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Investment Funds and Structured Operations Newsletter No. 2 – February 2023
March 8th, 2023
The Investment Funds and Structured Operations 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 advice can be provided by one of our lawyers.
On January 12, 2023, the Brazilian Securities and Exchange Commission (“CVM”), in partnership with the Brazilian Financial and Capital Markets Association (“ANBIMA”), carried out the event “Fala, CVM: nova regulação de fundos”, to discuss the impacts of CVM Resolution No. 175, published on December 23, 2022 (“Resolution” or “CVM Resolution 175”), for service providers and investors.
CVM Resolution 175 repealed CVM Instruction No. 555 and the other main rules regulating the investment funds industry. The new Resolution, which will enter into force on April 03, 2023, improves and brings several innovations to the regulation of investment funds. Therefore, the event aimed to clarify any doubts that may arise during this transition period, a natural interaction trend between the regulator and the market.
At first, CVM highlighted its intention to publish a rule that would bring more security and leadership to retail investors in investment funds, considering the regulation of liability limitation institutes, segregation of assets by class of shares, announcement of the indirect costs of funds, as well as the viability of new investment options to the retail market, such as the Credit Rights Investment Funds (“FIDCs”).
Subsequently, CVM clarified specific market doubts, focusing on the topics listed below:
Transparency, remuneration and commissions mechanism
The focus point of the changes brought by the Resolution corresponds to the need for greater transparency within the scope of the compensation for the funds’ service providers, with the purpose of increasing the investors’ perception of what is paid by investors.
According to CVM, by making compensation structures more transparent (in regulations and/or advertising materials), there is a tendency to foster more competition in the market. Also, greater transparency on remuneration to service providers aims to empower the retail investors, enabling them to make well-founded decisions about their investments. About this matter, CVM highlighted the following innovations:
- “Commission 2.0”
The commission mechanism, widely used in the market, was not prohibited by CVM – it only received a novel approach, named Remuneration Agreement. With new limitations, any revenues resulting from the Remuneration Agreement must be paid by the fund that received the investment, directly in favor of the investor funds, so they can remunerate the commission beneficiary (manager). In addition, the regulator decided that the type of remuneration paid to distributors, calculated based on the performance fee of invested funds, could result in inappropriate incentives. Therefore, the regulator required the disclosure to the investor about such remuneration.
- Compensation between Funds
Considering that under CVM Resolution 175, the Remuneration Agreements will be settled exclusively between funds, the new rule now prohibits the compensation of amounts (deduction from debts using credits) between the invested funds and the investor funds, aiming to increase informational symmetry. The scope of this prohibition and the possible conflict in view of the commission rule described above have generated discussions in the market, and CVM is expected to amend its text or provide further clarifications.
New rule on charges
The regulator chose to maintain an exhaustive list (although expanded, in comparison to the previous regulation) of the fund’s charges, both in CVM Resolution 175 and its Normative Annexes, without prejudice to the possibility of such list being expanded in restricted classes.
Notwithstanding, the new Resolution made it possible to separate expenses arising from fund operations, which can be considered directly as charges, from expenses that are considered as administrative expenses of such fund, which are covered by the respective administration fees, management or maximum distribution.
- Breakdown between the fund fees
According to the new Resolution, fund regulations will be required to breakdown between Management, Administration, Performance and Maximum Distribution Fees (in the latter, including the publicity of possible arrangements that provide for the commission of a percentage of previous fees), that must be individualized and addressed independently in the regulation of each fund or in the Annex of each class, as appropriate. Regarding the adaption of the funds that are currently in operation, such adaptation can be carried out by the administrator regardless of the shareholders’ approval, if such amendment does not cause any increase to the effective final fee charged from the shareholder.
- Calculation of fees
In cases where the calculation of Administration and Management Fees is not carried out exclusively based on a fixed percentage of the net equity of the fund, the funds bylaws can establish expressly different percentage fees, which vary according to the net equity of the fund. Regardless, article 113 of CVM Resolution 175 allows restricted classes (destined exclusively to professionals and/or qualified investors) to calculate and charge the fees provided for in the bylaws, according to any previously established criteria.
New arrangement for share classes and subclasses
In line with the concept established by the Economic Freedom Law, the new Resolution establishes the possibility of creating share classes and subclasses within the same fund.
Within the scope of classes, CVM clarified that the investments and, therefore, the assets of each fund will be separated (that is, each share class will be linked to a certain set of assets of its equity). Within the scope of subclasses, the investors will be separated and, therefore, the liabilities of each fund (for example, different rights and obligations of each share subclass will be assigned to investors).
- Requirement of financial statements
Within the operational scope, alternatives to reduce compliance costs in view of the applicable accounting rules were discussed, such as the exemption from the obligation to submit financial statements by the funds, for example, considering that their equity would be allocated in classes and those classes would then disclose the accounting statements. Despite of that, CVM clarified that the submission of both financial statements will be necessary – both the financial statements from fund and from each of the classes –, especially to provide for apportionment of existing contingencies in each of the share classes and between the service providers from a same fund.
Limitations for Share Classes
In line with CVM Resolution 175, there are legislative and accounting limitations to maintain the investment funds with share classes, which are:
- governed by different Normative Annexes; or
- are subject to different tax treatments.
Nevertheless, CVM has signaled that if legislative and normative adaptations necessary for the implementation of this structure are carried out, CVM’s intention will be to accept it. At first, only the share classes governed by the same Normative Annex are accepted in the same investment fund, if such share classes are subject to the same tax treatment among them, in comparison with the fund.
Amendments related to investments abroad
CVM Resolution 175 extended the indirect exposure in assets abroad to up to 100% of the fund’s equity destined to the public in general, provided that certain conditions are fulfilled. Despite of that, there was no unrestricted flexibility since, according to CVM, this would require the development of a system that would allow the visualization of positions and assets abroad, held by each class. However, regulator agents have committed to carry out a new analysis on the matter and reduce the limitations on the investments made abroad by funds destined to the retail investor as soon as such system for monitoring of positions and assets abroad becomes feasible.
Contracting Investment Advisors
This aspect remains regulated by CVM Resolution No. 21, whose provisions establish that the manager, in the role of a fund manager, cannot contract the services of an investment advisor. In case this manager is, in addition to being a manager, an institution that is part of the distribution system, the contracting of investment advisors is possible, as long as the manager carries out the correspondent duties of an institution that is part of the distribution system, and does not carry out the corresponding duties of a fund manager. On February 14, 2023, CVM published Resolutions No. 178 and 179, that represent the new regulatory framework for investment advisory activities and provide for conflicts of interest involved in carrying out such activities. For more information, read the article below on the subject.
Exposure to capital risk
CVM clarified that, until it enters into force, the rule will be adjusted so that funds that apply the Long & Short strategy are not required to comply with the gross margin limits, according to the original wording of the Resolution, in line with that was suggested by the participants of the public hearing.
1. In addition to the item previously mentioned, CVM highlighted other provisions in the rule that will soon be subject of review and amendment in the rule, such as:
(i) the rectification that the responsibility for hiring the custodian in Financial Investment Funds (“FIFs”) remains under the responsibility of the trustee; and
(ii) the express inclusion of administration and management fees in the list of charges of the Regulatory Annex of the FIFs.
2. In view of the complexity of the matter, CVM expressed its intention to publish an official letter soon, aiming to instruct and clarify the doubts on the Resolution CVM 175.
More information about CVM Resolution 175
The new Resolution will become effective on April 03, 2023, provided that:
(i) only on October 01, 2023, will the rules on maximum distribution rate and limits on exposure to capital risk in FIFs come into force;
(ii) the possibility of the funds constituting share classes and sub-classes will only come into force on April 1, 2024; and
(iii) the adaptation to the new rules, by FIDC and FIF, must occur until December 31, 2023 and 2024, respectively.
Other information about the new resolution can be accessed in this link, of our first Client Alert on the subject.
Our experts will carry out discussions on the topic, organized by investment fund category, and have held specific meetings with clients.
On February 08, 2022, the CVM’s Superintendency of Securities Registration (“SRE“) published the CVM Circular Letter CVM/SRE 3/2023, with the purpose of guiding the leading underwriters in the requirements for automatic registration of public offerings for securities distribution in the SRE – Offer Registration System (“SRE System”).
Below we highlight the main guidelines regarding the correct launch of primary, secondary or mixed offerings in the SRE System, especially in case of investment fund offerings:
(i) The administrator and the investment fund manager act on behalf of the fund, in case of primary distributions. Although they are considered as offerors by the regulation, for the purposes of the SRE System, they must not be identified as offerors, considering that the identification of the “offeror” is used to determine whether the offering is of a primary, secondary or mixed nature.
(ii) Sequential errors were found regarding the submission of applications for primary offerings of investment funds, carried out:
a. without proper selection of the “Issuer is also an Offeror” checkbox (which, for system purposes, characterizes a primary offering); and
b. with the addition of the fund administrator as a secondary offeror.
As a result, the primary offerings of these funds are interpreted by the SRE System as secondary offerings, considering the administrator as a secondary seller. For the purposes of the SRE System, offerors are always the issuer itself, in a primary distribution, or the secondary sellers, in a secondary distribution, but never the administrator or manager of the fund – except if such administrator or manager of the fund eventually appears as a shareholder and wishes to sell its shares in a secondary offering.
CVM publishes regulatory framework for investment advisor activities, replacing the position of autonomous agent
On February 14, 2023, CVM published Resolutions 178 and 179, which represent a new regulatory framework for investment advisory activities and for the transparency of remuneration practices in the securities intermediation segment. The new rules are the result of SDM Public Hearing No. 05/21.
CVM Resolution No. 178 will enter into force on June 01, 2022. Specifically, regarding the compliance with article 37, paragraph 2, of CVM Resolution No. 178, when registering clients introduced by investment advisors, the intermediary must request the execution of an acknowledgment instrument on the work system of investment advisors, their limits, prohibitions and potential conflicts of interest. Intermediaries will have until January 02, 2024, or until the next registration update of their clients, whichever takes place first, to have this acknowledgment instrument signed.
The main innovations of CVM Resolution 178 are:
(i) Exclusivity: investment advisors may function as appointed representatives for one or more intermediaries.
(ii) Flexibility regarding the corporate format adopted by legal entity investment advisors: this measure replaces the prior obligation of adopting the general partnership format.
(iii) Greater transparency for investors: the rule includes an acknowledgment instrument for investors, describing the essential characteristics of the investment advisors’ activity, in addition to reinforcing the duties of advisors in disclosing the remuneration structure and potential conflicts of interest to investors.
(iv) Creation of the position of officer in charge for the legal entity investment advisor: the professional must be registered as an investment advisor and has the duty of acting before regulatory, self-regulatory and intermediary agencies, among others.
(v) Details of aspects related to the inspection that intermediaries must carry out over investment advisors: the rule aims to clarify aspects that are part of the intermediary’s duty of inspection and reinforces its responsibility for the actions of the investment advisor before the client.
CVM Resolution No. 179 will become effective on June 01, 2023, except for the changes made in CVM Resolution No. 35 of 2021, specifically in its sections III (Quantitative and Specific Information Provided to the Client) and IV (Quarterly Statements) of Chapter VII -A (information on compensation and conflict of interest), which will enter into force on January 02, 2024.
The main innovations of CVM Resolution 179 are:
(i) Requirement to disclose qualitative and quantitative information on methods and arrangements for remuneration and potential conflicts of interest involving investment advisors: intermediaries must maintain such information available in a specific section or page on the internet, so that investors can access it before making an investment decision.
(ii) Creation of a quarterly statement on remuneration: the document must contain the remuneration earned by the intermediary within the reference period, allowing the analysis of accrued amounts.
CVM approves amendments to Resolution 875 and extends its validity until 2024
CVM approved, in a meeting held on February 14, 2023, the proposal to amend CVM Resolution 875 (“CVM Resolution 886“) requested by the Sandbox Committee (“CDS”).
Resolution 875 authorizes the creation and operation, on a temporary basis, of a certain infrastructure fintech for capital markets, as well as the carrying out of activities regulated by CVM within the scope of the Regulatory Sandbox (“Tokenizer”). In this case, the Tokenizer was authorized to conduct the establishment and management of organized securities markets, based on token and blockchain technology.
The Regulatory Sandbox is an experimental regulatory environment in which temporary authorizations were granted to assess innovative business models in securities market activities regulated by CVM.
The legal entities mentioned in CVM Resolution 875, which were authorized to establish and operate the Tokenizer, submitted a proposal to participate in the first admission process within the scope of the Regulatory Sandbox fostered by CVM and their proposal was considered suitable.
Through CVM Resolution 886, published on February 16, 2023, several amendments to CVM Resolution 875 were implemented, as follows:
(i) The effectiveness of Resolution 875 was extended until March 14, 2024, an additional period in which the Tokenizer may continue operate under the Sandbox system, as described in CVM Resolution 875.
(ii) The Tokenizer is allowed to conduct public offerings of securities and trades in an organized market of tokens representing the Real Estate and Agribusiness Receivables Certificates.
(iii) The entry into force of CVM Resolutions 135 and 160 encourages further updates.
Resumption of FIP data submission: ANBIMA document answers to doubts of the market
In 2023, the obligation to submit information on Private Equity Investment Fund (“FIP”) to ANBIMA’s database will be resumed.
In order to assist the managers in this process, ANBIMA published a document with answers to the main doubts of the market.
The document clarifies that managers should have carried out the first submission of retroactive data for the last four quarters and for the period of 2022 until February 28, 2023. Reports following this period must be made within 45 days from the beginning of the current quarter.
ANBIMA sustains that its new database for submission of information will reduce the cost of market compliance, as managers will invest less time in filling out of the fields. The platform itself will also generate reports in line with the needs of the market, which will be periodically provided by the association.
For more information, access the FAQ.
ANBIMA submits a study on the impact of capital markets’ growth on the Brazilian economy to the Federal Government
ANBIMA carried out a study highlighting the importance of capital markets in the economic growth and development of Brazil.
The document outlines the development of the market, the impact on the economy and emphasizes the growth potential of corporate debt instruments, especially to enable long-term financing operations. The study indicates that funding by capital markets has grown, while the dependence of companies on public resources has decreased.
The survey presents the growing participation of capital markets in the debt composition of Brazilian companies, as well as the mobilization of resources for infrastructure projects via incentive debentures. Since 2019, the issuance of incentive securities has exceeded BNDES disbursements, considering the increase in the average maturity of these assets.
For more information, access the study in full.
CVM rejects Settlement Agreement to terminate the Sanctioning Administrative Proceeding regarding lack of inspection of services contracted by FIDC.
A certain securities brokerage house (“Administrator“), in its capacity of fiduciary manager of a credit rights investment fund (“FIDC”), and an individual, in the capacity of officer responsible for the Administrator (“Officer“), jointly proposed a settlement agreement to terminate PAS CVM 19957.004982/2021-71 (“PAS” and “TC”, respectively).
The Administrator and the Officer are accused of violating:
(i) article 90, item X, of CVM Instruction 555, due to lack of inspection of services provided by third parties contracted by the FIDC; and
(ii) article 92, I, of CVM Instruction 555, which establishes the obligation of the administrator and the manager to conduct their activities, always seeking the best conditions for the fund.
The proceeding is a result of a claim filed by a certain financial institution authorized to conduct credit securitization activities (“Primary Securitization Company”), against:
(i) the FIDC;
(ii) the FIDC manager at the time of the CRI acquisition, as defined below (“Manager”);
(iii) another financial institution authorized to conduct credit securitization activities (“Secondary Securitization Company”);
(iv) an individual responsible for managing the assets or businesses of the Secondary Securitization Company;
(v) a company responsible for the construction of real estate projects (“Construction Company”).
On April 30, 2015, as holder of a certain real estate credits arising from the sale of fractions of autonomous units that were part of a real estate development in Caldas Novas, Goiás, the Construction Company issued real estate credit certificates (“CCI”), for BRL 99,321,611.88. The CCI at issue were assigned to the Primary Securitization Company, for BRL 52.5 million.
Also on April 30, 2015, the Primary Securitization Company issued, backed by the CCI, 175 Certificates of Real Estate Receivables (“CRI”), in the total amount of BRL 52.5 million, which were registered with the Clearing House for the Custody and Financial Settlement of Securities (“CETIP“) and publicly offered, pursuant to then-current CVM Instruction No. 476. The CRI were mostly subscribed by the FIDC.
The Primary Securitization Company would use the amounts arising from the payments made by the debtors, regarding the promises of purchase and sale of the real estate development units, to pay obligations related to CRI. However, from early 2016, the Construction Company faced difficulties in completing the project, which demanded more resources than expected.
Therefore, the Construction Company communicated its intention to buy back all the CRI, to terminate the operation, based on the securitization instrument and on the CCI assignment instrument. At that time, the outstanding balance added to the 2% redemption premium was BRL 38,388,110.04. At a meeting held on June 20, 2016, the CRI investors approved the full repurchase of securities by the Construction Company.
To raise the necessary funds for the repurchase, the Secondary Securitization Company issued 460 new CRI (“New CRI”), with the aim of using the funds to buy back the CRI previously issued by the Primary Securitization Company.
According to the allegations submitted to CVM, with the funds deposited by the Primary Securitization Company on behalf of the Construction Company, some of the CRI issued were redeemed without closing the fiduciary system of the CRI. The Primary Securitization Company appealed to the Judiciary Branch and CVM, due to the irregularities identified in the second transaction, since the New CRI were issued backed by credits whose assignment had not yet been perfected, as they were still linked to the original CRI.
At a meeting held on September 06, 2022, the members of the Settlement Agreement Committee (“CTC”) decided that it was not convenient nor opportune to execute the proposed TC and that the best solution for the case would be a pronouncement by the Collegiate Board at trial, considering:
(i) the reduced degree of procedural economy that would be achieved in the case of the execution of an adjustment, considering that not all the people mentioned in the PAS presented a proposal for the TC; and
(ii) the seriousness of the case, in theory, which involves possible fraudulent operations in a public offering automatically exempted from registration.
On November 22, 2022, by unanimity, the Collegiate decided to accept the joint and global proposal for a TC presented by the Management Company and its respective director responsible for the securities portfolio management activity at the time of the facts, partially diverging from the CTC opinion.
In this context, the proponents requested that the CTC reconsider the TC proposal submitted by the Administrator and its responsible Officer.
At a meeting held on November 29, 2022, considering the provisions of article 83 along with article 86, caput, of RCVM 45; and the decision of the Collegiate Board, of November 22, 2022, the CTC decided that it would be possible to discuss the feasibility of an adjustment for the early closing of the case. Therefore, the CTC decided to negotiate the conditions of the proposal.
On December 08, 2022, the proponents amended the joint TC proposal presented, offering the amount of BRL 450,000.00, to be paid in one single installment. At the time, it was alleged that the bidders had not been accused of committing a fraudulent transaction, but of breaching fiduciary duties, and that the Collegiate Board had accepted a lower amount proposal, in the same PAS, presented by those accused of committing a more serious infraction. The Committee decided to reiterate the terms of the deliberated negotiation on November 29, 2022, and granted a new deadline for the proponents to express their arguments. In turn, the proponents reiterated the terms of the TC counterproposal, presented on December 08, 2022.
Thus , in a meeting held on December 20, 2022, the Committee decided to express its opinion before the Collegiate Board on the rejection of the joint TC proposal presented by the Administrator and the Officer, considering that, despite the efforts made in the negotiation of the case, there was no agreement on the adjustment of amounts for the consensual termination of the PAS and the joint proposal at issue remains.
For more information, access the opinion on the settlement agreement.