Investment Funds And Structured Operations Newsletter No. 08 – October 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 for informational purposes and should not be used for decision making.

Specific legal advice can be provided by one of our lawyers.

HIGHLIGHTS

CVM proposes portability rules to improve speed, transparency and security in the transfer of securities

Technical area establishes frequency for self-assessment on Principles for Financial Market Infrastructures

CVM initiates public consultation to discuss rules governing FIAGRO

HIGHLIGHTS

CVM proposes portability rules to improve speed, transparency and security in the transfer of securities

On October 03, 2023, the Brazilian Securities and Exchange Commission (“CVM”) initiated a public consultation aimed at drafting a new resolution on the portability of securities, in order to mitigate – or even eliminate – challenges faced by investors who try to carry out the portability of their securities investments.

A regulatory impact analysis preceded this public consultation, and estimated that any increase in compliance costs for regulated entities would be relatively low, so that a resolution proved to be a valid option, considering the expected benefits for investors and for the development of capital markets in Brazil.

The key proposals of this public consultation are:

• Expansion of the channels, under the responsibility of the custodian or original intermediary, for requesting portability, which can be formulated at the origin, destination or with the central depository.
• Obligation to provide a digital interface, also under the responsibility of the custodian or original intermediary, so that the investor can request portability, track its progress or cancel the order.
• Definition of steps and final deadlines for processing or rejecting portability requests.
• Requirements relating to fraud prevention in portability requests.
• Standardization of expected conduct by the agents, in cases of transfer requests involving a change in ownership.

For more information, access SDM Public Consultation Notice No. 02/23, Regulatory Impact Analysis and the CVM article.

Technical area establishes frequency for self-assessment on Principles for Financial Market Infrastructures

On October 16, 2023, the Superintendence of Market and Intermediary Relations (“SMI”) published CVM/SMI Circular Letter 1/2023, with the aim of establishing guidelines for financial market infrastructure operating institutions as regards compliance with the Principles for Financial Market Infrastructure (“PFMI”) drafted by the Committee on Payments and Market Infrastructure (“CPMI”) and the International Organization of Securities and Exchange Commission (“IOSCO”).

This circular letter highlights that both CVM Resolution No. 31, of May 19, 2021, as amended, and CVM Resolution No. 135, of June 10, 2022, as amended, establish that applicants for authorization must submit a document proving compliance with the PFMI in order to be granted authorization to carry out the activities of central securities depository and administrator of an organized securities market.

Both the CVM and the SMI clarified that the PFMI are applied to financial market infrastructures that carry out clearing, settlement, registration and centralized deposit of securities, whose role is of recognized significance towards the market’s good standing and stability.

In addition, according to the SMI, the market infrastructure must use the CPMI/IOSCO assessment methodology to carry out formal self-assessments regularly in relation to compliance with the PFMIs, as these assessments are useful for identifying procedures that require structural improvements as well as for prioritizing resources for those areas in which this need has been identified.

Within this context, this circular letter determined that market infrastructure operators must publish their self-assessment as regards compliance with the PFMI on the institution’s worldwide computer network, observing the standard established by the CPMI/IOSCO. Publications must occur every two years, at least.

For more information, access CVM/SMI/SSE Joint Circular Letter  1/2023 and the CVM article.

CVM initiates public consultation to discuss rules governing FIAGRO

On October 31, 2023, the CVM published the new regulation for the Investment Funds in Agroindustrial Productive Chains (“FIAGRO”) in order to obtain public contributions. According to SDM Public Hearing Notice No. 03/23, the CVM based its regulatory proposal on previous experiences, particularly on the experimental regime established by CVM Resolution No. 39, of July 13, 2021.

This experimental regime provided for the implementation of the rules governing other structured funds, such as the Credit Rights Investment Fund (“FIDC”), the Real Estate Investment Fund (“FII”) and the Private Equity Investment Funds (“FIP”) to FIAGRO, thus observing its investment strategy. Nevertheless, it prohibited the transition between different asset categories. However, the new proposal removes this barrier.

The proposal addresses numerous significant changes by allowing not only the FIAGRO to apply resources in the Brazilian agribusiness through the acquisition of several assets that are part of the local market – such as financial assets, credit rights, real estate and equity stakes, in compliance with article 20-A of Law No. 8,668, of July 16, 1993 (“Law 8,668”) –, but also by establishing that these resources can also operate in the markets under discussion, without exposure to risk factors of any specific market, in a “multimarket” category.

In spite of this, in order to fit in the “multimarket” category, a FIAGRO cannot concentrate more than a third of its equity on assets bearing only one type of structured fund. In this case, the FIAGRO must comply with the general regulation of funds established in CVM Resolution 175, of 2022, as amended, as well as in Annex VI. Therefore, in the event of a concentration of one third or more of FIAGRO’s equity in assets that are subject to investment of other structured funds, the class mentioned will be further subject to the subsidiary application of the rules governing structured funds.

In addition, the CVM draft proposes that FIAGRO use the regulation applicable to real estate investment funds as basis, in line with the provisions of article 20-F, of Law No. 8,668. However, the CVM pointed out that since the FIAGRO industry is at an early stage, the draft under discussion proposed a flexible interpretation of articles 5 and 6 of Law 8,668, which refer to the management of the assets portfolio.

Therefore, the draft outlines that the management of the portfolio of assets and related activities is the responsibility of the resource manager, not the fiduciary administrator’s, with the possible exception of applying the FIAGRO mostly to rural real estate, according to article 5 of Normative Annex III. This suggestion is intended for requesting from the fiduciary administrator of this FIAGRO only the registration provided for in art. 1, paragraph 1, I, of CVM Resolution No. 21, of February 25, 2021, yet without imposing the provisions of article 5 of the law, since, according to the CVM, the article referred to has become outdated.

Another important development is that the FIAGRO is now allowed to join the regulated carbon market, which is traded on a compulsory or voluntary basis. This means that these funds will be able to invest in carbon credits while integrating sustainable finance and the green economy into agribusiness.

The changes described above are aimed at recognizing the importance of agribusiness to the Brazilian economic landscape, as well as fomenting the growth of this sector through the capital market. This is because the figures released by the CVM demonstrate the success of the FIAGRO, with 69 operational funds and an overall equity of BRL 14.7 billion until June 2023.

A public consultation is an opportunity for the financial community and other stakeholders to contribute suggestions and comments on the new rules. This proposal represents another step towards the development of a new regulatory framework for Brazilian investment funds, laying the foundations for a more solid regulatory environment, adapted to the reality of the market.

By involving the community, the CVM seeks to create rules that leverage the agribusiness development and encourage sustainable investments.

This public consultation will be open until January 31, 2024, and is aimed at providing everyone with the opportunity to contribute to the development of the capital market.

For more information, access the CVM article.