A brief overview of Brazil’s new investment funds regulatory framework
André M Mileski
Lefosse, São Paulo
Vinícius Braschi
Lefosse, São Paulo
On 23 December 2022, the Comissão de Valores Mobiliários (Brazilian Securities and Exchange Commission or CVM) issued the long-awaited Resolution No 175 (the Resolution), which provides for the new Brazilian investment funds regulatory framework. This echoed innovations introduced in 2019 by the Economic Freedom Law, such as:
the limitation on investors’ liability;
the applicability of the insolvency regime to locally formed investment funds; and
the possibility of for assets to be segregated into the same fund.
The Resolution’s enactment is the final stage of the largest public hearing ever conducted by CVM. It seeks to bring the local market in line with the most advanced international practices, and to consolidate the market practices and decisions of the CVM board in this regard.
When in effect, the Resolution will implement a new way of organising the regulations applicable to Brazilian-formed investment funds. This consists of:
a general section, which contains provisions applicable to every category of investment funds; and
specific sections in the form of separate normative annexes to the Resolution, dealing with and regulating the particularities of each category of funds.
The first categories with specific normative annexes are:
financial investment funds (mutual funds such as the equity, multimarket and fixed-income funds, which represent the majority of the funds in the Brazilian capital markets industry), and
fundos de investimento em direitos creditórios (securitisation investment funds or 'FIDCs').
The Resolution was initially planned to come into effect on 3 April 2023. However, there were numerous requests arising from the market considering the complexity and the structural changes that these new regulations will bring to the local investments funds industry. Therefore, on 28 March 2023, the CVM board approved the extension of its vacatio legis and delayed the Resolution’s entry into effect until 2 October 2023.
Some of the main innovations of the new Brazilian investment funds regulatory framework are outlined below.
Limitation of shareholders’ liability
The fund’s by-laws can define whether shareholders’ liability is limited to the value of their shares. If liability is not limited, the investor must sign an acknowledgment letter relative to the unlimited liability and will be liable for potential negative net equity, without prejudice to the liability of service providers for losses incurred by willful misconduct or bad faith. The Resolution also allows classes of shares with limited and unlimited liability to coexist in the same fund.
Liability of service providers
The responsibilities of the fiduciary administrator and portfolio manager – now named ‘essential services providers’ – will be split, in line with the usual market practices in foreign jurisdictions. They will be commonly liable for the fund’s formation, defining the terms of its by-laws and the engagement of other service providers. The essential services providers and all other service providers of the fund are accountable before CVM, within the limits of their attributions, for their acts or omissions contrary to the laws, the fund’s by-laws and applicable regulations.
Multiple classes of shares and segregation of assets
The funds’ by-laws may establish different classes of shares with distinct rights and obligations. All classes of shares must belong to the same fund category. The creation of classes subject to different tax treatment is forbidden. Classes of shares may be divided into subclasses that can only differ in relation to:
the target public;
investment terms and conditions;
amortisation and redemption;
the compensation of the service providers; and
the existence of entrance or exit fees.
The assets of each class of shares are segregated from one another and are only accountable for the obligations of the respective class.
Insolvency regime
The Resolution institutes an insolvency regime applicable to investment funds with shareholders’ limited liability. In case of negative net equity, the fiduciary administrator must take several measures as to the class of shares that has negative net equity to fulfil its financial obligations, including the suspension of distributions and new investments, and the elaboration of a termination plan jointly with the portfolio manager.
Governance
To promote greater agility and predictability in the governance of investment funds, the Resolution authorises the treatment of certain matters in the by-laws without shareholders’ meetings, regardless of the fund’s category, including:
the pledge of assets as collateral for transactions involving the class’s assets in classes exclusively targeted at qualified investors;
the issuance of new closed-ended class shares at the manager’s discretion (authorised capital);
the price of issuance of the closed-ended class shares;
pre-emptive rights in the issuance of closed-ended class shares; and
the establishment of ‘side-pocket’ structures to manage situations of exceptional illiquidity.
Investments in offshore assets
Once in effect, the Resolution will allow financial investment funds (mutual funds) targeted at retail investors to allocate up to 100 per cent of their net asset values in foreign-issued securities through dedicated foreign investment vehicles that comply with certain requirements. This is a significant evolution from the current regulations (that, as a general rule, only admit mutual funds targeted at retail investors to allocate up to 20 per cent of the net asset value in foreign-issued securities).
Investment of mutual funds in crypto and decarbonisation credits
Cryptocurrencies, decarbonisation credits (CBIO) and carbon credits are expressly defined by the Resolution. They are included as eligible assets for financial investment funds (mutual funds) where such assets are registered in a central depositary system authorised by CVM or by the Brazilian Central Bank, or traded in organised markets operated by entities authorised by CVM.