By Walter Douglas Stuber and Adriana M. Gödel Stuber*
At meeting of November 28, 2002, the Brazilian Monetary Council approved the new regulation to govern the requirements and procedures related to the organization, permit to operate, transfer of equity shareholding and corporate reorganization, as well the revocation of permit to operate of financial institutions1and other equivalent entities that need prior approval of the Brazilian Central Bank ("Bacen") to operate in the country. The regulation is a Schedule to Resolution nº 3040 of November 28, 20022.
Financial institutions or equivalent entities subject to that regulation and expressly indicated therein, are the following: multiple, commercial, development and investment banks; credit, finance and investment companies; savings and loan companies; mortgage companies; development agencies; leasing companies; securities brokers; securities dealers and exchange brokerage companies. Bacen will enforce the conditions required for the organization and authorize operation of all those institutions in Brazil.
The operation of financial institutions and equivalent entities will be conditioned on prior express approval of Bacen and assumes not only that the company was organized pursuant to applicable legal and regulatory rules, but also that it has a permit to operate.
The financial institution or equivalent company must inform Bacen the name of the technically qualified person overseeing the organization process and of the new company’s organization group.
Representatives of the future controlling group and future holders of qualifying interest must participate in the new institution’s organization group.
Controlling group is a concept deriving from the definition given to "controlling shareholder" by existing law governing corporations3. Thus, under the terms of corporation legislation, a controlling shareholder is "an individual or legal entity, or group of persons bound by a voting agreement, or under common control, that: (a) is the holder of partner’s rights that entitle the holder, on a permanent basis, majority of vote in decisions at shareholders’ meetings and authority to elect the majority of the company’s management members, and (b) effectively exercises the authority to conduct the business of the company and guide the corporate bodies."
For purposes of that regulation, qualifying interest is any individual or legal entity holding, directly or indirectly, either 5% or more of the shares or quotas representing the company’s total capital.
In order for a financial institution or equivalent entity to be organized, the interested parties must satisfy the following conditions:
- Publication of a statement of purpose4, by the individuals or legal entities that are not yet participants in the financial institution’s or equivalent’s controlling group, under the terms and conditions established by Bacen. Bacen is charged with disseminating that statement of purpose by any means it may deem appropriate;
- Submission of an economic-financial feasibility study and a business plan for the first three years of operation, as well as definition of the corporate governance procedures to be followed, including a detailed description of the incentive and salary policy structure;
- List of the institution’s controlling group;
- Evidence of an economic-financial capacity compatible with the size, kind and purpose of the engagement. At the discretion of Bacen, this condition may be satisfied either individually by controlling shareholder or by the controlling group;
- Document prepared by the members of the controlling group and holders of qualifying interest expressly authorizing the Federal Revenue Department to furnish Bacen with copies of the income tax returns containing a list of property and rights and actual debts and liens for the preceding three fiscal years, to be used exclusively in the authorization process, and authorizing Bacen to access information related thereto contained in any public or private registration and information system; and
- Nonexistence of limitations that might, to the best of Bacen’s knowledge, adversely affect the reputation of controlling members5.
The economic-financial feasibility study must contain at least the following information: (a) economic and financial analysis of the market segments in the region where the institution plans to perform and its projected share in these segments, including main competition in each segment; (b) anticipated profitability, including expected return in each of the market segments selected; and (c) financial projections showing the equity evolution for the period, including a list of sources of fund raising that render evolution possible.
The business plan, in turn, should include at least: (a) detailed information on the proposed organizational structure, with precise definition of duties attributed to the several levels in the institution; (b) internal control structure, showing mechanisms that ensure proper supervision by the management and effective use of internal and external audits as control tools; (c) setting of strategic goals; (d) definition of core products and services to be offered, including target public; (e) technologies to be used in placing products and extent of the service network; (f) setting of deadline to initial operation after Bacen authorizing it; and (g) description of the criteria used in the selection of and profile of management members, as well as identification thereof, upon request from Bacen.
Upon confirmation by Bacen that all conditions established in the regulation have been satisfied, it will forward communication to the interested parties which have ninety days, from the date of receipt of such communication, to make a formal application for permit to operate6. If properly justified, Bacen may grant an extension of up to nine days, upon whose expiration the organization process will be automatically cancelled if adequate measures have not been taken. Authorization to operate will be granted after Bacen’s approval of the organization documents, due respect being given to the legislation in force, with all members of the controlling group and holders of qualifying interest required to present sufficient evidence to Bacen as to the source of funds to be used. The institution will start operating within the time indicated on the business plan, but Bacen may exceptionally extend such time if properly justified by the members of the management7. Before the beginning of operations and after securing the authorization to operate, the institutions are required to present Bacen a certified statement of compliance of their infrastructures with the business plan previously presented, and in the case of financial institutions, adhesion to the mechanism of credit holders protection against financial institutions8. After the startup and for the first three fiscal years of operations, institutions must include proper evidence in the management report accompanying the financial statements that the transactions carried out are proper to the strategic goals established in the business plan. The independent auditors’ report must include a note regarding the financial statements, giving their opinion on the information contained in the management’s report. Upon determination in the three fiscal years of unsuitability of transactions with the strategic goals, the institution concerned must present reasonable justification thereof. This justification will be reviewed by Bacen, which may set additional conditions to be satisfied by the institution, fixing a deadline therefor.
Transfer of the company’s controlling shareholding and any direct or indirect change in the controlling group that may result in the effective management of the business, derived from: (a) shareholders’ or quotaholders’ agreement; (b) inheritance and acts of will , such as donation, acceleration of inheritance and creation of usufruct; (c) action by individual or legal entity, separately or collectively, or by group of persons representing common interest, is also conditioned on authorization by Bacen. However, the simple transfer of controlling shareholding to legal entity will not be conditioned on approval by Bacen to the extent that there is no admission of new individuals to the group of ultimate controlling members of the institution.
Reorganizations, including change of corporate purpose; creation or extinction of operating portfolio by multi-service bank; amalgamation, spin-off or merger are also conditioned on Bacen approval.
Additionally, the regulation lists other events that must be reported to Bacen within the times yet to be established by that body:
- admission of shareholder or quotaholder, holding qualifying interest or rights resulting therefrom, arising out of legal acts performed, directly or indirectly, with other shareholders or quataholders of the institution;
- increase of interest by shareholder or quotaholder by 5% or more of the company’s capital, whether cumulatively or not; and
- party assuming the status of qualifying-interest-holder shareholder or quotaholder.
Direct interest that result in control of institutions organized as from November 29, 20029, may only be held by individuals, financial institutions or equivalent or other legal entities whose sole corporate purpose is the corporate interest in financial institutions or equivalent entities10.
Revocation of the authorization to operate will be required upon the performance of actions that result in the extinction of company or change in its corporate purpose, which causes the institution to lose its status as a company member of the National Financial System. Extinction resulting from composition, full spin-off or merger, to the extent that the resulting or succeeding company is accredited by Bacen, does not imply cancellation. In addition to the indispensable requirements for the revocation of authorizations to operate, which requirements will be listed ahead, Bacen may condition said revocation to the liquidation of liabilities typical of the financial institution or equivalent entity. The following are the indispensable requirements for revocation:
- publication of a statement of purpose, under the terms and conditions established by Bacen;
- decision at a shareholders’ or quotaholders’ meeting, as the case may be; and
- attachment of proper documentation to the respective cancellation application, under the terms and conditions set forth by Bacen.
After exhausting all applicable measures available thereto within its authority, Bacen may revoke the authorization for financial institutions or equivalent entities to operate upon determination, at any time, of one or more of the following situations: (a) operating inactivity, without acceptable justification; (b) institution cannot be found at the address furnished to Bacen; (c) unjustifiable discontinuation, in excess of four months, of provision to Bacen of financial statements required under legislation in force; and/or (d) failure to meet the deadline set on the business plan submitted to Bacen for initial operation. Prior to the cancellation for any of the above reasons, Bacen will announce, by any means it may deem appropriate, its intention to revoke the authorization to operate, so that it is possible for the general public to present objections within thirty days.
Bacen may or may not approve applications related to any of the issues dealt with in the regulation and, in the course of review of those issues, may also request presentment of additional documents and/or information it may deem necessary to make a reasoned decision. Additionally, an interview with the members of the controlling group, holders of qualifying interest and appointed officers may be requested by Bacen. Bacen may summarily disapprove applications in the case of irregular registration information if such irregularity remains uncured for time yet to be established by Bacen, and/or in the event of misinformation and/or misrepresentation.
1 Financial institutions may only operate in the country if previously accredited by Bacen, pursuant to the main section of article 18 of Law nº 4595, of December 31, 1964, which, among other provisions, lays down rules applicable to the monetary, banking and credit policies and institutions and creates the National Monetary Council. Financial institution is defined by article 17 of Law nº 4595/64 as any legal entity, either of the public or private law, whose core or secondary business is to raise, intermediate or invest its own or third parties’ financial resources, in national or foreign currency, and keep in custody third parties’ valuables. At the criminal sphere, article 1 of Law nº 7492 , of June 16, 1986, which defines crimes against the National Financial System, sets forth as follows:
"Art. 1 Financial institution, for the purpose hereof, is the legal entity of the public or private law whose core or secondary business, whether or not cumulatively, is to raise, intermediate or invest third parties’ financial recourses, in national or foreign currency, and keep in custody third parties’ valuables.
Sole paragraph. The following are equivalent to financial institutions:
I – legal entities raising or operating insurance, exchange, layaway sales, capitalization or any kind of savings, or third parties’ resources;
II – individuals performing any of the business mentioned in this article, even if occasionally."
2 Resolution nº 3040 came into force on November 28, 2002, date of its publication on the Federal Official Gazette, and will give effect as of June 2, 2003, except as regards to transactions that imply transfer of control of institutions organized as of said publication date or cancellation of authorization to operate, which is immediately effective.
3 Pursuant to main section of article 116 of Law nº 6404, of December 15, 1976 (the Corporations Law).
4 Bacen may, if deemed necessary, require publication of the statement of intent individuals or legal entities that are already members of the controlling group of the financial institution or equivalent entity. When reviewing satisfied conditions, Bacen will take into account the kind and size of the institution concerned. Development agencies are exempted from the publication of the statement of purpose.
5 The controlling members are also subject the other legal and regulatory rules, when applicable, regarding the conditions for the discharge of management duties in financial institutions.
6 Should the interested party fail the meet that time, the company organization process will be shelved by Bacen.
7 Should the management of a financial institution or equivalent entity request that Bacen extend the deadline for the commencement of operations, Bacen may require additional documentation and statement necessary to update the permit to operation process regarding that institution or entity.
8 Bacen’s authorizing financial institutions or equivalent entities operation is conditioned upon the adhesion, by the interested party, to the mechanism that protects holders of credits against financial institutions, under the terms of existing laws and legislation. The minimum guaranteed deposit system in Brazil was created by the National Monetary Council by Resolution nº 2197, of August 31, 1995, which authorized the organization of a non-profitable private entity to run said credit holder protection mechanism. That entity is the Credit Guarantee Fund– FGC, whose by-laws and regulation are consolidated and attached to Resolution no. 3,024 of October 24, 2002. The FGC is a non-profitable civil association of the private law, whose participants are the multi-service, commercial and investment banks; the Federal Savings Bank (Caixa Econômica Federal), credit, finance and investment companies; real estate and mortgage companies; and savings and loan associations operating in the Country that: (i) receive demand, term or savings deposits; (ii) accept bills of exchange; and (iii) raise money by issuing and placing real estate and mortgage notes. In line with the provisions in the applicable regulation, FGC’s purpose is to offer guarantee to credits against institutions participants therein in the event of involuntary intervention, extrajudicial liquidation or bankruptcy, or acknowledgement by Bacen of the institution insolvency that, under the terms of existing legislation, is not subject to intervention, extrajudicial liquidation or bankruptcy.
9 Date of publication of Resolution nº3040 on the Federal Official Gazette.
10 This rule does not apply to development agencies and public financial institutions that are or may become object of privatization.
*
Walter Douglas Stuber and Adriana M. Gödel Stuber are lawyers specializing in financial law and capitals market, and founder and associate lawyer of Amaro, Stuber e Advogados Associados, respectively.The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
