Investment Funds and Structured Finance Newsletter no 5

The Investment Funds and Structured Finance Newsletter provides information on the main administrative acts, rules, and legal texts regarding the regulation of the investment funds, asset management, and structured operations.

This newsletter is for informative purposes only and should not be used for decision making. Specific legal consulting can be provided by one of our lawyers.

HIGHLIGHTS

CVM issues new Resolutions concerning Accounting Standards

The Superintendence of Accounting and Auditing standards (“SNC”) of the Brazilian Securities Exchange Commission (“CVM”) issued thirty-five (35) new Resolutions in June 2022 , targeting the revision and consolidation of normative acts, as determined by Decree 10,139/19. 

The rules came into force on July 01, 2022, except for CVM Resolutions 155, 156 and 157, which will come into force on August 01, 2022.

The new rules consolidate existing normative acts, without changes in content.

For more information, please see the CVM Resolutions.

 

CVM modernizes rules on organized markets and best execution of client orders

On June 10, 2022, the CVM issued Resolutions 133, 134 and 135, resulting from the SDM Public Hearing 9/2019, which intends to: 

    • define new wording for CVM Instruction 461, introducing regulatory provisions concerning the functioning of regulated securities markets and the incorporation, organization and operation of organized market management entities; and
    • amend CVM Resolution 35, to provide for the best order execution system within the scope of competition among trading environments (best execution).

Self-regulation: The CVM decided to maintain the current self-regulation model, instead of adopting the proposed model of mandatory binding to a unified self-regulation entity. In addition, the CVM developed alternative forms of structuring self-regulation activities, which can be carried out by contracting a self-regulation association, or collectively, by organized market management entities. Finally, each organized market management entity will remain in charge of maintaining its own Loss Recovery Mechanism (“MRP”). 

Large lots: The rule now enables the incorporation of specific segments for large batch operations, to be carried out in stock and counter markets. However, such operations must be carried out exclusively in environments with trading systems that favor appropriate price formation.

The CVM will announce, annually, securities that make up the minimum lots of shares and securities representative of shares that can be traded in operations with large lots. 

Best execution: As for the best execution rules, the changes described in CVM Resolution 35 set forth the obligations of intermediaries in light of the possibility of having multiple organized market management entities trading the same securities.

The CVM preserved the model proposed at the public hearing, in line with the European model, in which the duty of best execution falls on the intermediary. As a result, the intermediary is entitled to decide on which market the order must be executed.

Furthermore, in orders from unqualified investors, the total cost of the operation must be the predominant factor for order execution purposes, unless there is specific instruction otherwise. In such situation, the intermediary must execute the order as instructed by the client. 

Internalizing orders: The possibility of internalizing orders will be discussed based on complementary studies carried out by the CVM.  At the moment, such possibility was not subject to a specific regulation by the rule.

It is important to highlight that the CVM authorized the Retail Liquidity Provider (“RLP”), a format of internalization that has been monitored by the Autonomous Body, experimentally structured within the organized market management entity.

The following changes are also highlighted:

    • permission for specific trading procedures to be developed by organized market management entities of the stock exchange, subject to prior approval of the CVM;
    • mandatory listing only in case of securities listed in the rule. The issuer’s listing and the admission of securities to trading will be treated as different actions; and
    • permission for any investor to trade securities through access screens for foreign exchange systems, in line with initiatives adopted by the CVM concerning the flexibility of investors’ access to securities traded in other markets.

Resolution 133 (provides for the activity of market maker for organized market securities): The issuance of CVM Resolution 133 results exclusively from the process of reviewing and consolidating CVM Instruction 384 and Decree 10,139. There were no changes in content.

CVM Resolution 133 came into effect on July 01, 2022. CVM Resolution 134 and CVM Resolution 135 will enter into force on January 02, 2023, and on September 01, 2022, respectively.

For more information, see Resolutions 133, 134 and 135 and SDM Public Hearing Report 9/19.

 

CVM provides instructions for interpretation of a rule that regulates the operation of index funds

On June 20, 2022, the CVM’s Superintendence for Oversight of Institutional Investors (“SIN”) published CVM/SIN Circular Letter 6/2022.

The purpose of the Circular Letter is to clarify Article 14, II, of CVM Instruction 359, which prohibits managers of Market Index Investment Funds (“ETFs”) to carry out loans, except as provided for in articles 12 and 60 of the same rule.

According to the technical department, such prohibition intends to ensure that these funds replicate the variations and profitability of the reference index, without adopting a position that is detrimental to any of the assets comprising the index.

However, the SIN clarifies the interpretation that: “ETFs may carry out loans of assets as borrowers, with the exceptional purpose of avoiding failure to deliver assets to settlement and clearing houses maintained by securities markets regulated by the CVM. In such case, there is no prohibition.

According to Daniel Maeda, CVM’s Superintendent for Oversight of Institutional Investors:The technical department also recommends in the Circular Letter that the evidence justifying the need for a loan be filed and maintained at the disposal of the autonomous body’s supervision.”

For more information, access CVM/SIN Circular Letter 6/2022.

 

CVM provides guidance on new dynamics for submitting information to securitization companies

On June 20, 2022, the CVM Superintendence of Securitization Oversight (“SSE”) published CVM/SSE Circular Letter 1/2022. The purpose of the Circular Letter is to instruct securitization companies on a new system for submitting information and transferring registration records of S1 and S2 categories. The Fundos.NET system became the only channel for submission of information on July 01, 2022.

As of the same date, submission of periodic and eventual information concerning the securitization company itself and its emissions not subject to separate equity must be carried out exclusively via the Fundos.NET system. Such change meets the requirements of CVM Resolution 60.

The new form models of Monthly Certificates of Real Estate Receivables (“CRI”) and Certificates of Agribusiness Receivables (“CRA”) must also be submitted via Fundos.NET.

It is important to highlight that the securitization company that maintains its registration as category A or B publicly held company (according to CVM Resolution 80), must, additionally, continue to submit documents related to this rule via the Empresas.Net system.

Transfer of registration records of categories S1 and S2 securitization companies: The transfer of registration records of companies that expressed interest in carrying out such change was completed on June 30, 2022, for categories S1 or S2. The deadline for such communication to SSE expired on June 01, 2022. As a result, companies that did not express such interest will be automatically transferred to category S2, according to the automatic transfer provided for in art. 61 of the rule, but will maintain the issuer registration of CVM Resolution 80.

The Circular Letter also informs that the maintenance of the registration provided for in Resolution 80 will incur the collection of two inspection fees, one for publicly held companies and one for securitization companies, in accordance with Law 7,940/89. 

For more information, access CVM/SSE Circular Letter  1/2022.

 

CVM promotes specific changes in the new investment crowdfunding rule

On June 28, 2022, the CVM issued CVM Resolution 158, which introduces specific changes in CVM Resolution 88, a crowdfunding investment rule.

The purpose of this amendment is to answer to claims and questions introduced by electronic platforms for participative investment, regulated by the same rules.

Possible buyers of securities for subsequent transactions: the Resolution expressly provides in article 16 that a small business company may choose to limit possible buyers of subsequent transactions, in order to ensure that only current investors of small business companies be able to acquire securities. 

In this case, requirements and obligations related to crowdfunding platforms acting as intermediaries of transactions for purchase and sale of securities remain applicable, and such option must be informed in section 3 of Exhibit E, which provides essential information on the public offering.

Bookkeeping and control of ownership and equity interest: In order to grant a longer adaptation period for platforms, article 53 now sets forth that the obligation to establish control of ownership and equity interest or bookkeeping, as the case may be, will only be enforceable in the event that securities subject to public offerings were initiated after 90 days from the date of entry into force of CVM Resolution 88, pursuant to article 3, V.

A sole paragraph was also included to determine that during the 90-day period mentioned above, and while the obligation of art. 3, V is not adopted:

a) the maximum target amount raised provided for in art. 3, I, cannot exceed BRL 5,000,000.00; and

b) subsequent transactions with securities are not allowed.

CVM Resolution 158 entered into force on June 28, 2022, and the changes were incorporated into CVM Resolution 88 before it became effective, which occurred on July 01, 2022.

For more information, see CVM Resolution 158.

  

CVM provides clarifications on the functionality of public offerings of Commercial Notes

The CVM submitted, to the Brazilian Financial and Capital Markets Association (“ANBIMA”), clarifications regarding the functionality of public offerings of commercial notes, governed by Law 14,195/21. Commercial notes count on more flexible rules than other instruments.

The CVM Letter answered to a consultation carried out by ANBIMA. Check out the highlights:

REGULATION:

    • Commercial note offerings must comply with the rules applicable to public offerings of similar securities;
    • Since it falls under a specific law, the commercial note does not require the publication of a new regulatory act by the CVM. The autonomous body, however, has enabled the possibility of drafting regulatory measures if deemed necessary; and
    • No subsidiary application of Law 6,404 is necessary, except concerning the schedule and function of meetings, in which case the subsidiary application is expressly provided.

FUNCTIONALITY:

    • Currently, the participation of a fiduciary agent is not mandatory for the offering of commercial notes, although it is a common market practice; The CVM informed that, as offerings progress, the Commission can determine in the future that a trust agent be contracted, if necessary, to extend the protection to investors; and
    • The formalization of the issuance term of the commercial note can be carried out after its pricing. It is also not necessary to add this instrument after the bookbuilding;

ACQUISITION:

    • The issuer can acquire commercial notes in the secondary market at a price higher than the updated par value, given that there is no need to meet the procedures provided for in CVM Resolution 77, which restricts application to the acquisition of shares and debentures.

REDEMPTION: 

    • The investor can execute the equitable and successive redemption of the commercial note. Such redemption cannot be carried out through random selection, as it is the case with debentures, nor can the redemption with negative premium/discount.

For more information, see Letter No. 6/2022/CVM/SRE.

 

Sustainable funds should have complied with ANBIMA’s new rules by July 04

Financial institutions with fixed income and/or sustainable shares had until July 04 to adapt to the new ANBIMA rules for identification of such products. 

The requirements, which are part of the Third-Party Resource Management Code, provide criteria for identifying sustainable funds.

Funds whose purpose is sustainability will be able to use the “IS” suffix in their name, which corresponds to “Sustainable Investment”. Funds that involve ESG matters, but do not have sustainability as a purpose, cannot claim such distinction and cannot use ESG-related terms in their names. In contrast, they can include a phrase that informs this condition in their marketing materials destined for investors.

Funds that fail to prove their sustainable purpose must exclude from their names any term that refers to sustainability.

For more information, access the Third-Party Resource Management Code.

  

New rules for cybersecurity, identification of sustainable FIDCs and FICs, and trading enter public hearing

New rules for identification of Sustainable Investment Funds in Credit Rights (“FIDCs”) and Sustainable Quota Investment Funds (“FICs”), and for registration of operations traded by funds before ANBIMA, entered into a public hearing on June 13. Cybersecurity rules have also been updated. The new rules are part of the Third-Party Resource Management Code, and suggestions can be submitted by July 13 to the email audience.publica@anbima.com.br.

Cybersecurity: The code proposes that financial institutions implement and maintain, in a written document, the rules and procedures concerning the personal data of clients that such institutions have access to. The file must also include the actions carried out to protect the confidentiality of information and rules applicable to employees for the management of such data.

Institutions must also establish procedures and controls compatible with their size, risk profile, business model and complexity of activities, as well as develop business continuity, incident handling and governance plans.

For more information, see the cybersecurity and negotiation proposals.

Sustainable FIDCs: Funds that have sustainable investment as an investment purpose/thesis will be allowed to use the acronym “IS” (Sustainable Investment) in their names. However, funds that integrate ESG aspects into their management process, but do not hold sustainable investment as their main purpose, cannot use this identification. In contrast, they will be allowed to use a different description in marketing materials intended for investors.

In order to have the right to use the term “IS” in its name, a fund must explain in its regulation that its ESG purpose considers the assignor (company selling credits) and/or drawee (debtor company) and ensure that the other party involved in the transaction (assignor and/or drawee, as the case may be) will not cause damage to the portfolio. Methodologies and processes must also attest to the sustainable purpose commitment and constant monitoring of assets. Divestment or portfolio recomposition strategies must be formalized and included in the fund’s marketing materials, aiming to prove that the FIDC carries out continuous practices focused on sustainability.

Funds that take ESG issues into consideration in their portfolios but do not fully commit to sustainability as their purpose can use the phrase “this fund integrates ESG matters in its management” in marketing materials intended for investors. Similar to IS FIDCs, such funds must also expressly state whether the integration of ESG criteria occurs from the assignor and/or drawee, according to each case.

The public hearing also introduced innovations to the rules for identification of equity and fixed income funds. Quota funds, known as FICs (which replicate more than 95% of the portfolio of one or more funds), that invest exclusively in IS funds and/or in funds that integrate ESG matters, can also be recognized as sustainable. 

For more information, see the draft of the Manual of Rules and Procedures for Identifying Sustainable Investment Funds.

Negotiation: Fund operations with CRIs, CRAs, debentures and closed-end fund quotas, must be registered in the REUNE System – ANBIMA’s platform for pre-registration of trading in the secondary market.

The requirement is valid for transactions traded by stock exchange funds and/or organized market management entities. Currently, the system only receives information from operations closed by the treasury departments and brokerage firms – as provided for in the Trading Code.

The manager can outsource the submission of managed portfolio data, provided that service providers, stock exchanges and/or market management entities are previously authorized to record information in the system.

 

CVM publishes study on investment transfer services between brokerage firms

On June 23, 2022, the CVM published the results of its Regulatory Impact Analysis study, regarding the regulatory criteria for investment transfers between brokerage firms. The initiative was carried out by the CVM’s Office of Economic and Risk Management Analysis (“ASA”), aiming to assess the effectiveness of asset custody transfers and the need for regulatory changes on this service of great importance to investors.

Below are some of the study’s recommendations:

    • Any change of request must be forwarded to the custodian, in accordance with the regulations of other jurisdictions and segments, as well as the result of ASA’s investor survey and previous study of investors’ registration;
    • The transfer request must be filed through a specific investor/participant area, enabling the client to select within their portfolio the assets to be transferred;
    • The progress of such request must be made available to the investor, including date and protocol number of the request received and flow, in order to provide greater agility in the communication of errors;
    • Redefinition of deadlines for the transfer of different assets, as follows: (a) for private fixed income securities, up to 3 business days; (b) for investment funds, up to 7 business days; and (c) for Share Transfer Order (“OTA”), up to 15 business days.
    • Establish a depository central as responsible for the information on a single price and purchase date for the fixed income asset, which enables the automation of the process without exchange of information between brokerage firms. 

Study: In September 2021, the CVM’s technical area carried out a study focused on the process of custody transfer of investments, which is currently a procedure requested by investors to the brokerage firm with which they have an account, when they wish to migrate their investments to another firm. 

The custody transfer service is one of the matters that can be subject to Public Hearing, as stated in CVM’s Regulatory Agenda for 2022. 

For more information, see the study in full.

 

New SSM functionality for document updates developed

The Market Supervision System (SSM) has a new feature to facilitate the exchange of information between ANBIMA and the institutions subject to its codes.  The system now issues an automatic reminder for institutions that must update or submit documents.

By adhering to ANBIMA’s self-regulation codes, institutions commit to maintaining the policy register up to date, and to complying with the mandatory submission of documents whenever changes occur. If there is no change, institutions must state whether the registered policy remains valid, every two years.

In the first phase, institutions were able to test the new function, and as of the second half of July, notifications will be sent on a monthly basis.

There will be two automatic alerts: one informing that there was no policy registration, and another informing that the institution has not updated the policy for over two years, taking into consideration the data from the institution’s own registration.

In order to submit updates, simply access the SSM’s logged-in area, and Supervisory > documents. Subsequently, the document must be attached in PDF document. Alternatively, a reply without any document must be sent, stating that there is no pending documentation.

 

CVM DECISIONS

 

CVM suspends condo-hotel offering related to real estate project 

The CVM’s Superintendence of Securities Registration (“SRE”) suspended the public offering of Collective Investment Contracts (“CIC”) for a certain hotel property project.

The technical department identified the use of advertising material on a certain website, thus characterizing the public offering, but without due registration or waiver before the CVM, as provided for in art. 25 of CVM Resolution 86. It is important to highlight that the request for registration of the offering at issue is under analysis by the autonomous body.

Determination of CVM: The SRE/CVM determined the immediate withdrawal of such advertising material from the website and suspended any sale efforts regarding the project.

 

CVM analyzed proposed settlement agreements involving alleged churning practice

During a meeting held on June 21, 2022, the CVM’s Collegiate Board analyzed the proposal of a Settlement Agreement for Administrative Procedure for Imposition of Penalty (“PAS”) CVM SEI 19957.005450/2021-51, presented by a certain individual and a certain legal entity (asset manager).

Within the scope of the CVM SAP SEI 19957.005450/2021-51, proposals were submitted by:

    • An individual in the capacity of officer responsible for the portfolio management activity.
    • A legal entity in the capacity of asset manager.

The Specialized Federal Attorney General’s Office at the CVM (“PFE-CVM”) concluded that there was no legal impediment to the execution of the instruments.

After discussions, the Settlement Agreement Committee (“CTC”) decided to accept the proposal submitted by the individual in the following terms:

    • Obligation to pay: to reimburse claimant investor in the amount of BRL 66,347.40, adjusted by the IPCA index, from May 2015 to the date of actual payment; and
    • Pecuniary obligation: to pay the amount of BRL 13,269.48 to the CVM, updated by the IPCA index, from May 2015 until the date of actual payment.

With respect to the legal entity, the CTC decided to reject the execution of the agreement, given that there was no adhesion to the negotiation proposal presented by the CTC.

The Collegiate Board followed CTC’s decision, accepted the Settlement Agreement with the individual and rejected the agreement with the legal entity.

PAS CVM SEI 19957.005450/2021-51 was established by the Superintendence for Oversight of Institutional Investors (“SIN”) to investigate the alleged promotion of excessive turnover of an Investor’s portfolio, characterizing, in theory, churning (violation, in theory, of art. 14, II, and art. 16, VI, of CVM Instruction 306, in force at the time).

For more information, see the Opinion on the Settlement Agreement.

 

ANBIMA’s DECISIONS

 

ANBIMA signs a Settlement Agreement with investment institution 

ANBIMA has opened Regulation and Best Practices Process No. C 001/2022 (“Process“), in order to investigate indications of non-compliance with the Certification Code, related to (i) the activities of a professional not certified by ANBIMA’s Certification of Managers (“CGA”) in the management of third-party funds, with discretionary power to invest assets comprising the portfolios of investment vehicles (“Management Activity“) and (ii) the submission of inconsistent information to ANBIMA, concerning the withdrawal of a professional from activities considered eligible for certification.

Whereas:

    • The Institution has submitted the Settlement Agreement within the scope of the Process;
    • The Institution currently employs a professional certified by the CGA for the activity of third-party asset management, with discretionary investment powers in funds or managed portfolios;
    • The information considered inconsistent was sent to ANBIMA due to the use of a document with a standard and outdated wording;
    • The Institution, through the statement of the non-certified professional – which was sent to ANBIMA – has guaranteed that such professional did not carry out the activity covered by the certification, and was aware that such activity would only be carried out after obtaining prior certification; and pursuant to Article 34, Paragraph 3 of the Process Code, the execution of an Settlement Agreement does not imply confession of guilt as to the factual matter, nor acknowledgment of any irregularity of actions under analysis; and
    • The Institution exclusively manages products whose quotaholders are relatives of the Institution’s partners.

The execution of a Settlement Agreement was considered timely and convenient, in order to remedy and correct any non-compliance within the scope of the Process, as well as to ensure that they do not occur in the future.

Obligations assumed:

    • To carry out a comprehensive review of all procedures and policies concerning certification processes under ANBIMA’s Certification Code and submission of all related documents within sixty (60) days; and
    • To make a financial contribution of twenty-five thousand reais (BRL 25,000.00), destined to fund educational events and actions to be fostered and/or carried out under the coordination of ANBIMA.

For more information, see the Settlement Agreement.