Brazilian Securities Commission

Rio de Janeiro, March 7th, 2003

Mr. William H. Donaldson
US Securites and Exchange Commission
450 5th Street, NW Mail Stop 11-4
Washington, DC 20549
United States of America
Reference: File No. S7-02-03

Dear Mr. Chairman:

As chairman of the Brazilian Securities Commission (CVM), I would like to congratulate the staff of Securities and Exchange Commission for its remarkable efforts in preparing important new rules and regulations under the Sarbanes-Oxley Act of 2002.

On behalf of the interests of the Brazilian companies that are listed on U.S. national securities exchanges and national securities associations, I hereby present the CVM's views and suggestions regarding the proposed standards relating to listed company audit committees (Release nos. 33-8173; 34-47137; IC-25885), in connection with the requirements established by the Sarbanes-Oxley Act of 2002. The following comments are the result of several meetings with representatives of public companies, securities lawyers and other professionals of the securities industry, for the purpose of discussing the application of the Sarbanes-Oxley Act of 2002 to the Brazilian companies.1

As noted in the aforementioned release, the SEC has acknowledged the fact that "several foreign jurisdictions require or provide for auditor oversight through a board of auditors or similar body, or groups of statutory auditors, that are separate from the board of directors" and that "the proposed requirements may conflict with legal requirements, corporate governance standards and the methods for providing auditor oversight in the home jurisdictions of some foreign issuers", also recognizing that "the establishment of an audit committee in addition to these bodies, with duplicative functions, might not only be costly and inefficient, but it also could generate possible conflicts of powers and duties". Therefore, the SEC is proposing to provide for "an exemption from certain of the requirements for audit committees for boards of auditors or statutory auditors of foreign private issuers that fulfill the remaining requirements of the rule, if those boards operate under legal or listing provisions that are intended to provide oversight of outside auditors that is independent of management, membership on the board excludes executive officers of the issuer and certain other requirements are met".

According the Brazilian Corporation Law - Law 6,404, of December 15th, 1976 - the Brazilian companies may constitute a Fiscal Council (`conselho fiscal'), which may be either permanent or appointed for a specific fiscal year, by request of shareholders holding at least 5% of the outstanding shares of the company. The Fiscal Council of a Brazilian corporation is mainly charged with monitoring the financial management and reporting of a corporation. The responsibilities of the Fiscal Council may be more fully described in its charter (`regimento interno') or in the by-laws of the company, which may build on the statutory responsibilities of the Fiscal Council. However, the core duties of the Fiscal Council are established in article 163 of the Corporation Law, according to which the Fiscal Council has the following legal authorities:

    (a) to supervise the acts of the officers and ensure that they comply with their legal and statutory duties;

    (b) to give an opinion on the annual report of the management, including the supplementary information deemed necessary or useful for deliberation at a general meeting;

    (c) to give an opinion on any proposals of the administrative bodies to be submitted to a general meeting, regarding an alteration in the capital, the issue of debentures or subscription bonuses, investment plans or capital budgets, dividend distribution, transformation, merger, consolidation or division;

    (d) to report any error, fraud or criminal acts it may discover to the administrative bodies, and, if these fail to take the necessary steps to protect the corporation's interests, to a general meeting suggesting an appropriate course of action;

    (e) to call the annual general meeting should the administrative bodies delay doing so for more than one month, and an extraordinary general meeting whenever serious or urgent matters occur, including in the agenda of the meeting such matters as it may deem necessary;

    (f) to examine, at least every three months, the trial balance sheet and other financial statements periodically prepared by the corporation;

    (g) to examine the accounts and financial statements for the fiscal year and to provide an opinion on them;

    (h) to exercise such responsibilities during a liquidation, taking into account the special provisions which regulate liquidations.

The Fiscal Council is composed of a minimum of 3 and a maximum of 5 members, who are elected by a shareholder vote and, accordingly, the controlling shareholder typically elects a majority of its members. Holders of preferred, non-voting shares are entitled to elect one member of the Fiscal Council. Non-controlling holders of voting shares representing at least 10% of all voting shares may also elect one member of the Fiscal Council. The members of the Fiscal Council of a company may not be employees, directors, officers or affiliated with directors or officers of the company. The members of the Fiscal Council have fiduciary duties and are accountable to the company for any failure to fulfill their statutory and corporate responsibilities.

Many of the oversight functions envisaged for the audit committee are in fact exercised by the Fiscal Council of a Brazilian company. However, the decisions of the Fiscal Council are not binding on the corporation. The members of the Fiscal Council are entrusted with monitoring the management of the company and verifying their fulfillment of their statutory and fiduciary duties. The Fiscal Council, or any of its members, may make inquiries of management and of the independent auditors, to the extent required for it to fulfill its duties as an oversight body.

As an oversight body, the Fiscal Council has only an advisory role and does not participate in managing a Brazilian company. According to the Brazilian Corporation Law, publicly held corporations have a two-tier management, in which the board of directors functions as a supervisory, non-management board, and the board of officers is directly responsible for management duties and responsibilities. The board of directors of a corporation is expressly charged by statute with selecting and dismissing the independent auditors. Also, the selection and the dismissal of the independent auditors may be vetoed by members of the board of directors, if any, who are elected by minority holders of voting shares or holders of preferred, non-voting shares pursuant to certain enabling statutory provisions. The officers of a corporation are responsible for preparing its financial statements, subject to any instructions of the board of directors issued under its general powers.

It is important to notice that, under Brazilian law, the delegation of statutory responsibilities of any corporate decision-making body is not permissible as a matter of law and is not used in practice. Article 139 of the Brazilian Corporation Law codifies the bar on delegation providing that "the responsibilities and powers conferred by statute to the management bodies [i.e., the board of directors and the officers] may not be granted to any other body, whether established by statute or by the by-laws.

Based on the above description of the responsibilities of the Fiscal Council and its role in the oversight of a Brazilian company, it is our Commission's opinion that a functioning Fiscal Council, on a permanent basis, would qualify as a board of auditors under proposed Rule 10A-3(c)(2)(i)(B).

As to the proposed Rule 10A-3(c)(2)(i)(D), requiring that "home country legal or listing provisions set forth standards for the independence of such board or body, or statutory auditors, from the foreign private issuer or the management of such issuer", the Brazilian Corporation Law establishes that each member of the Fiscal Council bears the same fiduciary responsibilities of the corporation's board of directors and officers, are accountable for any damage resulting from any failure to comply with their duties and from culpable or fraudulent acts or any violations of the law or the bylaws, and shall exercise their duties in the sole interest of the corporation (article 165 of the Corporation Law). It is our opinion that these standards duly fulfill such requirement, since the Fiscal Council can be envisaged as a truly independent body.

Please note that the requirement that a qualified board of auditors be "directly responsible [...] for the oversight of the work of [the auditor] (including resolution of disagreements between management and the auditor regarding financial reporting)" in proposed Rule 10A-3(c)(2)(i)(E) is not fully consistent with Brazilian law. As discussed above, the officers of a Brazilian company are responsible for the preparation of the financial statements of the company, subject to guidance provided by the board of directors, while the Fiscal Council has an overall authority "to supervise the acts of the officers and ensure that they comply with their legal and statutory duties", and to examine, at least every three months, the trial balance sheet and other financial statements periodically prepared by the corporation, and "to examine the accounts and financial statements for the fiscal year and to provide an opinion on them", having also the authority to request whatever information is deemed necessary directly to the independent auditor. However, the Fiscal Council is not directly responsible for the oversight of the work of independent auditors.

Therefore, it is our suggestion that the SEC should consider expanding Instruction 1 to Rule 10A-3 to apply also to paragraph (c)(2)(i)(E). Accordingly, the responsibility for the resolution of disagreements relating to financial reporting would be assigned to the Fiscal Council only to the extent consistent with applicable Brazilian law. As a practical matter, the Fiscal Council may be required to provide non-binding recommendations to management on any disagreements between management and the auditors. A non-binding recommendation of the Fiscal Council would permit the Fiscal Council to be engaged in the oversight of the financial reporting and the relationship with independent auditors without resulting in an encroachment upon the responsibilities of management under Brazilian law.

The requirement contained in Rule 10A-3(c)(2)(i)(F), regarding the authority to appoint and retain any registered public accounting firm engaged by the listed issuer would collide with article 139, as mentioned above, since the board of directors is responsible for the appointment and retention of independent auditors, according to article 142, item IX, of the Corporation Law.

Sincerely yours,

Luiz Leonardo Cantidiano

1 According to the Brazilian Association of Public Companies - ABRASCA, there are over thirty Brazilian companies with securities listed on the New York Stock Exchange or quoted on The NASDAQ Market, Inc. which will be subject to the Sarbanes-Oxley Act and the related regulations.