Publications

Category: Labor and employment

The report of the Joint Committee responsible for evaluating Executive Order 905 of 2019 (MP 2019) confirms a step backwards from the initial proposal on negotiations with respect to profit sharing programs (PLR).

While the original text of MP 905 amended the current law so as to dispense with compulsory participation by labor unions, the new wording includes the need to at least notify the union entity. Only if the labor union does not appoint a representative within seven days to participate in the negotiation process may the committee conduct and complete the work autonomously.

In his opinion, the rapporteur for the joint committee justified the change by arguing that waiving labor union participation would result in the weakening of these entities and, in his view, it is necessary to preserve the role of labor unions in negotiations.

Trade unions’ role may even be very relevant and beneficial in negotiations of PLRs. However, the obligation to always notify them, regardless of the environment and the context of a specific negotiation, is a real step back from the proposal of MP 905, which sought to resolve a series of difficulties faced by companies in establishing PLR programs.

Today, the law presents as a requirement the participation of labor unions, which not infrequently results in some mishaps, such as:

• The silence of some entities in response to calls to sit on the joint committees;

• Interventions by labor unions often detached from corporate reality and misaligned with the workers' own desires;

• Trade unions that condition their participation in the negotiation process on the creation of a negotiation fee or compulsory contribution (scenario aggravated after the end of the compulsory payment of union dues).

The proposal by the joint committee resolves the first difficulty mentioned, since the companies will be able to sign the PLR program via the joint committee of employees, if the union notified does not respond within seven days.

This condition should avoid the repeated tax assessments applied to companies that decided to sign the PLR program directly with the committee, without the labor union’s endorsement.[1] The other two situations of deadlock, however, would remain unresolved.

As already occurs today, it would be up to companies to decide between attending to eccentric labor union proposals or complying with claims for mandatory negotiating fees (at risk of having their legality questioned). Otherwise, the business deadlock that has been installed may attract unnecessary strike movements and collective bargaining disputes, which, generally, do not resolve the issue.[2]

In this context, the original wording of MP 905 is more in line with the initiatives of economic freedom and de-bureaucratization defended by the current government. If it is approved by the Brazilian Congress, to the detriment of the text proposed by the joint committee, the difficult situations that many companies have been facing in instituting programs aimed at sharing profits or results with their employees could be resolved.

And, contrary to what is argued, this will not necessarily mean devaluation of labor unions. Professional entities that are actually representative will always be positively involved in negotiations of PLRs.

[1] The most recent decisions by the Carf have defended the position that the participation of labor unions in the negotiation of PLR programs is essential and that silence by some entities with respect to call notices made by companies does not eliminate this need.

[2] Many labor courts take the position that the prerogative to negotiate PLR issues is exclusive to employers, employees, and labor unions and for this reason they do not resolve the conflict. The Regional Court of Labor Appeals for the 2nd Region, for example, consolidated this understanding in Precedent 35 of the Collective Disputes Section, which returns the deadlock to the parties for them to form a committee to negotiate the PLR.

Category: Tax

The Ministry of Economy issued Ordinance No. 103/20 authorizing the Attorney General of the National Treasury to adopt a set of measures to suspend collection activities and facilitate renegotiation of overdue tax debts due to the coronarvirus pandemic (covid-19). The measures authorized on the basis of Executive Order No. 899/19 are the following:

I - suspend, for up to 90 days:

(a) the time limits for defending against administrative proceedings for collection of overdue tax debt of the Federal Government;

1. b) the forwarding of certificates of overdue tax debt for extrajudicial protest;

(c) the establishment of new procedures for the collection and liability of taxpayers; and

(d) the procedures for cancellation of payments for default.

II - offer a proposal for a transaction by adhesion related to debts registered as overdue tax of the Federal Government, upon payment of at least 1% of the total amount of the debt, with deferment of payment of the other installments for 90 days, subject to the maximum term of 84 months or up to 100 months for individuals, micro-companies, or small businesses, as well as the other conditions and limits established in Executive Order No. 899/19.

These measures for the adaptation of actions to collect the overdue tax debt of the Federal Government should be regulated by the PGFN in the coming days.

However, there is still no provision for extending the term of validity of clearance certificates, which is the taxpayers' claim in view of the current scenario.

Category: Banking, insurance and finance

The National Monetary Council (CMN) issued two new resolutions on March 16 to ease prudential regulatory constraints imposed on banks in an attempt to maintain the flow of credit in the Brazilian economy and stimulate economic activity.

The first of these, CMN Resolution No. 4782/20, determined that, for the next six months, restructuring of debts with individuals and legal entities that have suffered deterioration in their credit capacity as a result of the current crisis no longer need to be considered "problematic assets" for the purposes of article 24 of CMN Resolution No. 4,557/17. In order to qualify for this exception, the transactions that will be restructured: (i) must not be characterized as problematic assets on the date of publication of this new rule; and (ii) must have individuals or legal entities with financial capacity to honor the obligation as counterparties, considering the new conditions agreed upon.

In practice, banks will not need to increase the provisioning normally required for this type of transaction, as the Risk Weighting Factor (FPR) applicable to these debts may be maintained at 85% of the exposure amount, as provided for in article 24-A of BCB Circular No. 3,644/13.

Through this act, the Central Bank of Brazil expects that up to R$ 3.2 trillion in debts may be renegotiated more easily, depending on the interest of the parties.[1]

It is important, however, that the financial institutions that make use of this exception log the adequacy of these renegotiations to the criteria mentioned above. In order to avoid abuses, CMN Resolution No. 4,782/20 requires that credit analysis documentation relating to restructurings carried out under such circumstances be kept at the disposal of the Central Bank of Brazil for five years.

The second rule, CMN Resolution No. 4,783/20, reduced financial institutions’ capital requirements until April of 2022. More specifically, the Additional Principal Capital Conservation (ACPconservation), currently set at 2.5% of institutions' risk weighted assets (RWA), will be reduced to 1.25% between April of this year and March of next year, with a gradual increase projected to return to the current level in April of 2022. ACPconservation is additional capital that banks must maintain in relation to the total volume of their exposures in normal times to ensure that in stress scenarios their core capital is more protected as losses occur.

With this measure, banks gain some room to expand their credit portfolios without the need to raise additional capital to that end. The expected result is an increase of approximately R$ 637 billion in the financial system's credit extension capacity.[2]

The CMN's changes to prudential rules show that this regulator is attentive to recent events and understands that what is usually prudent in times of normality may not be so in exceptional situations. Given that it has not yet been possible to size up the economic shock of the covid-19 outbreak, the expectation is that many other fostering measures may be established by the Brazilian government in the coming weeks, including significant regulatory changes with direct effects on the core business of financial institutions. Proper monitoring and necessary adjustments corresponding to these measures are essential to mitigate the structural effects of the crisis on financial institutions and on the Brazilian economy in general.

[1]Estadão. "BC facilitates renegotiation of debts of companies and families." https://economia.estadao.com.br/noticias/geral,bc-facilita-renegociacao-de-dividas-de-empresas-e-familias,70003234653

[2] Idem

Category: Contracts and complex negotiations

The covid-19 pandemic affects, more or less severely, the most varied sectors of the economy, preventing or generating difficulties for companies and individuals in fulfilling their contracts. In this situation, what are the applicable legal solutions?

Although a pandemic like this one is an unusual experience for Brazilians, the law, in the course of its very long historical evolution, has developed, as a response to crises and troubled periods, institutes to regulate problems of this nature. These institutes deal with the problem of supervening changes in contractual circumstances and their effects on contractual relations as a means of softening the harshness of the traditional principle pacta sunt servanda ("contracts must be performed").

In current Brazilian civil law, the following institutes are more commonly employed: theory of unpredictability, excessive burdensomeness, acts of God, and force majeure.

We explain each of them below, indicating their legal basis and the practical consequences of their application:

 Theory of unpredictability

Excessive burdensomeness

Acts of God and force majeure 

This is a very simplified overview of the institutes, just to provide a first explanation. The problem of change in circumstances, due to their exceptional nature, obviously always depends on a circumstantial analysis. In a more analytical manner, the problem depends on several factors, such as:

• Nature of the contract: long or short term; type of contract; nature of the obligations agreed upon (of means, outcome, or guarantee); whether the contract is arm’s length or random.
• Existence of terms and conditions on the subject.
• The branch of law applicable to the contract: whether subject to civil law, consumer law, labor law, administrative law, etc.
• Branch of activity of the party to the contract affected by the change in circumstances.
• Determination of the real impact of the new circumstances on the ability of the party to the contract to fulfil its obligations.
• Whether or not alternatives exist so that, despite the new circumstances, the party to the contract will continue to fulfil its obligations.
• Determination in the light of the law, especially objective good faith, to verify whether the measures taken by the party to the contract may be considered reasonable, either to continue to fulfill its obligations to the extent possible, or to protect other interests (for example, the health of its employees).

The implementation of each institute leads to different effects. In the case of the unpredictability theory, the result that can be achieved is, in principle, revision of the contract values, with the objective of re-establishing the economic balanced damaged by the event. For excessive burdensomeness, the request made by the affected party is for termination of the contract (or, in the case of contracts that generate obligations only for one of the parties, revision of the contract), with the other party being able to offer adjustments to the contract in order to maintain the obligation, but on new bases. Finally, for force majeure, the result is, first, release from liability for breach of contract and, second, suspension of performance of the obligation or termination of contract, depending on whether the impediment is temporary (i.e. it lasts for a period that, after exceeding its effects, the parties still have an interest in performance of the obligation) or definitive (the effects last for a period that makes the contract engagement impossible).

Another area in which the institutes described above will have various effects is that of administrative contracts. There are many species in this genus governed by different laws and, therefore, they should be treated on a case-by-case basis. In any case, the general rule of Brazilian administrative law (embodied in article 37, subsection XXI, of the Federal Constitution and article 65 of Law No. 8,666/93) points to the fact that, in the case of an unforeseeable event or, even, a foreseeable event but with incalculable consequences, the Government will be responsible for the economic and financial rebalancing of the contracts. That is, even if the event could be classified as pertaining to the institutes of the theory of unpredictability, excessive burdensomeness, or force majeure, the consequence will be the assumption of damages by the Government and not sharing between the parties, as happens in contracts governed by private law.

The different treatment of administrative contracts, which may seem more favorable to private parties, is based precisely on the fact that, when participating in a bidding process, the private party prices its contract within conditions of risk, but not of total uncertainty caused by events of an unpredictable or foreseeable nature, but of incalculable consequences. Thus, the pricing of contracts depends on the assumption of uncertainties by the Government, since, otherwise, it would not be possible to choose a winning bid. In addition, private entities that contract with the Government are also subject to contractual amendments and assumption of burdens, due to the power of unilateral amendment of contracts and continuity in the provision of services even under adverse financial conditions, to which private entities are not subject in their relations with each other. Consequently, rebalancing is the protection of private parties who contract with the Government.

This general rule has been given its own treatment in public service concession contracts, governed by Law No. 8,987/95 (common concessions) or by Law No. 11,079/04 (PPPs). Because they are long-term contracts, they provide for their own risk allocation. However, even in this type of administrative contract, force majeure events, especially those not insurable, tend to be allocated to the Government, following the rule that total unpredictability should be allocated to the Government. Public services in general will therefore suffer a sensitive and, in all likelihood, unprecedented impact due to the pandemic. It is easy to note some sectors that will be even more affected, such as public passenger or cargo transportation service providers, logistics infrastructure operators (highways, airports, railways, and ports) and health service providers, among others.

Thus, if due to measures of loss of demand or increased obligations, with the adoption of new protocols and work shifts to attend to the state of emergency decreed by the Federal Government, by many states, and by some municipalities, it is a fact that the unpredictable pandemic will generate consequences that cannot be addressed without rebalancing of agreements with the Government. The form and intensity of each rebalancing will depend on the identification of the impact and nature of the service.

Therefore, at the present time, depending on the circumstances of each contract, all the above institutes may be applicable for contracts whose performance has been substantially impaired by covid-19.

In relation to new contracts signed with knowledge of the effects of covid-19, it is very important that the parties explicitly address, and, if possible, in detail, the allocation of the risks of the pandemic. For them, the possibility of contractual revision based on the above-mentioned institutes, especially the theory of unpredictability and excessive burdensomeness, will be reduced due to the predictability of the economic and social effects of the crisis.

This article serves as initial guidance regarding the problem, and does not avoid the need to analyze the concrete circumstances of each situation under consultation.

Category: Tax

On February 12, the Superior Court of Justice (STJ) initiated a ruling that may have important repercussions on the use of writs of mandamus to obtain a declaration of rights to offset tax overpayments. The discussion relates to a motion to decide diverging rulings in Special Appeal No. 1.770.495-RS (EREsp 1.770.495-RS), filed after a judgment handed down by the 2^nd Panel of the court.

On that occasion, having upheld the appellate decision handed down by the Court of Appeals of the State of Rio Grande do Sul, the understanding prevailed that, although a writ of mandamus may be used as an instrument to declare the right to offset tax overpayments not extinguished by the statute of limitations, this procedure could not affect past property effects. Accordingly, the amounts collected should be claimed via administrative means or in a separate lawsuit.

The decision's line of argumentation puts into debate the coexistence of the guidelines contained in Precedent 271 of the Federal Supreme Court (STF) and Precedent 213 of the STJ. The first, approved by the STF in December of 1963, establishes that a writ of mandamus does not produce past property effects, which must be subject to a request before the Government or a separate lawsuit. The second, approved by the STJ in September of 1998, establishes that a writ of mandamus is the appropriate means for declaring the right to an offset.

It is therefore appropriate to investigate the judgments[1] that resulted in the approval by the STF of Precedent 271 in order to identify the scope of this precedent and to state that Law No. 12,016/09, which currently governs writs of mandamus, included a specific provision for the issue.

An analysis of the cases that preceded the issuance of the precedent shows that they referred to situations in which employees claimed recognition of a certain right before the Government, for example, appointment to an office after approval in a civil-service examination, and, as a result, payment of a certain amount.

The judicial relief in the writs of mandamus with the scope reported was eminently of the nature of establishing rights. Therefore, the collection of any amounts arising from delay in the implementation of this legal relationship, as a kind of compensation, would not be compatible with this procedural instrument.

Law No. 12,016/09, as explained above, provided in its article 14, paragraph 4,[2] that wages and monetary advantages recognized in favor of a public servant by a judgment issued in a writ of mandamus do not cover the period prior to the application for mandamus. This confirms the understanding that decisions recognizing a certain right in favor of a public servant does not allow for a claim, through the narrow pathway of a writ of mandamus, for economic redress concerning the past. The time limit is the assignment to a judge of the judicial measure.

In turn, in the STJ, Precedent 213 arose as a result of consolidated case law in favor of the possibility of using the writ of mandamus as an instrument to declare the right to offset a tax overpayment. In other words, since the tax obligation derives from the law, in view of the fact that the principle of legality is the guiding principle of the Brazilian tax system, a defect of unconstitutionality or illegality in the normative vehicle that introduces a new requirement is the precondition for declaring the right to return amounts paid by way of an offset. It is precisely this issue of law alone that must be assessed in the writ of mandamus in order to declare the right to an offset.

One consequence of this limitation on the scope of writs of mandamus seeking a declaration of the right to an offset is the prohibition on reviewing issues concerning the definition of the amount to be returned, which would even exceed the restrictions on the use of the constitutional remedy. All issues relating to calculation of the amounts to be offset, proof of undue payments, and procedure, among others, shall follow the provisions of specific legislation and shall be effective vis-à-vis the Government.

An additional element in admission of the writ of mandamus as a means of recognizing the right to an offset is the fact that the activities of the administrative authorities acting in tax matters are binding. This means that, even if the STF or the STJ has decided that a certain provision of law is unconstitutional or illegal, the authorities will continue to apply the unconstitutional or illegal command until the provision is expressly revoked or a decision in concentrated control of constitutionality or binding precedent is issued by the STF. The effective result of this position is that if the taxpayer chooses to initiate the procedure for an offset before the Government, regardless of a court decision, its request will be rejected and a penalty imposed.

In this scenario, a writ of mandamus having as its scope the declaration of a right to an offset is the appropriate mechanism for a taxpayer to obtain judicial relief authorizing it to offset amounts charged on the grounds of unconstitutional or illegal provision.

It follows, therefore, that mere declaration that the taxpayer is entitled to an offset does not allow the conclusion to be drawn that past property effects have been assigned. On the contrary, the decision is an order that only declares the right to the offset and its effectiveness vis-à-vis the Government is conditioned on the observance of a specific procedure (at the federal level, Law No. 9,430/96 and RFB Normative Instruction No. 1,717/17).

Returning to EREsp 1.770.495-RS, it may be seen that the assessment of the matter by the First Section of the STJ is the result of some confusion between the guidelines of Precedent 271 of the STF and Precedent 213 of the STJ. The conclusion of the judgment may lead to a relevant change in the way writs of mandamus are used to declare a right to an offset.

Thus far, two opinions have been issued, by Justice Gurgel de Faria and Justice Napoleão Nunes Maia Filho, in order to reaffirm the case law of the STJ and the guidance of Precedent 213, admitting writs of mandamus to declare a right to an offset. And the important thing: always with the proviso that the corresponding rules and confirmation of amounts must be respected before the Government, which is charged with supervising the entire procedure adopted. There is not yet a date for resumption of the judgment, which will occur with the presentation of the opinion of Justice Herman Benjamin.

With the completion of this judgment, the STJ is expected to correct the confusion created in the specific case (EREsp 1.770.495-RS), which led to the matter being reviewed by the First Section. This may avoid the regression represented by the acceptance of varying guidance, which dates all the way back to 1963, and the contempt for the case law of the Court settled more than 20 years ago.

[1] Ordinary Appeal in Writ of Mandamus 6,747 and Extraordinary Appeal 48,657.

[2] Article 14. An appeal may be brought against the judgment denying or granting mandamus. (...)

Paragraph 4. The payment of wages and monetary advantages assured in a judgment granting a writ of mandamus to a public servant of the direct administration or federal, state, and municipal authorities shall only be made in relation to the benefits that fall due as of the date of filing of the complaint.

Category: Capital markets

B3 S.A. - Bolsa, Brasil, Balcão recently issued a second report on listed companies to adapt to Novo Mercado´s regulations, focusing on the obligations that will come into force in 2021. In the report, 121 companies listed in the Novo Mercado segment were reviewed.

Companies must fully implement the changes by the time of the general meetings to be held in 2021 (to approve the results for the 2020´s fiscal year). The deadline applies solely to companies that were already listed in the Novo Mercado segment by January 2, 2018. Those companies who joined the Novo Mercado after such date must be in compliance with the new rules as of their listing.

As in its first report issued in February of 2019, B3 pointed out that several companies have not yet made all the changes required (both reports may be found at the b3 website). It is clear, therefore, that B3 is regularly monitoring the implementation of the changes required by the regulations of its premium segment, in which there is a higher bar for corporate governance standards.

In this article, we provide some guidelines on how to adapt in order to comply with the regulations requirements.

Changes in corporate bylaws

Companies need to adapt their bylaws to provide for the board of directors’ composition with at least two independent directors or 20% of the members of the board of directors, whichever is greater (it is mandatory that the independence criteria be in accordance with the new regulation requirements).

Companies will also have to adjust the provisions on transfer of control (articles 37 and 38 of the Novo Mercado Regulation), withdrawal from the Novo Mercado segment (articles 42 to 45 of the Novo Mercado Regulation), arbitration (articles 39 and 40 of the Novo Mercado Regulation), and some other items provided for in the Novo Mercado Regulation.

Official letter 618/2017-DRE issued by B3, is quite useful in the process as it describes examples of provisions that comply with the new regulation. It is available at B3’s website.

As a rule, companies that have gone through the adaptation of their bylaws have adopted the provisions contained in said official letter or have opted for a similar wording as indicated by B3.

Management evaluation

In accordance with article 18 of the Novo Mercado regulation, companies must structure and disclose a process for evaluating their management (board of directors, board of executive officers and committees). In order to comply with this requirement, it is necessary to indicate the management evaluation mechanisms as per item "d" of section 12.1 of the Reference Form.

In general, companies have been quite succinct in the description of their evaluation process. Some choose to describe them by body (below is an example relating to the board of directors):

"The Board of Directors is subject to an evaluation process. It is annual, formal, and structured, conducted by the chairman of the body, and includes two dimensions: global performance by the board of directors and individual performance among its members.

In relation to global performance, the evaluation criteria are grouped into four categories: a) strategic focus of the board; b) knowledge and information about the business; c) independence of the board; and d) organization and operation. In the individual evaluation among members, the items for evaluation are grouped into the following categories: a) impartiality, b) effective contribution to the decision-making process, and c) assertiveness.

The purpose of the process is to facilitate the pondering and a structured discussion over the actions for continuous improvement of the Board of Directors' performance, systematically improving the body's efficiency. The first stage of the process is an individual reflection by each member regarding the board, recorded through a questionnaire. Then there is a consolidation of the individual notes and a conversation between each member of the Board of Directors and its chairman, who conducts interview and feedback processes. The results are consolidated and discussed at a board meeting, which then establishes an action plan for any improvements."

Other companies, as in the example below, describe a joint evaluation for all management bodies:

"The performance evaluations of the management and advisory bodies, as boards, are performed annually, after review and recommendations made by the Corporate Governance Committee to the Board of Directors, contemplating various issues related to the functioning of such bodies during the period under analysis, including the quality of participation and performance. The purpose is to identify opportunities to improve the functioning of the bodies. The evaluations are performed through interviews with the members of each body and the main executives of the company, who also perform a self-evaluation with respect to their performance in the exercise of their functions, without, however, individually evaluating the other members of management and/or other bodies. The company uses the results of these evaluations in the continuous improvement of its corporate governance structure, including the functioning of the Board of Directors, therein making the adjustments necessary so that its practices are always in line with the best local and international practices. The company has already carried out an evaluation of its management in 2019, and there was a discussion with the Board of Directors in May of this year. No outside consulting or advisory services have been engaged by the company related to the subject-matter of this item “d.”

Auditing Committee

Companies must establish an Auditing Committee in accordance with article 22 of the Novo Mercado regulation. The duties of this committee should be exercised in practice by the body, contributing to the corporate governance of the company.

Within the scope of B3’s supervision, however, the evaluation of the adoption of the Auditing Committee is only performed formally, by confirming the description of its operation and responsibilities (according to items 5.1 to 5.4 of the Reference Form), as well as its composition (items 12.5/6 and 12.7/8 of the Reference Form).

The companies that have already established an Auditing Committee generally sought to reconcile their duties with those of the Internal Audit and Compliance areas, which are also related to the company's risk management (and which are required by the regulation).

As a rule, companies have chosen to assign to the Auditing Committee the functions of supervision and risk assessment, as per the examples below:

"Auditing, Risk Management, and Finance Committee: mission to oversee the implementation of internal and external auditing processes, mechanisms, and controls related to risk management; the consistency of financial policies with strategic guidelines; and the risk profile of the business units, also overseeing the review of financial statements and information released to the market."

"Lastly, the Auditing Committee, the body of the company's governance structure responsible for assessing the effectiveness and sufficiency of the internal controls and risk management structure, considers that the procedures aimed at increasing the effectiveness of the internal controls and risk management processes currently adopted are adequate, according to the Auditing Committee Report disclosed in the Financial Statements of December 31, 2018."

The regulation requires that the Auditing Committee: (i) have autonomy and budget approved by the Board of Directors; (ii) have a coordinator indicated in the Reference Form; (iii) have internal rules (the full text of which must be made available on the CVM’s IPE Online system); (iv) have the minimum responsibilities and composition stipulated by the regulation; (v) release a report at least once a year on its main subjects and recommendations; and (vi) report its activities on a quarterly basis to the Board of Directors and the Company must publish the minutes of the Board of Directors' meeting in which such information is analyzed.

Audit Department

Another obligation related to the audit structure is the creation of a specific department to perform this function in the company (article 23 of the regulation).

To confirm the implementation of this structure, B3 will also evaluate items 5.1 to 5.4 of the Reference Form. As a rule, companies have chosen to describe the Audit department as the one responsible for performing operational activities related to risk assessment and to provide to the Auditing Committee and the Board of Directors the information necessary to improve management tools. The Internal Audit department has also been assigned the role of monitoring complaints or other activities carried out in cooperation with the Compliance teams:

"The scope of Internal Audit is (i) to issue an opinion on the conformity of the processes; and (ii) to investigate processes in cases of complaints, with reporting to the Auditing Committee, an advisory body to the Board of Directors.”

"Internal Audit Board, reporting to the Auditing, Risk Management, and Finance Committees, responsible for carrying out work on different business processes, in accordance with the audit plan validated annually by the committee.”

"The company also has an Internal Audit Board, subordinated to the Auditing Committee (body of the Board of Directors), which serves in the independent evaluation of the processes and investigation of potential violations."

"Audit Board: its mission is to provide the Board of Directors, the Auditing Committee, and the Board of Executive Officers with independent, impartial, and timely assessments of the effectiveness of the risk management and governance processes, as well as the adequacy of internal controls and compliance with the rules and regulations associated with the operations of the company and its subsidiaries. Internal Audit functionally reports to the Board of Directors and the Auditing Committee, and the Auditing Committee is responsible for periodically evaluating the performance of the Audit Officer, after hearing the considerations of the Board of Executive Officers."

Under the terms of the sole paragraph of article 23 of the Novo Mercado regulation, the company may engage an auditor registered with the CVM to perform this function, in lieu of the obligation to create it internally.

Compliance, internal controls, and corporate risks

B3 assesses compliance with this requirement based on an analysis of items 5.1 to 5.4 of the Reference Form, in which companies describe their Compliance departments with the following functions:

"Compliance: assist in the fulfillment, compliance, and application of internal and external regulations imposed on the company's activities.”

"Compliance Board, subordinate to the Legal and Compliance Vice-Presidency: responsible for the compliance program against corruption and bribery, applied and updated according to the characteristics and current risks of the company's activities."

Under the terms of B3's regulation, the functions of Compliance, internal controls, and corporate risks cannot be accumulated with operational activities (among others, those conducted by the legal, controllership, internal audit, and investor relations areas are considered non-operational activities).

Disclosure of policies and rules required by the regulation

The Novo Mercado regulation, in different articles, require companies to present certain policies, codes, and regulations, as indicated below:

• Internal rules of the Board of Directors (article 25)
• Internal rules of the Auditing Committee and other committees (article 22, II, and article 25)
• Internal rules of the Auditing Committee (article 25)
• Code of professional conduct (article 31)
• Remuneration policy (article 32, I)
• Policy for appointing members of the Board of Directors, its advisory committees, and executives under the bylaws (article 32, II)
• Risk management policy (article 32, III)
• Related parties transaction policy (article 32, IV)
• Securities trading policy (article 32, V)

The existence of policies, codes, and rules is evaluated by B3 based on documents made available by the companies on the CVM portal through the Empresas Net system.

Each company prepares these documents to meet the minimum requirements of the regulation and adapt it to its own reality. For companies that still need to prepare these documents, there are good examples available for consultation on the CVM’s system.

Conclusion

The preparation of regular reporting demonstrates the importance that B3 has been giving to the issue, as well as its initiative to guide and assist companies in the process of compliance with the regulation. It is expected, therefore, that compliance with the provisions will be subject to intense monitoring by B3.

In this sense, companies should pay special attention to the changes, even if such changes provide a reasonable grace period for companies to adapt. It is important to emphasize that structural changes required to meet the obligations of the regulation are not always easy to implement. One example of the implementation of internal audit and compliance departments, which needs to be evaluated outright, as it may require a separate budget and hiring of specialized personnel.