CVM Explanatory Note No. 23/81

CVM EXPLANATORY NOTE NO. 23/81.
Ref.: CMN Resolution No. 680, of 01.22.81, which alters the administrative structure of Stock Exchanges.

I – INTRODUCTION
The Securities and Exchange Commission (CVM), when elaborating the foundations and principles for the regulation of the securities market, approved by the National Monetary Council (CMN), elected the self-regulation system as a means to increase the efficiency of regulatory activity in this market, avoiding excessive centralization of the power to issue norms and monitor compliance. For the aforementioned system to fully achieve its objectives, however, it is necessary that self-regulatory entities be endowed with an administrative structure that, on one hand, facilitates effective participation in their general governing bodies by all those who, directly or indirectly, interact with the market. On the other hand, this structure must allow for greater autonomy and agility in regulatory decisions, particularly those aimed at preserving confidence in business and protecting investors. Regarding Stock Exchanges, entities whose self-regulatory power is expressly enshrined in law, care must be taken to ensure that the improvement of their administrative structure is in consonance with the needs arising from the evolution and development of this market. With this purpose, this Resolution, by altering the basic norm that disciplines these associations (CMN Resolution No. 39, of 10.20.66), seeks to adapt the administrations of Stock Exchanges to the current stage of the market, insofar as it allows for greater representativeness in their Boards of Directors, through the access of investor representatives and other segments of society to these Boards, and enables the effective professionalization of the executive area, by delegating greater management powers to the General Superintendent. It is worth noting that the CMN Resolution No. 39 is not being completely reformed, but rather one of its sections. Such a position does not mean, however, that the CVM and the market itself are not aware that other changes need to be made to said legal document, with studies already underway for this purpose. The partial alteration now approved is justified, however, as it encompasses measures that, in addition to meeting more immediate requests from the market, reflect priorities defined by the CVM for the improvement of the self-regulation system.

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II – COMPOSITION OF THE BOARDS OF DIRECTORS
Article 10 of CMN Resolution No. 39/66 determined that the Boards of Directors of Stock Exchanges would be composed of 08 (eight) people, being:
six holders or administrators of brokerage firms or companies, members of the respective Stock Exchange, with a term of 03 (three) years; one representative of open companies whose securities were admitted to trading on the respective Stock Exchange, elected annually by choice of the general assembly, from a triple list presented by these companies, jointly; the General Superintendent, responsible for the execution of the policy and determinations of the Board of Directors, a professional chosen by this same Council, for a period of 02 (two) years, renewable. As observed, Res. No. 39 did not provide for representation for investors who, like brokerage firms and open companies, have direct interests in the performance of Stock Exchanges. Furthermore, since these associations are auxiliary bodies of the CVM in the regulation of the market and, consequently, perform an eminently public function, decisions emanating from their Boards of Directors do not affect only specific segments of the market, but are of interest to all of society. Thus, even for the sake of coherence, it was understood that it would be highly beneficial to have greater representativeness in these councils, allowing the effective participation not only of investors, but of representatives of other segments of society, who could also contribute positively to the improvement and evolution of this market, ensuring that the performance of Stock Exchanges corresponds to the aspirations of the entire community. To this end, the Resolution provides for the creation of 5 (five) additional seats on the Boards of Directors of the Stock Exchanges, one of which must be occupied by a representative of investors (individual or institutional). The filling of the remaining seats will be at the discretion of the Stock Exchanges, which, according to their needs and peculiarities, may further promote the opening of their Boards, not only through the increased representativeness of open companies and investors, but also by allowing the participation of other segments of society in these bodies. Complementing the proposal regarding the composition of the Boards of Directors, other organizational measures are introduced into the general governing body of Stock Exchanges, deserving mention the following:

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a) considering the importance of the role of the General Superintendent, as the main executive of the Stock Exchanges, a special quorum is required when the Board of Directors deliberates on the choice or dismissal of said professional (art. 8°, sole paragraph); b) to provide representatives of segments that do not operate directly in Stock Exchanges with a reasonable management period, the term of these representatives is fixed at 02 (two) years; to ensure that this representation does not suffer discontinuity, the simultaneous election of respective alternates is also determined, with the same term (art. 10, §§ 1° and 5°); c) the Stock Exchanges are delegated the fixing of the conditions for the election of alternates for the representatives of brokerage firms or companies, since these associations already adopt their own criteria that allow for immediate substitution in case of impediment of the titular (art. 10, § 3°); d) unlike what is stipulated for the representative of open companies, no uniform criterion is provided for the indication of candidates who will represent investors and other segments. Thus, the establishment of these criteria is left to the discretion of the Stock Exchanges, which will thus have greater freedom to effectively exercise the concept of broad representativeness, advocated in this Resolution; e) with the objective of ensuring effective representativeness in the Boards of Directors for open companies, investors, and other segments of society, it is prohibited that their representatives be linked to brokerage firms. Similarly, to provide access to a greater number of entities that have real interests in the development of the market, simultaneous participation in these Boards by more than one person belonging to the same brokerage firm, open company, conglomerate, or institutional investor is also prohibited (art. 10, §§ 6° and 7°); f) the obligation for the representatives of brokerages on the Board of Directors to have their names submitted to prior approval by the CVM is eliminated, as they are, in their capacity as administrators of these companies, already accredited by this Commission (art. 14).

III – REDEFINITION OF ATTRIBUTES
The Board of Directors, responsible for setting the guidelines and policies of the entity, and the General Superintendent, the professional in charge of their execution, are responsible for conducting the activities developed by Stock Exchanges.
The competencies then attributed by Resolution No. 39 to the General Superintendent were, for the most part, functions of an administrative nature, namely, those necessary for the maintenance and normal functioning of Stock Exchanges.
The resolution of issues of a regulatory nature, i.e., those that could affect those who directly or indirectly operate in these associations, were, in general, under the exclusive responsibility of the Board of Directors.

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Since the main characteristic of the stock market is the speed with which operations are carried out in it, and considering that, in the capacity of the main executive of Stock Exchanges, the General Superintendent is directly responsible for the supervision and discipline of these operations, it is necessary that this professional be granted competence to adopt some measures that, due to their urgency, must have immediate effects, otherwise they would become ineffective. In fact, the adoption of some regulatory measures cannot depend on prior manifestation of the Board of Directors, since this, due to its own characteristics as a collegiate body and because it does not exercise executive functions that require a daily and permanent presence in the Stock Exchange premises, hardly has the agility necessary for the full efficacy of said decisions. With this purpose, Resolution No. 680 introduces relevant modifications in the general conduct of activities developed by Stock Exchanges, insofar as it transfers to the General Superintendent some attributes previously exclusively belonging to the Board of Directors, confers upon him other competencies not expressly provided for in Res. No. 39, and allocates to said professional attributes that, although already contemplated in the latter legal document, were not explicitly delegated to either of the two administrative bodies of the Stock Exchanges. Among these attributes, the following stand out:
a) the General Superintendent is granted full autonomy to hire his main assistants, as well as the other components of the executive staff, without the need for prior approval from the Board of Directors (art. 12, item III); b) to speed up and make more efficient the supervision of Stock Exchanges over the operations carried out therein, the respective General Superintendents are granted the power to establish the exchange of confidential information between these associations, provided that the requesting Stock Exchange justifies the effective need for such data (art. 12, items V); c) the supervision of brokerages, as well as of operations carried out in the trading floor, is, contrary to the provision in Res. No. 39, expressly delegated to the General Superintendent, as it requires direct and constant monitoring by the self-regulator, in addition to presenting eminently executive characteristics; similarly, as responsible for supervision, the initiation of administrative inquiries to investigate irregularities occurring in the Stock Exchange is attributed to the General Superintendent (art. 12, items VII, VIII, and XI); d) the suspension of trading of securities, as well as the cancellation of operations, are other functions of a regulatory nature that, requiring immediate decisions, fall under the responsibility of the main executive of the Stock Exchanges (art. 12, items IX and X). Although recognizing that the disciplinary power of Stock Exchanges, according to specific delegation of Law No. 6.385, is restricted to their own Members, the Resolution does not fail to also enshrine the function of these associations as true auxiliary bodies of the CVM in the supervision of operations carried out therein, as advocated in art. 17, sole paragraph of this Law.

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Thus, Stock Exchanges are given, through the General Superintendent, the power to summon, in order to provide information or clarifications, any natural or legal persons who, although not directly linked to brokerage firms or companies that are members, have, in some way, contributed to the practice of irregularities. In fact, this competence is in consonance with the cited legal provision, as it not only offers Stock Exchanges better conditions for the investigation of infractions occurring in the operations of this market, but also allows the provision of necessary subsidies for the judgment of said persons by the CVM (art. 12, item XII). In addition to speeding up and making more efficient the exercise of activities developed by Stock Exchanges, the modifications introduced by this Resolution allow for the effective professionalization of their executive administrations insofar as they provide the General Superintendent with greater autonomy of action. The Board of Directors is reserved the political power to set the basic norms and guidelines of the Stock Exchanges, as well as the continuous evaluation and supervision of the performance of the General Superintendent in the application of these norms and guidelines, also accepting appeals possibly filed against certain acts of this professional. Thus, Resolution No. 680, by establishing a precise division of competence between the executive and deliberative bodies of Stock Exchanges, allows these bodies to effectively fulfill their main objectives. In fact, the delegation to the executive body, represented by the General Superintendent, to exercise all acts necessary for the regular functioning of these associations, including those with eminently administrative characteristics and, therefore, directly related to the associated brokerages themselves, prevents the Board of Directors from being overloaded with routine activities. This measure, undoubtedly, will give said Board better conditions to fully exercise its normative and deliberative functions, with objectives not aimed exclusively at a specific segment of the market, but which will primarily aim at a better alignment of Stock Exchanges with the interests of society as a whole. Rio de Janeiro, February 10, 1981. Signed original by ANTONIO MILÃO RODRIGUES LIMA Acting President