Registration of Issuance of Securities. In these cases, the initial projection will be communicated in the documents to be defined, but will be updated, at least annually, in the document referred to in item I of Article 13.
In Article 15, innovation occurs in that recommendations are included in a text of a basically imperative nature. With this, the CVM aims to emphasize the relevance of a certain type of information, very desired by the market, but whose nature is considered sophisticated. It will be up to the company, given the importance it attributes to the Securities Market as a source of resources, to decide whether to apply itself more or less to the provision of this type of information. In Article 16, the concept is placed that, upon registering and acquiring the status of open, the Company obligates itself to generate and disseminate a continuous flow of minimum information. It should be clarified that, from this concept, documents certifying the regularity of the Company regarding Registration obligations will not be issued by the CVM. This may be done upon request, but not as a regular practice. Regarding this aspect, the CVM will act exclusively in cases of non-compliance with obligations, as provided in Article 19. Regarding Article 17, it should be noted that the provisions regarding Quarterly Information were attenuated in the definitive text, when compared with the project submitted to the public hearing. Indeed, the obligation to produce more detailed accounting data was left for the information related to the 2nd quarter. In any case, the final version of the Instruction, in this aspect, does little more than endorse a practice already adopted by a large number of Open Companies. Finally, it should be clarified that external audit of the semi-annual statement is not necessary, nor is it necessary to include equity method accounting and monetary correction. Regarding Article 19, it suffices to highlight its coercive character, and not punitive, under the provisions of Article 9 of Law No. 6.385/76. Under these terms, the application of such fine does not exempt the Company's Administration, in case of non-compliance with the provisions of the Instruction, from eventual classification under Article 11 of Law 6.385/76.
Article 21 endorses a concept introduced by previous norms. Indeed, upon receiving and making available to the public the information provided by Open Companies, the CVM does not guarantee that such information is true or that it has been provided to the adequate extent. Thus, at any time, the CVM, after a process of verifying the consistency of the information, may come to question

CVM EXPLANATORY NOTE NO. 15/79.
5 compliance with the criteria issued by the Instruction in question, not only in terms of observance of the deadlines determined by Article 17, but also of content.
Article 25, finally, clarifies that no initial new registration, nor much less a new issuance of securities, is required from companies already listed as open. It establishes, only, from when they shall begin to provide information under the new system.
Rio de Janeiro, October 11, 1979.
Original signed by
ROBERTO TEIXEIRA DA COSTA
President