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Investment Funds and Structured Finance Newsletter – March 2023

April 13th, 2023

The Investment Funds and Structured Finance Newsletter provides information on the main administrative acts, rules, and legal texts regarding the regulation of the investment funds, asset management, and structured operations.

This newsletter is for informative purposes only, and should not be used for decision making. Specific legal advice can be provided by one of our lawyers.

In this edition:

CVM AND ANBIMA HILIGHTS

CVM DECISIONS

CVM AND ANBIMA HIGHLIGHTS

CVM issues circular letter to clarify provisions of CVM Resolution 175

On April 11, 2023, the Superintendence for Oversight of Institutional Investors (“SIN”) and the Superintendence of Securitization Oversight (“SSE”) of the Brazilian Securities and Exchange Commission (“CVM”) published the CVM/SIN/SSE Joint Circular Letter 1/2023 (“Circular Letter”).

The purpose of this Circular Letter is to clarify and publish the interpretations of the technical areas of CVM on certain provisions of CVM Resolution 175, dated December 23, 2022 (New Regulatory Framework for Funds), as questioned by market participants over the last few months.

The document contains eighty-four responses to the questions received, divided into twenty-four main topics.

For more information, please access CVM/SIN/SSE Joint Circular Letter 1/2023.

CVM amends Resolution to postpone entry into force of CVM Resolution 175, regulatory framework for investment funds

On December 03, 2022, CVM Resolution 175 (“CVM Resolution 175”) was published, encompassing the new regulatory framework for investment funds in Brazil. It was well received by the market and brought Brazilian funds closer to the international standing, in addition to clarifying aspects related to the attributions and responsibilities of service providers involved in the operation of investment funds.

After its publication, market participants began to interact with the CVM, which, on its turn, began to collect information, opinions and doubts. The CVM also identified points for improvement regarding the rule before its entry into force, initially scheduled for April 03, 2023.

So, on March 28, 2023, CVM Resolution 181 was published, which amends CVM Resolution 175 (“CVM Resolution 181”). In general, the changes to CVM Resolution 175 were aimed at:

- - text revisions for rule refinement and clarification of certain provisions;
  - correction of material errors, since some published excerpts did not convey the decision made by the Collegiate Board very clearly as to the approval of the rule;
  - changes in the duration of the rule; and
  - changes in the Monthly FIDC Report.

Next, we highlight the main changes introduced by CVM Resolution 181.

General Part

Article 73 of the general part of the regulation, concerning the Shareholders’ Meeting, was amended. The new wording was intended to include the fact that, in addition to the essential service providers, both the shareholder (or group of shareholders) and the custodian that hold at least 5% of the total issued shares may also convene, at any time, a shareholders’ meeting to decide on the agenda regarding the fund, the class or the community of shareholders.

Also, Article 117, Chapter XI, of the General Part, regarding the expenditures, was amended and now includes that the expenses arising from loans obtained from a quota class, as well as from contracting the credit risk classification agency, are fund costs.

Normative Annex I – FIF

Article 12 of Normative Annex I to CVM Resolution 175 (“Normative Annex I”), which provides for the Financial Investment Fund (“FIF”), was amended to clarify that, if the liability of the shareholders is not limited to the amount they subscribed to, and, in addition to that, the investment policy allows for the possibility of exposure to venture capital, then the shareholder must attest, in the participation agreement, that they have knowledge of the risks arising from such unlimited liability.

CVM Resolution 181 also amended the second paragraph of article 24 of Normative Annex I. According to the change, the monthly information (balance sheets, portfolio composition, monthly profile, etc.), as described in items I and II of the same article will have to be made available for each sub-class separately, in addition to the daily information provided. Still within the scope of FIFs, CVM Resolution 181 clarified that it will be up to the manager to contract the custodian, under the terms of the newly included article No. 25 of the Resolution at issue.

Article 44 of Normative Annex I was also amended to elucidate that, in FIF commitment operations, the limits established for issuers must be observed in relation to the class counterpart. This must happen, not only in operations without settlement collateral by councils or clearing and settlement service providers (authorized to operate by the Central Bank of Brazil), but also in operations without a settlement collateral by an infrastructure operating agency of the financial market authorized by the CVM.

In addition to that, CVM Resolution 181 changed the sole paragraph of article 58, of Normative Annex I. According to it, the share class defined as “Multimarket” should have an investment policy that involves several risk factors, without focusing on any specific factor. Now, with a clearer wording, the article provides for the investments made by the “Multimarket” class. The following are not subject to the concentration limits per issuer, as provided for in article 44 of Normative Annex I:

1. 1. shares and certificates of deposit of shares admitted to trading in an organized market;
  2. subscription warrants and receipts admitted to trading in an organized market;
  3. class quotas typified as “Shares”;
  4. the ETF shares;
  5. BDR-shares; and
  6. BDR-ETF shares.

However, this is only valid if it is clearly set forth in the bylaws and in the respective adhesion agreement (to be signed by the investor). Also, it must be accompanied by a warning that the portfolio may be exposed to the risk of concentration in assets of few issuers.

Also, Article 45 of Normative Annex I already provided that, cumulatively with the concentration limits per issuer, the quota class would also need to comply with certain concentration limits, pursuant to each financial asset modality. To this list, through CVM Resolution 181, the limit of up to 20% of net worth for receivables certificates was included, 5% of which corresponding to the limit for application in receivables certificates composed of non-standardized credit rights. In addition, methane credits, which have not yet been regulated and were not included in the definition of “financial assets”, in Article 2 of Normative Annex I, were omitted from Article 45 of Normative Annex I.

As for the maximum limits of gross margin use, in terms of article 73 of Normative Annex I, CVM Resolution 181 included new wording about the quota classes defined as “Multimarket”. In the specific case of this quota class involving long and short positions of assets and derivatives of the variable income market (whose expected result comes from the difference between the positions), they will no longer need to observe the gross margin limit of 70% of the net worth.

Normative Annex II – FIDC

Article 30 of the Normative Annex II (“Normative Annex II“) of CVM Resolution 175, which covers Credit Rights Investment Funds (“FIDC“) provides for the service providers that the administrator should contract for the fund, in addition to those listed in the general part of CVM Resolution 175. Formerly, according to item I, the administrator should contract the custody service, if applicable, and the custodian could not be a related party to the administrator or the specialized consultancy. However, CVM Resolution 181 amended this subsection, and removed this generic prohibition. Instead, it clarified that:

- - only in cases where the investment policy allows for the acquisition of credit rights arising from or transferred by the administrator, manager, specialized consultancy and its related parties, then, the custodian contracted, under Article 30, cannot be a party related to the administrator or specialized consultancy; and
  - this requirement does not apply to the quota class intended exclusively for professional investors.

To the Article 32 of Normative Annex II, about the service providers that the administrator may contract on behalf of the fund, paragraphs 2, 3 and 4 were added, which previously had been within the scope of the contracting responsibility of the trustee, under Article 30, mentioned above. With such change, the credit rights transferor may be contracted by the administrator, on behalf of the fund, as a recovery agent for the claims due and in default. And, in the class intended exclusively for a professional investor who does not have their quotas allowed for trading, the originator and the credit rights transferor may be contracted by the administrator to carry out the custody of documents relating to the credit rights, provided that the requirements listed in items I through VI are met.

In addition to the changes mentioned above, CVM Resolution 181 amended the time frame for auditing the financial statements of the debtor or co-obligator with considerable concentration within the fund, so that more recent information is considered regarding the moment when such debtor enters the fund’s portfolio. Thus, Article 45 of Normative Annex II (which provides that the application of resources in credit rights and other liability or co-obligation assets of the same debtor is limited to 20% of the net worth of the quota class), allows for the increase in this limit regarding classes for qualified investors, when the debtor or co-obligator:

- - is registered as a publicly traded company;
  - is a financial institution or equivalent; or
  - is an entity that has prepared its financial statements for the fiscal year immediately preceding the date of acquisition of the credit right drawn up in accordance with the provisions of Law 6,404 of 1976; and with the regulations published by the CVM (provided that audited by an independent auditor and registered with the CVM).

Formerly, the requirement was for financial statements related to the tax year immediately prior to the date of constitution of the respective quota class.

Effective Date of the Regulation:

Article 140 of the general part of CVM Resolution 175 was changed to establish that the regulation will enter into force only on October 02, 2023, and no longer on April 03, 2023. Without detriment, paragraphs 1 and 4 of that Article were also amended to provide: (i) that Article 48, paragraph 2, item X, of the General Part of CVM Resolution 175 (which refers to the establishment of the maximum rate for distribution, under the Regulation), and (ii) that Article 99 of CVM Resolution 175 (which refers to remuneration agreements based on the rate of administration, performance or management) will only enter into force as of April 01, 2024.

Regarding the time limits for the adaptation of funds already constituted, Article 134 of CVM Resolution 175 was amended to postpone the adaptation term for FIDC under CVM Resolution 175 and its Normative Annex II, to April 01, 2024, deadline formerly set for December 31, 2023. Further investment funds, other than the FIDCs, still must adapt to the new regulation until December 31, 2024, as originally proposed.

This postponement provides an extended schedule for market agents to finalize the operational procedures necessary to comply with CVM Resolution 175, in line with the feedback received by the CVM from the market.

For more information, access the full version of CVM Resolution 181.

The full article prepared by Demarest Advogados about CVM Resolution 175, in its originally released version, can be accessed here.

The full article prepared by Demarest Advogados about the event held by ANBIMA on CVM Resolution 175 can be accessed here.

Investment Product Distribution Code Update – ANBIMA

On March 09, 2023, the Brazilian Financial and Capital Markets Association (“ANBIMA”) updated its Investment Products Distribution Code (“Code”).

This Code self-regulates the distribution of investment products and establishes principles, rules and procedures regarding its activities, with the aim of fostering the maintenance of ethical standards, procedure standardization and fair competition.

The following participating institutions are subject to the Code, such as:

1. 1. multi-purpose banks;
  2. commercial banks;
  3. investment banks;
  4. development banks;
  5. brokerage firms and securities distributors; and
  6. participating institutions authorized by CVM to distribute their own investment products only (such as third-party resource administrators and fiduciary administrators in the distribution activity of investment products).

It is important to highlight that the entities included in item (vi) are not required to formally adhere to the Code, without detriment to compliance with the provisions of the Code, as applicable. This is a concession made by ANBIMA to the entities under item (iv), although resource administrators and trustees must still formally adhere to the Third-Party Resource Administration Code and follow its specific rules.

Institutions can request the exemption from any procedure and/or requirement laid down in the Code by submitting a request to the regulatory and best practices council, in accordance with ANBIMA’s rules and procedures.

Next, we highlight the main changes brought by the new Code.

Suitability

The new Code introduces new suitability regulations. According to the new provisions, participating institutions, in the exercise of the distribution of investment products, are responsible for their clients’ suitability and cannot recommend investment products, neither conduct operations or provide services without checking their clients’ suitability. In addition to that, such entities must implement and maintain a written document with suitability rules and procedures, which should contain, among other topics:

1. 1. the mechanism for collecting information from the client for profiling;
  2. the criteria used for classifying the client’s profile; and
  3. the criteria used for classifying each investment product.

Also, participating institutions must evaluate and classify their clients under, at least, three profile categories, as follows:

Profile 1	Client declares that they have low risk tolerance, low investment knowledge and that they prioritize investments in liquidity investment products.
Profile 2	Client declares medium risk tolerance and seeks to preserve its capital in the long term, willing to allocate a portion of its resources for investments that pose a higher risk.
Profile 3	Customer declares risk tolerance and accepts potential losses in exchange for higher returns.

To classify their products, participating institutions should consider, at least:

1. 1. the risks associated with the investment product and its underlying assets;
  2. the profile of issuers and service providers associated with the investment product;
  3. the existence of collaterals; and
  4. the grace periods.

All investment products distributed by the participating institutions must be classified based on a single continuous risk scale methodology, with a score of 0.5 to 5 as parameter. Such methodology should be written and consider credit risk, as well as market and liquidity. The 0.5 score corresponds to lower-risk investments, while five represents high-risk investments.

Intermediation abroad

As the Code is updated, institutions should follow specific rules for offering intermediation of investment products abroad.

Participating institutions may offer intermediation services abroad to clients who live in Brazil through foreign intermediary institutions, in accordance with the terms of the contract executed between those institutions. To this end, these institutions should:

1. 1. ensure that the foreign institution is authorized for intermediation in its country of origin;
  2. ensure that the foreign institution contracted does provide services, exclusively in recognized markets, in accordance with the applicable CVM regulation; and
  3. to conduct due diligence in the foreign institution by requiring it to respond at least to the ANBIMA’s due diligence questionnaire for the provision of intermediation services abroad.

Without detriment to the provisions of the Code, foreign intermediation for clients who live in Brazil is also subject to the rules of the head office jurisdiction of the respective foreign intermediary agent.

Data Privacy Protection

The Code proposes that participating institutions must implement and maintain, in a written document, the rules and procedures concerning clients’ personal data to which they have access. The document should describe, at least:

1. 1. how the institutions have access to privacy and personal data control;
  2. the criteria adopted for protecting the confidentiality of information assets; and
  3. the rules applicable to employees for identity management as well as access to the information and personal data assets.

Next steps

The Code will enter into force on May 08, 2023, except for the chapters and annexes on suitability, which will take effect as of September 05, 2023.

For more information, please, access the full text on the new Distribution Code.

The ANBIMA regulations for identifying multimarket funds, FIDCs, ETFs and sustainable FICs will be subject to public hearing

The current ANBIMA rules about sustainable funds, specifically applicable to equity and fixed-income funds, state that financial institutions can describe funds, that have sustainable investment as primary goal, with the suffix IS (that is, “Sustainable Investment”). Moreover, funds that adopt ESG criteria may be recognized as part of a broad investment strategy, for having different objectives and considering ESG factors. In this case, the IS suffix is not allowed to be used. Instead, the following sentence should be added: “this fund integrates ESG matters into its management” in its sales materials.

With CVM Resolution 175, all investment funds may, in theory, adopt certain ESG classifications. CVM Resolution 175 provides that funds of any category (under the General Part of this regulation) with references to sustainable finance aspects as well as “ESG”, “ASG”, and similar allusions, must establish:

1. 1. what environmental, social, or governance benefits are expected and how investment policy seeks to implement them;
  2. the methodologies, principles or guidelines followed to qualify the fund or class in this way;
  3. the body responsible for certifying or issuing qualified opinion, if any, in relation to environmental, green, social, sustainable and/or related aspects;
  4. specification on the form, content and frequency of reporting on ESG/ASG results achieved by the investment policy of the fund or class, in a certain period, as well as the reporting officer.

Thus, the current ANBIMA regulation is, to some extent, incompatible with the broader structure published by the CVM with the new regulatory framework for investment funds. Considering this and to expand the scope of its current regulation, ANBIMA opened, on March 07, 2023, a public hearing aimed at expanding its regulations related to the description of funds for sustainable purposes or integrating ESG aspects. The rules are already in force for stock and fixed-income funds since January 2022, and will be extended to multimarket funds, credit rights investment funds, quota funds (that invest in the local or foreign market), as well as index funds.

1. 1. The public hearing brings in a few additional points aimed at, in addition to extending the regulation to other types of funds, increasing transparency for investors, such as: Information should be provided to investors about processes and strategies in case of non-compliance with its ESG objective/purpose;
  2. the link to access the ESG methodology should be included in the regulation; and
  3. if the fund invests in quotas (in the local market or abroad), it will be necessary to include information demonstrating that the funds invested are identified and/or classified with ESG characteristics, in its material.

For more information, access the ANBIMA release.

The CVM provides instructions on the characterization of receivables and fixed-income tokens as securities

The CVM’s SSE published, on April 04, 2023, CVM/SSE Circular Letter 4/2023, which provides instructions for service providers involved in the characterization of receivables or fixed-income tokens (“TR”) as securities.

The document also clarifies certain public offerings for the distribution of TRs that can be made under the regime provided for in CVM Resolution 88.

The technical area of CVM detected problems as well as TR public offerings that bore characteristics of securities, non-compliant with the standards applicable to the capital market.

Use of CVM Resolution 88 for the performance of TR offerings

According to SSE, TR offerings of up to BRL 15 million can be made compatible with the regulatory model of receivables certificates or other securities, as provided for in Law 14,430, also on crowdfunding offerings, and they may be issued by securitization companies that are not registered with the CVM and carried out through platforms registered under CVM Resolution 88 (provided that the same requirements of both the Law and the Resolution, as mentioned above, are duly met).

According to Luis Lobianco, CVM Securitization Supervision Manager (“GSEC-2”), securities issued by closed-capital securitization companies can be “tokenized and offered via crowdfunding platforms”.

Information Transparency

The technical area points out that, according to CVM Opinion 40, the use of blockchain technology is recommended for securities issuers, as well as the dissemination of specific information about tokenized assets, in a language that is appropriate for the public to understand.

For more information, please access CVM/SSE Circular Letter 4/2023.

Chairman of CVM hopes to launch platform to facilitate assets custody transfers between brokerage firms

On March 02, 2023, during an event on digital economy in São Paulo, the CVM’s chairman, João Nascimento, detailed the third phase of finance decentralization in the financial market, which he called “Open Capital Market”.

On June 23, 2022, the CVM published its Regulatory Impact Analysis study, concerning the regulatory criteria for investment transfers between brokerage firms. The initiative was carried out by the CVM’s Economy and Risk Management Analysis Consultancy, aiming to assess the effectiveness of custody transfers of assets and the need for regulatory changes to this service of great importance to investors, as published in our July 2022 Newsletter.

The goal of the “Open Capital Market” will be, in Nascimento’s words, to foster the “custody transfers of funds.”

This new option serves as an alternative for investors to be able to transfer their investments from one broker to another. The CVM’s chairman concluded: “today, if for some reason an individual wants to take investment to another company, they must redeem, pay taxes and then invest the remainder in the new broker”.

For more information, please access CVM’s release on the Regulatory Impact Analysis as well as CNN’s article on Nascimento’s statement.

CVM Circular Letter introduces new document delivery format to Fundos.NET system

On March 17, 2023, the CVM’s SSE published CVM/SSE Circular Letter 3/2023 (“Circular Letter”), aimed at informing the Board of Real Estate Investment Funds (“FII”) about the launch of a new document submission format through Fundos.NET system.

The Circular Letter under discussion brings in the following news:

1. 1. CVM Instruction No. 516/2011, in Article 23, paragraph 5, provides for the need for submission of audited financial statements, within 60 days of the date of the event, in the event of (a) incorporation, merger, spin-off; (b) termination of activities; or (c) replacement of fund administrator;
  2. Within this context, the Circular Letter clarifies that financial statements prepared for such purposes may become available through a new specific category found in the Fundos.NET system. A table was created to standardize the submission of information about Real Estate Receivables Certificates (“CRI”) and Agribusiness (“CRA”) invested by FIIS, to ensure the integrity of the data presented by all participants; and
  3. The new standardization will be available in Fundos.Net system for submission of the 2023 quarterly report.

Note: In the event of replacement of a fund administrator, the former administrator must draft and forward the audited financial statements to the new administrative institution, which, in turn, will be responsible for uploading the document to the FNET system.

For more information, please access CVM/SSE Circular Letter 3/2023.

CVM adjusts the rules aimed at issuers and offerings

On March 22, 2023, the CVM amended CVM Resolution 180, which provides for occasional changes to CVM Resolution 80 (on issuers of securities), as well as CVM Resolution 160 (public offering), both amended in 2022, to clarify certain regulatory commands, and enable the adoption of the automatic registration proceeding for certain subsequent offerings.

Amendments to CVM Resolution 80 – Securities issuers:

- - Change in the request flow of the issuer’s registration: as it is for bid registration orders, the technical area will give notice within 10 days of the filing, only in case the documentation submitted for the issuer’s registration is insufficient;
  - Revision of non-required fields of “Category B” companies: for the sake of clarity, the use of the “X” marker indicating non-enforceability in items and sub-items of the reference form (as Annex C to that resolution), without any change in the content of the requirements; and
  - Repeal of footnotes No. 90 and 91: it clarifies doubts that may have arisen during the completion of the reference form. Footnote No. 90 was about Human Resources information from issuers registered in Categories “A” and “B”. Footnote No. 91 encompassed diversity indicators regarding the issuers’ employees.

Amendments to CVM Resolution 160 – Public offerings for distribution of securities:

- - Clarification on the Frequent Issuer of Fixed-Income concept (“EFRF”): changes the wording of the EFRF status, so that there is no doubt as to the possibility of offerings benefiting from automatic proceedings in events where the single debtor of securities is classified as EFRF;
  - Application of automatic proceedings in subsequent offerings of closed-end fund quotas: clarifies that it is possible to apply automatic proceedings for offerings to professional and qualified investors, and introduces the possibility of adopting it to subsequent offerings intended for the general investor public, if it contains a prior analysis by the self-regulatory authority;
  - Prior analysis by self-regulatory entity: changes the wording of the 7^th paragraph of Article 27, in order to remedy the omission identified as to the cases in which the documents necessary in the registration requirement (which demand prior analysis by a regulatory entity, as well as possible new hypotheses of registration applications to be analyzed by a self-regulatory entity) would be applicable. The new wording does not expressly describe all the hypotheses of the Resolution in which there may be prior analysis by the self-regulatory entity. In addition to that, it allows for the expression of the self-regulator on the absence of impediment or conditions for the acceptance of registration to be submitted until the effective registration of the offer, by the CVM, and not as of the moment of the registration application;
  - Change in offer registration request flow: optimizes the registration request analysis routine, so that the technical area will contact the applicant only in cases where the documentation submitted is inadequate, in line with other regulations amended by the CVM on registration requests. The suitability of the registration documentation can be assumed after a 10-day period, thus avoiding unnecessary confirmation actions.

For more information, please access  CVM Resolution 80, CVM Resolution 160, our Open Companies Newsletter and CVM Resolution 180.

CVM provides guidance on requests for registration of public offering coordinators

On March 24, 2023, CVM Superintendence of Securities Registration (“SRE“) published the CVM/SRE Circular Letter 4/2023 (“Circular Letter”). It aimed at providing general guidelines on procedures to be followed by intermediary institutions as to the registration requirements for public offering coordinators for the distribution of securities.

As per the amendment to CVM Resolution 161 (“CVM Resolution 161”), of July 13, 2022, the registered institutions are authorized to act exclusively as public offering coordinators in the distribution of securities, in observance to the proceedings defined in CVM Resolution 160. This authorization does not allow for the regulated company to function as an intermediary in any other type of distribution of securities, whether in a primary or secondary form, be it in the stock exchange, commodity or future exchange markets, neither organized or non-organized over-the-counter exchange trading markets.

The Circular Letter also complements topics in the CVM/SRE Circular Letter 2/2022, and introduces new subjects, such as:  

- - Alert on upcoming closing date of Article 23, CVM Resolution 161: Coordinators who have already carried out at least one public offering for the distribution of securities within 24 months prior to the publication of CVM Resolution 161 (July 14, 2022, according to the Official Federal Gazette), are authorized to conduct new public offerings for the distribution of securities under the specific regulations until they complete the registration process. However, such condition is only applicable provided that the coordinator’s registration application is submitted within 180 days after entry into force of CVM Resolution 161 (January 02, 2023).
  - Information about the registration application: The registration application for public offering coordinators must be forwarded to SRE, and registration requests for public offering coordinators should be submitted through the ANBIMA Market Supervisory System (“SSM”), at https://ssm.anbima.com.br.
  - Access to the system by coordinators: The Coordinators System will also be the means used to request data changes or registration cancellations, in accordance with articles 12 and 18 of CVM Resolution 161. 
  - Restrictions on the accumulation of roles by responsible directors: Among the activities that cannot be accumulated by the director in charge of intermediation activities on public offerings are also those of (a) distribution, (b) treasury and (c) proprietary or third-party operation tables.
  - Restrictions to contracting independent investment agents/advisors: The registration as securities coordinator for public offerings of non-financial institutions, pursuant to Article 3, II, of CVM Resolution 161, does not allow, in any event, for contracting Investment Advisors (“AI”) by such institutions. However, there is no impediment if AIs wish to act in public offerings of securities that are coordinated by public offering coordinators other than financial institutions, if they are contracted by financial institutions participating in the distribution consortium.