Investment Funds and Structured Finance Newsletter No. 6 – 2023

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

This material is informational in nature and should not be used for decision making. Specific legal advice can be provided by one of our lawyers.

The English version of the Investment Funds and Structured Operations Newsletter is a summarized version of the Portuguese version, in which we highlight the most important news to our international clients. If you want to access a specific article that was not translated into the English version, please, contact us.[/vc_column_text][vc_separator][vc_column_text]In this edition:

HIGHLIGHTS:

1. CVM Resolutions on investment advisor activities and remuneration transparency entered into force on June 01, 2023
2. Anbima and CVM discuss adaptation of the market to new fund regulation
3. ESG and crypto assets: Anbima expands self-regulation of investment funds
4. Published Decree on Virtual assets
5. Videocast discusses challenges of open investment in the fund industry

HIGHLIGHTS:

CVM Resolutions on investment advisor activities and remuneration transparency entered into force on June 01, 2023

On June 01, 2023, the Brazilian Securities and Exchange Commission (“CVM“) Resolution 178, of February 14, 2023 (“CVM Resolution 178“) came into force, which regulates the activity of investment advisors, as well as part of the provisions of CVM Resolution 179, of February 14, 2023 (“CVM Resolution 179“), which sought to expand the transparency standards regarding the remuneration practices of the securities intermediation segment, including, consequently, investment advisors. Both regulations were published by CVM in February 2023.

Among its main changes, CVM Resolution 178 now allows: (i) investment advisors to be incorporated as legal entities; (ii) the adoption of corporate types other than the general partnership; and (iii) the existence of investor partners that are not registered as investment advisors.

As a main feature, CVM Resolution 179 determined that financial institutions must provide, on their websites, a qualitative description of the remunerations and potential conflicts of interest for such intermediaries when carrying out their activities.

The resolutions were the subject of detailed analysis in our Investment Funds and Structured Operations Newsletter No. 2 – 2023. For more information, access our Investment Funds and Structured Operations Newsletter No. 2 – 2023.

Read the Anbima article in full.

Anbima and CVM discuss adaptation of the market to new fund regulation

On June 05, 2023, the Brazilian Financial and Capital Markets Association (“Anbima“) and the CVM met to discuss the adaptation of the market to CVM Resolution 175, of December 23, 2022, as amended (“CVM Resolution 175“), as well as its normative annexes. This was the second event held in 2023 to discuss the changes implemented by CVM Resolution 175, which will enter into force on October 02, 2023, subject to the specific rules for certain matters provided for in this resolution.

The event was attended by the president of CVM, João Pedro Nascimento, and the president of Anbima, Carlos André, and was divided in two blocks:

The first part focused on the discussion of the general rule of CVM Resolution 175 and its Normative Annex I, regarding financial investment funds (“FIFs“). The participants of this panel were: (i) Roberta Anchieta, head of fiduciary management at Banco Itaú Unibanco; (ii) Pedro Rudge, founding partner of Leblon Equities (the persons mentioned in items (i) and (ii) are referred to as “Guests“); (iii) Daniel Maeda, Superintendent of CVM’s Institutional Investors Oversight (“Maeda“); and (iv) Dalmo Fugita, analyst in CVM’s Superintendence of Market Development (the persons mentioned in items (iii) and (iv) are referred to as the “First Panel Respondents“).

During the block in question, several aspects of the new regulation were questioned, among which the following stood out:

1. 1. The impact on the pension entities. Pension entities must adapt their rules to the new regulation. The Guests highlighted that the standardization of rules is essential and still needs to be improved, considering the significant restrictions and limitations existing in the current model, especially regarding the need to duplicate fund structures or to create different funds to ensure the feasibility of an investment.
   2. New structure of classes and subclasses. As for the new structure of classes and subclasses in investment funds, the Respondents of the First Panel reaffirmed their position that classes are understood as mechanisms for the management of a fund’s assets, which can include portfolios individualized by class, thus constituting asset management vehicles. In turn, subclasses are understood as mechanisms for managing the liabilities of a fund, which can, for example, segregate their respective target audience and distribution vehicle. Therefore, in the words of Daniel Maeda: “classes are management vehicles and subclasses are distribution vehicles. Assets are segregated only and exclusively at the class level”.
   3. Compliance costs. Dalmo Fugita expressed CVM’s concern about developing a regulatory framework that could reduce compliance costs. In his words: “we seek to integrate CVM’s corporate case law and international best practices and recommendations, in order to modernize the regulation, in addition to results of other regulatory projects”.

In addition to the highlighted topics, the following were also discussed: (i) remuneration agreement for service providers; (ii) deadline for adjustment of other CVM regulations that affect CVM Resolution 175; (iii) provision for other regulations that will amend CVM Resolution 175; (iv) exemption from registration of securities bookkeeper with the CVM; and (v) investment in cryptocurrencies, governance, social responsibility and environment (“ESG“) funds, as well as assets abroad.

The second panel focused on the discussion of the remaining normative annexes, which are specific to each of the types of investment funds. Participants included Carlos Takahashi, vice president of Anbima, Julya Wellisch, member of Anbima’s board of directors, Bruno Gomes, superintendent of Securitization Oversight at CVM, and Daniel Maeda.

The main topics of discussion were:

1. 1. The duties of the administrator and fund manager, within the scope of the normative annex regarding Real Estate Investment Funds (“FIIs“), which will be included in CVM Resolution 175, after CVM Resolution 184, of May 31, 2023 (“CVM Resolution 184“) enters into force.
   2. The option to define that the period for investment of resources of the Private Equity Investment Funds (“FIPs“), is initiated upon the first payment of the fund’s quotas.
   3. The registration of credit rights, as provided for in the normative annex to CVM Resolution 175 regarding Credit Rights Investment Funds (“FIDCs“). The discussion focused on the adaptation of stocks and the creation of new funds following the implementation of CVM Resolution 175, since, given the new duties of the investment fund manager provided for in the regulation, the market raised doubts about who will be responsible for determining which credit rights are subject to registration. This doubt was answered by Bruno Gomes, who clarified that the person responsible for monitoring the credit rights subject to registration will be the administrator, together with the manager.
   4. Adjustment of “socio-environmental funds” to “ESG funds”. At this point, Maeda clarified that there are still no rules that provide greater clarity on what exactly ESG is, but that CVM Resolution 175 was a first step towards further clarification of the term.

Further discussions were held on topics such as: (i) expectations about the new structured products, in light of the new dynamics of classes and subclasses; (ii) permission to repurchase quotas, which, according to those attending the panel, was already addressed in B3’s own self-regulatory framework, and which Resolution 175 only brought clearly and expressly; (iii) pension funds; (iv) fund charges; and (v) the new annex of Investment Funds in Agroindustrial Production Chains, which is under discussion and should be launched in 2023.

Access the full event on Anbima’s YouTube channel.

Read the Anbima article in full.

ESG and crypto assets: Anbima expands self-regulation of investment funds

In addition to the information disclosed in the Investment Funds and Structured Operations Newsletter  No. 5 – 2023 on the new guidelines for ESG criteria, Anbima’s rules concerning the self-regulation of investment funds in Brazil have also been updated for crypto assets.

These changes were discussed at a public hearing held in May 2023, and the concepts and criteria established by CVM Resolution 175 were maintained.

In the case of investment funds or managed portfolios that invest in crypto assets, the regulation requires that any risks related to the segment be informed in the fund’s regulation or portfolio contract. However, in the case of portfolios or managed funds, for which the main risk factors are not linked to crypto assets, only a simplified notice on such risk factors is required in the documents.

The changes aim to consolidate Brazil as a market reference in Latin America, especially in innovation sectors, according to Zeca Doherty, executive director of Anbima.

Read the Anbima article in full.

Published Decree on Virtual assets

On June 20, 2023, Decree No. 11,563 of June 13, 2023 (“Decree 11,563“) entered into force, regulating Law No. 14,478 of December 21, 2022, known as the Legal Framework for Crypto Assets (“Law 14,478” or “Legal Framework for Cryptocurrencies“), which is the result of Bill No. 4,401 of December 21, 2022.

Law 14,478 provides for the guidelines to be followed in the provision of virtual asset services and in the regulation of virtual asset services providers, and equates virtual asset services providers to financial institutions, in accordance with Law No. 7,492, of June 16, 1986, which defines crimes against the Brazilian national financial system.

In view of these guidelines, Law 14,478 establishes the crime of fraud with the use of virtual assets, securities or financial assets, and amends Law No. 9,613 of March 03, 1998, which provides for money laundering, to include virtual asset services providers in the list of its provisions.

It is important to highlight that the regulation defines virtual assets as “a digital representation of value that can be negotiated or transferred by electronic means and used for payment or investment purposes”. However, this definition does not include:

1. 1. Brazilian currency and foreign currencies;
   2. digital currency, under the terms of Law No. 12,865 of October 09, 2013;
   3. instruments that ensure that the holder has access to specified products or services or to the benefit from such products or services, such as points and rewards from loyalty programs; and
   4. representations of assets whose issuance, bookkeeping, trading or settlement is provided for by law or regulation, such as securities and financial assets.

In order to regulate the Legal Framework for Crypto Assets, the body or entity of the Federal Government, as defined in an act of the Federal Executive Branch, must establish: (i) which financial assets will be regulated, in accordance with Law 14,478; and (ii) regulate the operation and oversight of virtual asset services providers; according to Decree 11,563, published by the Federal Executive Branch.

To this end, in order to meet market expectations, these duties were assigned to the Central Bank of Brazil (“BCB“), without changing, however, any powers of the CVM, nor providing for security tokens subject to Law No. 6,385 of December 07, 1976. (“Law 6,385”).

In addition, other powers established by a separate legislation remained unchanged, such as the powers relating to the National Consumer Protection System (“SNDC“) and the prevention and repression of money laundering.

As the regulator of the Brazilian virtual assets market, the BCB is expected to standardize several aspects relevant to the virtual assets sector, initiating the publication of regulations that provide for the incorporation of entities operating in this sector. Thus, the BCB will establish a minimum operation period of 06 months for entities that are already functioning to adapt to the new rules, in line with the Legal Framework for Virtual Assets.

Read in full Law 14,478  and the Client Alert published on December 23, 2022.

Read in full Decree 11.563 and the Client Alert published on June 15, 2023.

Read the CVM article in full.

Videocast discusses challenges of open investment in the fund industry

On June 26, 2023, the Network for Market Telecommunications (“RTM Trends“), held a videocast (which are podcasts in video format) focused on transmitting content about technology and innovation within the context of the financial market. The episode discussed the challenges of open investment and its impact on the investment fund market.

The executive manager of Distribution of Investment and Pension Products at Anbima, the head of Business at RTM Trends, the business analyst at RTM Trends and the CEO of Lina Infratech participated in this episode. The participants initially highlighted that open investment is the fourth phase of open finance, which already represents the evolution of open banking.

The debate covered several topics, including: (i) the different types of information that will be shared in this stage of open finance on funds; (ii) how the data can be processed; (iii) market expectations regarding open finance; and (iv) how institutions are preparing, and their main challenges.

Open investment was divided into two parts:

The first is the open data phase, in which public application programming interfaces (“APIs“), which do not require authentication, are made available on the internet. This means that anyone can visit the address of a particular financial institution and check all the products it offers, whether they are variable income, fixed income, funds, foreign exchange, insurance, or pension plans.

Therefore, this is a phase of great importance, especially when we look at the aggregation of data and product offerings of financial services in the investment market.

The second phase involves the analysis of sensitive data. This is when the analysis of the data portfolio of each of the users is actually initiated, along with the consolidation of financial information.

Financial institutions involved in open investment are mainly large market institutions, referred to as S1 or S2, according to their economic size, as well as brokers and distributors, who have shown interest in participating, considering the possibility of obtaining gains for their funding structures and the provision of new services.

At the end of the episode, the guests highlighted one benefit and one challenge of open investment. The challenges highlighted were: (i) the initiation of financial transactions, where there is a flow of transactional data, as is the case, for example, with portability and the investments themselves; and (ii) adherence to open finance, in terms of bringing in both institutions and investors.

Among the benefits, the following were highlighted: (i) the fact that open finance is a result of increased competitiveness in the market, in order to generate greater competition in line with the BCB’s intention to bring greater pulverization to the market; and (ii) the creation of better products for investors, due to increased competition.

Access the full video on YouTube.

Read the Anbima article in full.