Explanatory Note to CVM Instruction No. 91 of December 6, 1988

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 91, OF DECEMBER 6, 1988.
Ref.: CVM Instruction No. 91, which establishes provisions regarding Conversion Funds and consolidates the legislation on the matter.

Resolution No. 1,460, of February 1, 1988, of the National Monetary Council, enabled, in its article 11, the application of resources resulting from conversions into securities through the Foreign Capital Conversion Funds (FCCE).

Furthermore, in item I of that same article, the National Monetary Council attributed competence to the CVM to establish rules regarding the quotas of the Funds and their transferability abroad. Item II, in turn, limits the participation of the Conversion Funds in the voting capital and total capital of a single company. And item III, which deals with the tax and registration regimes of foreign capital that the Funds must obey, further expands the CVM's competence regarding the rules to be adopted by the Funds, to which will be applied, "in all other respects, the provisions of Annex II to Resolution No. 1,289, of March 20, 1987, as well as the provisions that may be established by the CVM."

However, Resolution No. 1,289, in its Annex II, in regulating the constitution and operation of Foreign Capital Investment Funds, aimed to foster the raising of new resources abroad. Therefore, it is necessary to adapt Annex II Regulation so that it can also apply to the Conversion Funds, notably due to the fact that the resources that will constitute their assets are already in the country.

Moreover, considering on one hand the competence attributed to the CVM by Resolution CMN No. 1,460 and, on the other hand, that in article 2 of the aforementioned Resolution two conversion ceilings were established – one of which intended for projects to be developed in the areas of SUDENE, SUDAM, Espírito Santo and Jequitinhonha Valley – on May 11, 1988, through CVM Instruction No. 78, the regime for Foreign Capital Conversion Funds for Investment in the aforementioned areas was established.

In light of this scenario, aiming to consolidate in a single legal instrument all rules aimed at regulating the Conversion Funds, the Securities and Exchange Commission (CVM) has issued this Instruction, taking into account the necessary adaptations of the provisions contained in Annex II to Resolution CMN No. 1,289/87, Annex Regulation to Resolution CMN No. 1,460/88, provisions regarding the tax treatment of the Funds, and also the validity of CVM Instruction No. 78/88.

In this context, the new Instruction, similar to the provision in article 5 of Resolution CMN No. 1,289, provides for a minimum period of 60 days for the Funds to obtain the resources necessary for the formation of their initial capital, which, according to article 4 of the Instruction, must be at least 12,000 (twelve thousand) OTNs. However, this period may be extended upon presentation of justifications, and a period is also provided for Funds that have already obtained authorization to operate to proceed with the necessary adaptations to their regulations.

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 91, OF DECEMBER 6, 1988.
2

For its part, article 19, item III, opened the possibility that the external credit acquisition rate eligible for conversion, when due, be paid in cruzeiros, in the country, since the resources resulting from the conversion process can only be remitted abroad after the minimum stay period of 12 years has elapsed (article 33).

It is also worth recalling that this Instruction, considering the competence attributed to the CVM by the National Monetary Council, establishes, in its article 26, that the quotas of the Funds may be transferred abroad, complying with the requirements contained in Resolution CMN No. 1,460/88 and complementary norms.

The new Instruction, in its article 35, provides for the possibility of transferring quotas from one FCCE to another FCCE, or from one FCCE (Incentivized Areas) to another FCCE (Incentivized Areas). Indeed, the CVM understands that, if the quota holder is dissatisfied with the management of their resources, they may transfer them from one Fund to another.

Regarding the tax treatment of the Funds, article 39 of this Instruction subjects them "to the norms and tax rates of income tax established in the legislation of this tax."

In fact, according to what is determined by Decree-Law No. 2,469, of September 1, 1988, capital gains derived from transactions with securities and financial assets and the earnings distributed to FCCEs and FCCEs (Incentivized Areas) are excluded from income tax withholding.

Additionally, the aforementioned Decree-Law determines that earnings distributed by FCCEs and FCCEs (Incentivized Areas), in any form and for any title, as well as capital gains derived upon the redemption of quotas or liquidation of the investment, are subject to the norms and tax rates of income tax established in the legislation of this tax. Finally, Law No. 4,131, of September 3, 1962, establishes that earnings distributed by the Funds are subject to supplementary income tax, given the modifications introduced by Law No. 4,390, of August 29, 1964, and by Decree-Law No. 2,073, of December 20, 1983.

Article 36, in turn, aiming to safeguard the interests of quota holders, determines that the regulations of the Funds must provide, with precision and detail, for the purpose of subscription and redemption of quotas, regarding the value of the quota and the period for liquidation of each investment, which may be differentiated based on the redemption value.

Chapter XI of the new Instruction deals with the composition of the Funds' portfolio, establishing the appropriate distinctions for FCCEs and FCCEs (Incentivized Areas). Regarding the latter, the composition of their portfolio presupposes, in addition to the acquisition of shares issued by publicly-held companies, the purchase of shares issued by companies benefiting from resources originating from tax incentives that possess the competent registration with the CVM.

And article 44 determines that the remaining resources of FCCEs (Incentivized Areas) may be applied not only in the securities provided for FCCEs, but also in Investment Certificates issued by FINAM, FINOR, and FUNRES, acquired on the Stock Exchange. Indeed, these certificates represent an instrument or means of payment that can be used to purchase, in auctions specifically held for this purpose, the securities issued by companies benefiting from tax incentive resources.

Finally, it is worth recalling that this Instruction, by containing all the provisions of CVM Instruction No. 78/88, revokes it.

Signed original by
ARNOLD WALD
President