Investment Funds and Structured Operations Newsletter – October 2024

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 one of our lawyers.

HIGHLIGHTS

CVM publishes guidelines regarding remuneration and taxonomy of ESG funds

On October 15, 2024, the Superintendence of Institutional Investors Oversight (“SIN”) of the Brazilian Securities and Exchange Commission (“CVM”) released Circular Letter No. 6/2024/CVM/SIN, with additional interpretations regarding the:

• Investment funds subclass code taxonomy;
• Use of service providers’ remuneration summary reports; and
• Investment fund classes that incorporate environmental, social, and governance aspects (“ESG”).

These guidelines correlate with specific provisions of CVM Resolution No. 175 of December 23, 2023, and its Annexes I, IV, and V, which respectively provide for Financial Investment Funds (“FIF”), Private Equity Investment Funds (“FIP”) and Index Funds.

The document includes joint proposals from the Brazilian Financial and Capital Markets Association (“ANBIMA”) and the CVM, that aim to simplify compliance with CVM Resolution 175 within the market.

Use of remuneration summary reports under CVM Resolution No. 175

As of November 01, 2024, the fund’s essential service providers can, when disclosing the fees due by investment funds, to opt for:

• disclosing and using fees in a segregated manner; or
• disclosing and using a global fee, to be included in the fund’s regulations.

If they opt for the global fee, the fund manager must disclose the remuneration summary report on a public and easily accessible page on their website.

From November 01, 2024, the use of the remuneration summary will be optional for pension structuring fees.

Market players must also comply with ANBIMA’s self-regulation rules to ensure remuneration transparency.

Subclass code taxonomy

The circular letter clarifies that the subclass code will contain 15 alphanumeric characters.

ESG investment fund classes

Finally, the circular letter emphasizes that, according to Article 49 of CVM Resolution 175, investment funds that do not seek environmental, social, or governance benefits cannot use terms related to sustainable finance in their regulation.

A class of quotas that do not provide for the integration of ESG factors into their investment policy but use the word “green” or other terms that reference a location, proper name, or other meanings not correlated with sustainable finance goals can still use these terms in their trade name provided that:

• Such terms do not mislead investors into correlating the funds with ESG factors;
• The class of quotas material does not contain any references, directly or indirectly, to the adoption of practices and enforcement of ESG factors;
• The sale strategy does not mislead investors into believing that the class of quotas seeks to create or integrate ESG factors within their investment process.

For more information, please access the circular letter in full and the CVM article.

CVM technical department publishes interpretations regarding FIDC and FII regulation

On October 30, 2024, the CVM’s Superintendence of Securitization and Agribusiness (“SSE”) issued CVM/SSE Circular Letter 6/2024, answering questions from market participants regarding the application of Regulatory Annexes II and III of CVM Resolution 175, which address Receivables Investment Funds (“FIDC”) and Real Estate Investment Funds (“FII”), respectively.

The circular letter clarified the following topics:

1. FII management fee

The SSE clarified that having a fund manager, as an essential service provider for the fund, is optional for FII, in which securities account for less than 5% of the equity. If there is a manager, however, the management fee can be deemed a fund charge, according to Article 117, XVI, of CVM Resolution 175.

2. Issuance of new FII quotas

Although the process for obtaining prior authorization for the issuance of new FII quotas has not changed, such authorization is now the responsibility of the manager, if there is one. If there is no manager, the fund administrator will be in charge of the fund administrator.

3. Hiring of consultants and specialized companies by FIIs

The SSE clarified that the manager cannot contract a consulting and specialized company to support the administrator in their responsibilities regarding real estate assets, given that the manager is only competent to manage securities invested and not real estate.

4. Responsibility for the FII classification

According to the SSE, if the FII has a manager as an essential service provider, they will be responsible for the classification of the funds, as provided for in Article 89 of CVM Resolution 175. If the FII invests less than 5% of its equity in securities and does not have a manager, the administrator will assume this role, as provided for in Article 40, paragraph 4, of the Regulatory Annex III of CVM Resolution 175.

5. Responsibility of the subordinate FIDC subclasses

According to the SSE, the limited liability of the class and quotaholder does not prevent FIDC regulation from establishing that a given quotaholder can be called to invest in the fund to adjust the subordination index. In other words, the structure of the limited liability class can include investors from a subordinate subclass that, given the product’s structure, may be called to invest in the fund to adjust subordination as long as the regulation provides for this.

6. Prohibition established in Article 42 of Normative Annex II (FIDC)

Article 42 prohibits FIDC from acquiring receivables originated from or assigned by the administrator, manager, specialized consulting company, or any parties related to them. However, there are two exceptions:

• When the manager, the registration entity, and the custodian of receivables are not related to each other; and
• When the registration entity and custodian are not related to the originator or assignor.

About this, the SSE clarified that:

• In both cases above, custodians are the same – those responsible for the custody of receivables; and
• The prohibition provided for in Article 42 cannot be suspended if the FIDC class quotas are aimed at the general public.

7. Deadline for registration of receivables invested by FIDC

FIDC, in operation when CVM Resolution 175 came into force (October 02, 2023), must comply with the new regulation by November 29, 2024, and register receivables that are subject to registration.

Based on Circular Letter No. 8/2023/CVM/SSE and Circular Letter No. 2/2024/CVM/SSE, the concept of “receivables subject to registered” is dynamic. Therefore, a receivable can become subject to registration once registrants implement an interconnection model to verify if the receivable is unique.

The regulation does not set a deadline for receivables to be registered from the moment they become “subject to registration,” except for the November 29, 2024, term for registering existing stocks as of October 2, 2023. As such, the SSE understands that, within the scope of the manager’s and administrator’s responsibilities, receivables must be registered within the shortest possible time and that these service providers must prove their efforts to comply with the regulation.

8. Registration of overdue receivable stocks (FIDC)

According to the SSE, overdue receivables that were not paid upon assignment to the FIDC cannot be registered. Regarding the existing FIDC on October 2, 2023, the SSE understands that in addition to the overdue and unpaid receivables at the time of assignment to the FIDC, those that entered default within the deadline to comply with the FIDC regulation will also not be subject to registration.

In addition, the SSE understands that overdue receivables are not subject to registration only when all installments are overdue. However, nothing prevents the manager from continuing to maintain the registration of such default receivables rather than canceling and submitting them to custody.

For more information, please access the circular letter and the CVM article.

CVM releases a new sustainability booklet addressing investment and environmental matters

On October 09, 2024, the CVM released the updated Volume 2 of the “Sustainable CVM Series,” which addresses the “Relation between Investments, Environment, and Impact.”

The update highlights the importance of factoring environmental and social aspects into investment decisions, addressing regulatory advances and public policies within the scope of sustainable finance, and emphasizing this market’s growth trend.

The booklet also addressed sustainable taxonomy and materiality matrix in sustainability reports, presenting the concepts of “single and double materiality,” which are essential for the proper development of these reports. It included explanations regarding the International Sustainability Standards Board (ISSB), which is the standard enforced by the CVM.

Sustainable taxonomy

Sustainable taxonomy can be viewed as a classification system that establishes criteria for identifying assets, projects, and activities with positive or negative environmental impacts and provides a basis for assessing to what extent an activity related to a financial asset can contribute to or hinder an environmental goal. Sustainable taxonomy aims to increase transparency, comparability, and reliability in sustainable financial investments and can serve as a basis for classifying securities related to environmental, social, and climate issues.

Materiality

While taxonomy establishes criteria to identify which activities are sustainable, the materiality matrix assesses the financial, environmental, and social impact of these activities, contributing to a comprehensive and informed analysis of sustainability issues.

“Single materiality” refers to the financial and operational impacts of ESG factors on a company’s cash flow. “Dual materiality” expands this analysis, considering not only the cash flow of the company but also the “inside-out” impact. In other words, dual materiality analyzes how and to what extent the business model or activity of a particular company affects the environment and society. This includes carbon emissions, impact on biodiversity, working conditions, and other social and environmental aspects.

The Sustainable CVM Series aims to equip investors with knowledge, data, and instruments to make informed investment decisions. The main goal is to mitigate greenwashing risks and assist the CVM in monitoring and preventing issues.

For more information, please access the Sustainable CVM Series and the CVM article.

ANBIMA publishes fund remuneration transparency rules and new questionnaire for service providers

On October 21, 2024, ANBIMA published transparency rules for the remuneration of investment fund service providers and a new questionnaire for essential service providers.

The new rules come into force on November 01, 2024, and are included in the “Rules and Procedures of the Code of Administration and Management of Third-Party Resources,” updated according to new interpretations of CVM Resolution 175.

The main change regarding remuneration transparency is that fund managers can provide a single global fee that includes every charged fee in case they do not wish to inform all fees charged for service and distribution services separately in the fund regulation. However, the fund manager must provide a new document on their website to inform the separate fees. This document must also comply with other requirements from the code, such as providing general information on the class or subclass of the fund.

Additionally, a mandatory due diligence questionnaire was published to assist service providers in the relationship between administrators and managers. This questionnaire aims to ensure a minimum standard of governance when different parties make partnership agreements. In addition to topics such as internal controls and information security, the questionnaire addresses exposure to capital risk and liquidity tools, which are innovations from CVM Resolution 175, as well as matters involving ESG and investment in cryptoassets.

For more information, visit the Rules and Procedures of the Code of Administration and Management of Third-Party Resources and the ANBIMA article.