Investment Funds and Structured Finance Newsletter – September 2024

The Investment Funds and Structured Finance Newsletter provides information on the main administrative acts, rules, and legal texts regarding 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.

The English issue of the Investment Funds and Structured Finance Newsletter is a summarized version of the Portuguese issue, in which we highlight the most important news to our international clients. If you want to access a specific article that was not translated into the English version, please contact us.

HIGHLIGHTS

CVM publishes new FIAGRO regulation: What has changed?

On September 30, 2024, the Brazilian Securities and Exchange Commission (“CVM”) published CVM Resolution No. 214, which specifically regulated the Investment Funds in Agroindustrial Productive Chains (“FIAGRO”), after three years in which CVM Resolution No. 39, of July 13, 2021, provided for such funds temporarily.

Depending on the investment policy of each fund, the temporary regulation enabled FIAGRO to be incorporated based on the same regulation of credit rights investment funds (“FIDC”), Real Estate Investment Funds (“FII”) and Private Equity Investment Funds (“FIP”).

The new regulation was created after a long wait and was discussed by market players through the CVM’s Public Consultation SDM 03/2023. CVM Resolution 214 brought greater flexibility to FIAGRO, without prejudice to other changes, for not providing a specific definition for “agroindustrial productive chain”, and for enabling the fund to invest, through the same class, in different types of assets originating from such chain, without restricting a particular category, similar to a “multimarket” fund.

CVM Resolution 214 will enter into force on March 03, 2025, and will integrate Normative Annex VI to CVM Resolution 175. FIAGRO that are already in operation must comply with the new regulation by June 30, 2025.

For more information, please access our Client Alert about CVM Resolution 214 and the CVM article.

New circular letter provides additional guidelines to items of CVM Resolution 175

On September 26, 2024, the CVM Superintendence of Institutional Investors Oversight (“SIN”) published Circular Letter No. 5/2024, to disclose additional interpretations regarding general provisions of CVM Resolution No. 175, of December 23, 2023, and its Regulatory Annexes I and V, which provide for financial investment funds (“FIF”) and index funds, respectively.

Regarding the main content of CVM Resolution 175, the SIN clarified that the incorporation of quota classes with different tax treatments is allowed, provided that these classes belong to the same category of the fund, that is, funds regulated by the same normative annex of CVM Resolution 175. For example, it is possible to incorporate a FIF with multimarket, fixed-income and shares quota classes, given that they are regulated by the same FIF regulation.

Regarding Normative Annex I, which provides for the FIF, the SIN clarified that whether or not these funds already comply with CVM Resolution 175, they are exempted from submitting:

• an offering term sheet, from October 01, 2024; and
• a performance statement, from December 2024.

In addition, it was also confirmed that the FIF class involving infrastructure investments, intended for professional investors, is exempted from complying with the concentration per issuer limit provided for in Article 60 of Normative Annex I.

With regard to Normative Annex V, which provides for index funds, the SIN clarified that “the annual contribution to stock exchanges or to the organized exchange market entity in which the fund’s shares are admitted to trading”, provided for as an index fund charge by Article 61, item VIII, of CVM Instruction No. 359, of January 22, 2022, also applies to index funds, as provided for in Article 117, XIV of CVM Resolution 175, which defines as fund charges the “expenses inherent to: a) the primary distribution of quotas; and b) the admission of quotas to organized market trade”.

Finally, regarding index funds, the SIN exposed its interpretation of Article 41 of Normative Annex V of CVM Resolution 175, regarding Exchange Trade Funds (“ETF”) that replicate an index whose portfolio includes future contracts. According to the SIN, 95% of the ETF net worth must be exposed in future contracts that make up the index replicated by such fund.

For more information, please access CVM/SIN/SSE Joint Circular Letter 5/2024 and the CVM article.

CVM publishes guidelines to procedures in public offerings for the distribution of securities with tax benefits

On October 11, 2024, the CVM Superintendence of Securities Registration (“SRE”) published CVM/SRE Circular Letter 3/2024, which provides guidelines on the procedures that must be followed by the lead coordinator in public offerings of securities with tax benefits.

These guidelines comply with Decree No. 11,964 of March 26, 2024, which provides for the criteria for framing an infrastructure project as a priority.

The letter highlights that lead coordinators must follow up on the framing of investment projects as a priority with the competent sectoral ministries, even if there is no previous ordinance to authorize the project, and are in charge of suspending the distribution of securities with tax benefits, under Articles 22 and 83 (CVM Resolution No. 160), as amended, in case the respective competent authorities deny such priority framing for these projects.

In addition, the letter defines the information from Decree 11,964 that must be included in disclosure documents within the scope of public offerings of securities with tax benefits. Such information must be included in the notice of initiation, in the notice to the market, in the prospectus and in the notice of closure, as the case may be, noting that offerings intended exclusively for professional investors, which do not have a prospectus, must also include such information in advertising and other disclosure materials provided to professional investors within the context of their offering.

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

For more information regarding Laws 12,431 and 14,801, as well as Law No. 11,478 (which created the FIP for investments in infrastructure and RD&I, with tax benefits to its shareholders), and regarding, please access our client alerts: 

Federal law creates infrastructure debentures with tax benefits

Regulation refines fundraising for Investment Projects in Infrastructure and RD&I

Ministry of Transport publishes ordinance to regulate the issuing of incentivized and infrastructure debentures

ANBIMA establishes rules for remuneration disclosure in the distribution of securities

On October 10, 2024, the Brazilian Financial and Capital Markets Association (“ANBIMA”) published the new versions of the Distribution and Trading Codes, and their respective rules and procedures, which were updated by CVM Resolution No. 179, of February 14, 2023, and will enter into force on November 01, 2024.

ANBIMA’s goal is to demand that institutions define and disclose remuneration charged in the sale of securities, to ensure greater transparency for investors.

Distribution Code:

The main change to the Distribution Code obligates institutions to provide users with information on remuneration from the sale of securities on their websites and applications login page. If the investor contacts via telephone, such information must be provided within three business days. From January 2025, institutions must also provide investors with a quarterly statement with remuneration data regarding November-December 2024.

In the case of investment in funds, investors must be informed of the effective rate and receive an estimate of the variable distribution rate at the time of contracting. Investors must be warned that this estimate can vary due to existing commercial agreements between the distributor and the fund manager.

Trading Code:

Institutions must have an internal document describing the procedures for calculating the remuneration obtained from the sale of specific securities, such as the Real Estate Secured Bill (“LIG”) and the Brazilian Structured Operations Certificate (“COE”).

For more information, please access:

ANBIMA article

CVM Resolution 179

Distribution Code Rules and Procedures

Trading Code

Negotiation Code Rules and Procedures

Comparisons between previous documents and those that enter into force on November 1, 2024:

Comparison – Distribution Code Rules and Procedures

Comparison – Trading Code

Trading Code Rules and Procedures.

Public hearing discusses transparency rules for funds remuneration and service provider questionnaires

On September 16, 2024, ANBIMA opened a public hearing to address the implementation of rules aimed at increasing transparency in remunerating investment fund service providers.

The public hearing will also discuss new minimum governance requirements for essential service providers and FIDC managers.

The proposals aim to clarify and standardize the fees employed by the funds, in line with regulatory updates brought by CVM Resolution 175.

Main proposed changes:

• Remuneration transparency: Information on the remuneration of service providers must be standardized and disclosed to investors, especially in cases where the fund regulation provides for a global fee. In this regard, the funds will keep a document on the manager’s website providing for minimum parameters and information regarding classes, subclasses, and rate segregation.
• Governance of essential service providers: A new due diligence questionnaire has been developed to ensure that fund managers and administrators meet minimum governance requirements. The questionnaire encompasses exposure to capital risk, internal controls, information security, and matters involving ESG principles and crypto assets.
• FIDC requirements: A specific due diligence questionnaire was created to assist FIDC managers in hiring credit rights registrars and addressing risks associated with service provision. This questionnaire will require information on money laundering prevention, technological structure, and risk management.

For more information, please access the ANBIMA article.

DECISIONS

CARF analyzes possibility of treating a real estate investment fund as a legal entity for tax purposes

By unanimous vote, while analyzing the voluntary appeal filed by the taxpayer involved in Case No. 16327.720170/2023-66, the 1st Ordinary Panel of the 1st Chamber integrating the 1st Section of the Administrative Council of Tax Appeals (“CARF”) canceled the assessment that equated two real estate investment funds (“FIIs”) to legal entities (“PJs”) to apply the “anti-elusive rule” provided for in Law No. 9,779, of January 19, 1999.

The legislation provides for the Withholding Income Tax (“IRRF”) levy of 20% on profits distributed to shareholders. There will be an exemption from the following taxes on the income and capital gains of FIIs:

• Corporate Income Tax (IRPJ)
• Social Contribution on Net Profits (CSLL)
• Social Integration Program Tax (PIS)
• Social Security Financing Tax (COFINS)
• Tax on Financial Transactions (IOF)

The exception is provided for in Article 2 of Law No. 9,779/99, which establishes the equalization of FIIs to PJs, for tax purposes, when the quota holder:

• Is a developer, builder or partner of the real estate project in which the FII has invested funds; and
• Owns more than 25% of the fund’s quotas, either alone or jointly with a connected person.

In this case, the tax authorities considered that a shopping mall management group was the controller of a shareholding company, which, in turn, was the builder and developer – one of the partners of such project – with more than 25% of the funds’ quotas. In this perspective, after the CVM recommended that the Brazilian Federal Revenue Office analyze the case, the tax authorities determined that FIIs be equated to PJs, given that the management group holds an indirect interest in the FIIs via its controlled shareholding company. 

The reporting officer, Efigênio de Freitas Junior, and the other panel members argued that the regulation on the fund equalization to PJ does not apply to indirect interest, except in cases where there is proof of intent, fraud, and/or simulation. He also stated that the analysis of the quota holder’s position of builder, developer, or partner – for the purposes of equating the FII to PJ – must be carried out on the date of the taxable event, with the exception of past events.

The reporting officer clarified that the regulation addresses the partner and the connected person separately. Consequently, the term “connected person” is used to identify the major quota holder. Thus, the “equalization rule” must only be applied if the builder, developer, or partner owns, alone or jointly with the connected person, more than 25% of the fund’s quotas.

Other arguments posed by the taxpayer and liable parties were not addressed due to the cancellation of the entry. The trial result was also applied to case 16327.720184/2023-80, in which the taxpayer is the related FII.

However, the final verdict has not been published yet. As a result, the information above reflects the determinations of the trial plenary and can be further adjusted when such verdict is published.