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CVM releases Public Hearing Notice proposing changes to regulations applicable to Brazilian depositary receipts (BDRs) and to foreign issuers

25Out2016Oct25,2016
Capital Markets
CVM releases Public Hearing Notice proposing changes to regulations applicable to Brazilian depositary receipts (BDRs) and to foreign issuers

The Brazilian Securities Commission (“CVM”) released, on October 20, 2016, Public Hearing Notice SDM No. 07/2016 making available for public comment draft regulations applicable to Brazilian depositary receipts ("BDRs") and to foreign issuers.  Foreign issuers were defined in CVM Rule No. 480, of December 7, 2009, as amended ("CVM Rule 480"), as being issuers who have neither head offices nor more than 50% of their assets located in Brazil ("Foreign Issuers") (“Draft Regulations”).

The proposed changes seek to improve access for Foreign Issuers to the Brazilian capital markets through expansion of the type of BDRs which may be offered to investors resident in Brazil.  The changes subject to the public hearing are limited to specific issues; it is not the intention to have a general review of the rules relating to BDRs or the definition of Foreign Issuers. 

The Draft Regulations include changes to CVM Rule 480, as well as CVM Rule No. 476, of January 16, 2009, which regulates public offerings with restricted selling efforts; No. 332 of April 4, 2000, governing the issuance and trading of BDRs; and No. 494 of April 20, 2011, which regulate the establishment and operation of investment clubs. 

In summary, the main changes proposed are as follows:
  • Public offer with restricted distribution of Level I and Level II BDRs. Under the current regulations, only Level III BDRS may be the subject of a public offer with restricted distribution. According to the Draft Regulations, it is proposed that Level I and Level II be included in the list of securities that may be the subject of public offerings with restricted selling efforts.

  • Verification of Foreign Issuer status. Pursuant to the current regulations: (a) in the case of sponsored BDRs, whether the issuer is deemed to be a  Foreign Issuer, must be verified in the event of registration of a Foreign Issuer, a public offering of BDRs and a BDR program; and (b) the CVM may, exceptionally, waive the verification as to Foreign Issuer upon application for registration of a public offering of BDRs, upon request by the issuer setting out the grounds for such waiver (although the prevailing regulations do not detail under what conditions such waiver may be granted).  The Draft Regulations propose: (a) that verification as to Foreign Issuer also occur in the event of a public offer with restricted selling efforts, in which case, such verification should be carried out by the lead bookrunner, since this offer is not registered with the CVM; and (b) that Foreign Issuers be automatically exempt from this requirement in the case of a public offer of BDRs, if the percentage of assets located in Brazil does not exceed the maximum limit of 65% whether recorded in individual, separate or consolidated financial statements.

  • Other relevant changes. Among other changes proposed by the Draft Regulations, the following stand out: (a) inclusion of BDRs in the type of securities which may be included in the portfolio of investment clubs, up to the limit of 33% of their net equity; (b) in the case of unsponsored Level I BDR programs, the depository institutions must disclose information as to the company whose securities are underlying the BDR up to the opening of trading on the day following such information being made available in the country of origin; (c) changes in the procedure for registration and cancellation of BDR programs, adopting specific deadlines and analysis procedures; and (d) clarification regarding the scope of depositary institutions to exercise voting rights in respect of the shares that underlie the BDRs it issues.
Comments on the Draft Regulations must be submitted to CVM by November 21, 2016.  We remain at your disposal to discuss any of the topics related to the Draft Regulations.
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