New regulations on the portability of investments in securities

On August 26, 2024, after carrying out a Regulatory Impact Analysis (“AIR”) and public consultation (at the end of 2023), the Securities and Exchange Commission (“CVM”) published CVM Resolution No. 210 (“CVM Resolution 210”), which establishes regulations and procedures for the portability of investments in securities, and (II) CVM Resolution No. 209 (“CVM Resolution 209”), which provides for additional amendments to CVM Resolution 210.

CVM Resolutions 209 and 210 represent a significant advance in the regulation of securities portability in Brazil. They provide a more transparent, safe, and efficient environment, benefiting investors and financial institutions and contributing to the development of Brazil’s capital market.

• CVM Resolution 210

CVM Resolution 210 –, which establishes procedures, deadlines, regulations on conduct and transparency for the portability of securities – aims to simplify the transfer of securities between custodians, intermediaries, central depositors, registrars, and portfolio managers, without changing the ownership of assets.

Key topics:

• Portability of securities: It involves the transfer of securities as well as any rights and burdens attributed to them, led by an investor or their representative, carried out between custodian institutions, intermediaries, central depositories, registrars, and securities portfolio managers, without changing the corresponding ownership.
• Regulations on conduct: Institutions must operate in good faith, diligently, and loyally, and it is forbidden to privilege their own interests or the interests of persons linked to them to the detriment of the interests of investors.
• Digital interface: Custodians, intermediaries, and central depositors must provide a digital interface for submitting portability requests, accessible exclusively through a password, electronic signature, or a similar identification mechanism.
• Deadlines and procedures: The portability of securities must be carried out by observing the following maximum deadlines, counted from the date on which the custodian or original intermediary has received the portability request directly from the client – if any – or from the date on which they were notified regarding such request, as provided below:
  • Securities subject to centralized deposit (including real estate investment fund quotas “FII” and exchange-traded funds – ETF, which are listed on the stock exchange): up to two days
  • Positions arising from derivative contracts traded in an organized stock exchange market: up to two days
  • Derivative contracts traded or registered in an organized securities counter market, with a central guarantor counterparty: up to five days
  • Structured Operation Certificate (“COE”), Guaranteed Real Estate Letter (“LIG”), Financial Letter (“LF”) and other instruments issued by a financial institution, if publicly offered and distributed or under the custody of a third party other than the issuer: up to two days
  • Investment fund quotas: up to nine days, encompassing the deadlines assigned to each agent involved, considering (i) up to two days for the original intermediary, (ii) up to two days for the destination intermediary, and (iii) up to three days for the trustee. The deadline can be extended to up to five days if there is a change in the quota distribution method between categories on account and order, as well as direct distribution.
  • Other securities: up to five days
• Severe infringement: The following are considered to be severe infringements:
  • repeated non-compliance with the deadlines established for concluding portability;
  • action or omission preventing or unjustifiably delaying the processing of the portability request; and
  • infringements to the regulations provided for in Articles 5, 6, and 12 of CVM Resolution 210, regarding the provision of a digital interface for the portability request.

CVM Resolution 210 does not apply to portability requests involving:

• derivative contracts traded or registered in an organized counter market without a central counterparty;
• COE, LIG, and LF issued by financial institutions authorized to operate by the Central Bank of Brazil (“BC”), if distributed and held by the issuer;
• investment fund quotas, if portability implies a transfer between different classes or subclasses;
• change of central depository or registrar; and
• transfer of book-entry securities to the centralized deposit system.

The new regulation does not address the transfer of an investment fund quota between different classes or subclasses as an effect of portability. This is a significant topic under discussion in the market, especially regarding “mirror funds”, used in investment arrangements in which different distributors create their own exclusive vehicles (feeders) to enter into a strategy of another investment fund(s) (masters) by investing in these funds.

Thus, feeders operate as mirror funds of master(s), differentiating themselves, in essence, in terms of distributions and commercial conditions (such as fees, investment and redemption rules, target audience, among others) established in each feeder. Thus, within this context, portability would face operational differences that could be significant among numerous feeders – even if their assets and investment strategies are identical. The CVM has already commented on this topic, which will be subject to discussion in due course in order to evaluate the regulatory alternatives that can overcome the specific operational complexities involved in the potential portability of quotas between different classes and subclasses.

• CVM Resolution 209

CVM Resolution 209 amends several CVM resolutions published previously in order to update and align their provisions with the regulations involving the portability of securities, as follows:

1. CVM Resolution No. 21, of February 25, 2021, which regulates securities portfolio managers:
   • Art. 33, paragraph 3: Portfolio managers must keep a letter of awareness executed by the quota holder stating that these quotas are not subject to the current regulation on securities portability, either in the Terms of Adhesion and Acknowledgment of Risk or in a statement of their own.
   • Given that the quotas distributed by managers are not subject to the portability regulation, the CVM included this topic among the provisions on the regulation governing the potential distribution of investment fund quotas by fund managers. However, it is worth highlighting that the portability of quotas distributed directly by managers can occur, according to the CVM, if there is a direct distribution by the manager, and a “direct” or “on account and order” distribution by the destination intermediary indicated by the quota holder.
2. CVM Resolution No. 31, of May 19, 2021, which regulates the provision of centralized securities deposit services:
   • Art. 35: The transaction involving securities must be notified to the central depository through an instruction issued by custodians or through the investor’s direct request, in compliance with the current regulation on securities portability.
3. CVM Resolution No. 32, of May 19, 2021, which regulates the provision of securities custody services:
   • Art. 11, §§ 1st and 2nd: Transfers of securities without a change of ownership must be carried out to the custodians indicated by the investor, in compliance with the current regulation. Transfers involving a change of ownership must comply with reasonable procedures and be carried out within two business days.
   • § 3rd: Custodians must disclose the documents required for the transfer and inform the client of any non-compliance.
4. CVM Resolution No. 35, of May 26, 2021, which establishes regulations and procedures to be observed for intermediating transactions involving securities in regulated markets:
   • Art. 30-A: The portability of securities must comply with the current regulation on securities portability.
5. CVM Resolution No. 45, of August 31, 2021, which provides for the procedures relating to the CVM’s sanctioning role:
   • Annex A, Group IV: It frames severe violations of the regulation on securities portability as infringements.
6. CVM Resolution No. 175, of December 23, 2022, which establishes the new CVM regulatory framework for investment funds:
   • Art. 3rd, XXIX-A: Defines the term “portability” as the transfer of investment fund quotas without changing ownership.
   • Art. 39-A: Portability requests submitted by a quota holder or contracted distributor must be processed in compliance with the current regulation on securities portability.

CVM Resolutions 209 and 210 will enter into force on July 01, 2025.

The deadline was established considering the need for institutions to adjust their internal interfaces, systems, and procedures to the new requirements, thus avoiding the need to request future deadline extensions to the CVM.

Demarest’s Capital Markets team is available to provide any further clarifications on the topic that may be necessary.