Investment Funds and Structured Operations Newsletter No. 9 – November and December 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 informative purposes only, and should not be used for decision-making.

Specific legal advice can be provided by our legal team.

HIGHLIGHTS

NOVEMBER 2023

CVM opens public consultation to discuss FIAGRO regulation 

On October 31, 2023, the Brazilian Securities and Exchange Commission (“CVM”) opened a public consultation to obtain contributions on the new regulation regarding Investment Funds in Agroindustrial Productive Chains (“FIAGRO”).

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 involved applying regulations on other structured funds – Credit Rights Investment Fund (“FIDC”), Real Estate Investment Fund (“FII”) and Private Equity Investment Funds (“FIP”) – to FIAGRO according to its investment strategy. However, the same regime banned transition between different asset categories.

In contrast, the new proposed regulation eliminates this impediment through several significant amendments that would enable FIAGRO to:

• Invest in Brazilian agribusiness by acquiring domestic market assets, such as financial assets, credit rights, real estate and shareholdings, under the terms of article 20-A, Law No. 8,668, of July 16, 1993 (“Law 8,668”).
• Operate among these markets within the “multimarket” category, without exposure to the specific risks of any market.

However, to classify as a “multimarket” fund, a FIAGRO cannot concentrate more than a third of its equity on assets that belong to the same type of structured fund. In this case, the FIAGRO must comply with the general regulation on funds, established in CVM Resolution No. 175, December 23, 2022, as amended, as well as in Annex VI. Therefore, if one third or more of the FIAGRO’s equity is concentrated in assets that received investment from other structured funds, the multimarket FIAGRO will instead be subject to the regulation on structured funds.

In addition, the CVM draft proposes that FIAGRO use the regulation applicable to real estate investment funds as a reference, in line with the provisions of article 20-F, of Law No. 8,668. However, the CVM has emphasized that because the FIAGRO industry is in its early stages, the proposed regulation introduces a wider interpretation of articles 5 and 6 of Law 8,668, which provide for the management of assets portfolios.

In this regard, the proposal outlines that the fund manager, and not the trustee, is responsible for portfolio management and related activities, with a possible exception for a FIAGRO that has invested mostly on rural property, in compliance with article 5 of Normative Annex III, which provides for real estate investment funds. As such, the draft proposes that FIAGRO trustees only be required to obtain the registration provided for in art. 1, paragraph 1, I, CVM Resolution No. 21, of February 25, 2021, without enforcing article 5 of the resolution in question, since this article has become outdated according to the CVM.

Another important development is that the FIAGRO can now enter both the mandatory and voluntary regulated carbon markets. This means that these funds can invest in carbon credits while integrating sustainable finance and the green economy into agribusiness.

All the amendments proposed above seek to recognize the importance of agribusiness to Brazil’s economic landscape, as well as fostering the growth of this sector through the capital markets. This is further evidenced by the successful FIAGRO figures released by the CVM – 69 funds in operation and a total equity of BRL 14.7 billion until June 2023.

This public consultation offers the financial community and other stakeholders an opportunity to contribute suggestions and comments on the new regulation. This proposal represents another step towards the development of a new regulatory framework for Brazilian investment funds, laying the foundations for a steadier regulatory environment in line with the reality of the market.

By involving the community, the CVM seeks to create rules that foster agribusiness development and stimulate sustainable investment.

Contributions can be submitted to the public consultation by January 31, 2024. 

The Brazilian Financial and Capital Markets Association (“ANBIMA”) will also analyze the CVM’s public consultation and submit its own contributions by January 14, 2024.

For more information, access the CVM article.

CVM updates operation aimed at nonresident individual investors

 On November 16, 2023, the CVM’s Superintendence of Institutional Investors Oversight (“SIN”) published CVM/SIN Circular 9/2023, which introduced a new procedure for nonresident individual investors that are exempt from registration with the CVM to obtain an operation code (CVM Code), under the terms of CVM Resolution No. 13, of November 18, 2020.

The new version of the SIE-WEB – CVM’s platform for representatives of nonresident investors to manage their clients’ registration – now provides a fictitious operation code upon the investor’s association with an also fictitious 000000 account named “joint account for simple registration of nonresident individual investor”.

As such, the full code that will enable these investors to operate in Brazilian markets will be defined as RRRRR.000000.INRINR-1.1, within which:

• RRRRR is the code that a representative obtains when they register nonresident investors with the CVM.
• INRINR is the individual code obtained by the representative for this investor when the initial registration stage is concluded.

The new system is aimed at enabling the market to successfully accommodate:

• Nonresident individual investors not registered with the CVM (exemption); and
• Investors that waive the exemption mentioned above and opt for officially registering with the CVM.

As a result, the new regulation establishes that nonresident individual investors that have obtained an operation code under the terms of CVM/SIN Circular No. 3/2022 must cancel the previous registration and register to the 000000 account, thus adjusting to the new system. Otherwise, these investors will be charged an inspection fee regarding the documentation required in the CVM’s regulation and will become part of the net worth of the portfolio to which they belong for all purposes.

For more information, access CVM/SIN/CVM Circular Letter No. 9/2023 and the CVM article.

CVM amends specific provisions of Resolutions 141 and 151

On November 30, 2023, the CVM issued CVM Resolution No. 195, which entered into force on December 01, 2023, introducing specific amendments to Article 1, sole paragraph, of CVM Resolutions No. 141 and No. 151, of June 15, 2022, which provide for joint financial statements and the submission of pro forma financial statements.

The amendment rectifies the wording of the resolutions, reinstating part of the original wording from CVM Resolutions 708 and 709, of May 02, 2013.

For more information, access CVM Resolution 195 and the CVM article.

DECEMBER 2023

CVM prioritizes FIAGRO in 2024 regulatory agenda 

The specific regulation of the FIAGRO is one of the CVM’s regulatory priorities in 2024, seeking to replace CVM Resolution No. 39, of July 13, 2021 (“CVM Resolution 39”), which was published on an experimental basis to enable the initial development of the FIAGRO industry.

In addition, CVM’s regulatory agenda includes the publication of a securities portability rule, aimed at mitigating or eliminating the difficulties and inefficiencies faced by investors in investment portability. The CVM aims to simplify the investor’s investment journey, providing greater transparency, agility and security.

To this end, the CVM intends to work on two topics:

• Inclusion

The CVM will require in the Companies’ Reference Form details on people with disabilities who work in these companies, seeking to foster a more inclusive and democratic environment. 

• Sustainability

A regulation will be published regarding investment funds for recycling projects (ProRecicle), as created by Law No. 14,260, of December 08, 2021, whose funds are earmarked for recycling projects and recycling institutions. 

As for the public consultation with the market, after drafting a regulatory impact analysis (“RIA”), the CVM will discuss the expansion of retail products, the concept of qualified investor and the role of digital influencers in the capital markets.

The following topics will also be subject to public consultation with the market and will be exempt from a prior RIA:

• Flexibility of requirements for smaller organized markets (CVM Resolution No. 135, of June 10, 2022).
• Creation of an experimental regulatory environment for smaller companies, through the regulation of articles 294-A and 294-B of Law No. 6,404, of December 15, 1976, which provide for the access conditions of smaller companies to the capital markets and the requirements to qualify as a smaller company.
• Encouraging private credit by regulating Law No. 14,711, of October 30, 2023 (Legal Framework of Guarantees).
• Reviewing the information regime for Financial Investment Funds (“FIF”).
• Improvement of the rules for FIP.
• Crowdfunding (CVM Resolution No. 88, of April 27, 2022).
• Sanctioning Administrative Proceedings (“PAS”) – CVM Resolution No. 45, of August 31, 2021.

For more information, access the CVM article and the 2024 Regulatory Agenda.

“Vai Fundo” podcast addresses CVM proposals for specific regulation of FIAGROs

On December 05, 2023, ANBIMA’s “Vai Fundo” podcast launched an episode addressing CVM’s proposed amendments to CVM Resolution 39, which aim to expand the presence of FIAGROs in the financial and capital markets.

The episode’s guest, Bruno Gomes, superintendent of securitization and agribusiness at the CVM, discussed the CVM’s proposals to strengthen FIAGROs in the capital markets. The guest highlighted the progress of FIAGRO-FII (FIAGROs focused on investing in real estate assets) and FIAGRO-FIDC (FIAGROs that follow the structure of credit rights investment funds).

“We allow FIAGRO-FIDC, FIAGRO-Real Estate and and FIAGRO-FIP. FIAGRO-Real Estate has advanced considerably and proven to be a viable option for investors, benefiting from all the governance that real estate funds already have. The FIDC is another interesting option for qualified investors. The success of this experience has brought FIAGRO to a level of almost BRL 18 billion,” says Bruno.

The public consultation for drafting the specific regulation for FIAGROs will remain open for contributions until January 31, 2024, and is aimed at a broader range of activities, expanding the portfolio of these funds to include various assets, such as real estate, rural properties, Rural Product Notes (“CPRs”), Agribusiness Receivables Certificates (“CRAs”) and company shares. The new regulation also proposes that FIAGROs participate in the regulated carbon market, either on a mandatory or voluntary basis, including through funds aimed at this market.

For more information, access the CVM article and listen to the Podcast in full.

CVM postpones intermediaries’ obligation to provide remuneration practices information

The CVM published CVM Resolution No. 196, of December 20, 2023, postponing the entry into force of certain obligations imposed on intermediaries of securities transactions in regulated securities markets by CVM Resolution No. 179, of February 14, 2023, especially regarding the information that must be provided by intermediaries regarding aspects of their remuneration practices.

These obligations would originally enter into force on January 02, 2024, but the date was postponed to November 01, 2024, due to a request made by an association representing market participants.

CVM Resolution 179 amended CVM Resolution No. 35, of May 26, 2021, mainly seeking to expand the information that intermediaries must provide to their clients on their remuneration and conflicts of interest, such as indicating the forms and amounts of remuneration in the same environment used by the client to transmit investment orders, in addition to sending quarterly statements on the remuneration earned by the intermediary due to investments in securities made by clients.

In addition, the CVM’s Collegiate Board instructed the Superintendence of Market and Intermediary Relations (“SMI”) to actively monitor market participants’ efforts to adapt to CVM Resolution 179.

For more information, access CVM Resolution 179 and the CVM article. 

CVM advises on integrating ESG factors into suitability procedures 

On December 26, 2023, the SIN and the SMI published CVM/SIN/SMI Joint Circular Letter 1/2023, aimed at disclosing their interpretations of the provisions of CVM Resolution No. 30 of May 11, 2021, which provides for the duty to verify the suitability of products, services and operations to the client’s profile within the scope of securities. 

CVM Resolution 30 determines that persons qualified to act as members of the distribution system and securities consultants must verify that the product, service or operation offered is suitable for the client’s targets and that the client has the necessary knowledge to understand the related risks.

Given the increasing structuring of products with strategies, approaches or objectives relating to Environmental, Social and Governance (“ESG”) topics, the letter clarifies that the investor’s risk appetite and interest in securities with ESG targets should also be taken into account, so that the products offered are suitable for the client’s profile. 

In addition, the letter clarifies that intermediaries and securities consultants must certify, using their best efforts and within the limits of their powers, whether a given security recommended by them effectively complies with an ESG target. This is intended to prevent potential greenwashing practices from harming the clients, by inducing them to invest in alternatives that do not comply with the investment targets they are seeking. 

For more information, access Joint Circular Letter and the CVM article.