New Rules in Brazil Applicable to Financial Institutions

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...