By: Antonio Mazzucco and Luiz Gustavo Doles
The Securities and Exchange Commission (CVM) ended the year 2022 with the publication of the CVM Resolution No. 175 on December 23, establishing a new regulatory framework for investment funds in Brazil.
The Resolution brings several changes when compared to previous regulations, in addition to consolidating the rules on investment funds into a single regulation.
To this end, the standard is divided into parts: a general part applicable to all categories of investment funds and several supplements that deal with specific issues. In addition, there are two annexes to the Resolution that deal with financial investment funds (FIF) — the new name for funds regulated by CVM Instruction 555 — and credit rights investment funds (FIDC) — regulated by CVM Instruction 356.
The Resolution comes into effect on April 3, 2023, repealing, in addition to CVM Instruction 555, CVM Instructions 356 (FIDC), 444 (FIDC-NP), 472 (FII) and 578 (FIP).
The annexes dealing with other investment funds, such as real estate investment funds (FII) and equity investment funds (FIP), are expected to be published in the first half of 2023.
The new rules require that funds currently in force must adapt by December 31, 2024, with the exception of FIDC and FIDC-NP, which must adapt by December 31, 2023.
One of the main inspirations for the Resolution is the Economic Freedom Act (Law No. 13,874/2019). In addition, the Resolution formalizes practices already adopted by the market and aims to bring the local investment fund industry even closer to international standards with the aim of attracting foreign investors and increasing access for local investors.
There are several innovations brought about by the law, but the following are worth highlighting:
Possibility of creating classes with segregated assets and quota subclasses
The Resolution introduces an important innovation: the investment fund regulations may provide for the existence of different classes of shares, with different rights and obligations, and the administrator must create a segregated asset for each class of shares.
This measure segregates the risks associated with each share, since the shareholders of a class will only be responsible for the obligations relating to that class.
Furthermore, it is permitted to create subclasses of shares, allowing companies to create different conditions depending on the target audience, payment, amortization and redemption conditions, in addition to different administration or management fees.
Limitation of liability of shareholders
The LLE, in section I of its article 1,368-D, innovated in the sense of allowing the limitation of the liability of shareholders to the value of their shares, leaving the regulation of the matter to the CVM.
The entity fulfilled its duty, indicating how funds with negative equity should deal with such limitation of liability.
Insolvency of investment funds
The Resolution regulates the civil insolvency regime in situations where the net equity of a specific class of fund shares is negative.
In this case, the fund administrator dealing with this scenario must take several measures to preserve the fund's liquidity (including suspending share redemptions and disclosing relevant facts) and prepare a plan to resolve the negative net equity, together with the manager, which must be subject to deliberation by the shareholders.
Furthermore, the CVM may request a judicial declaration of insolvency of the class of shares, when it identifies a situation in which its negative net equity represents a risk to the efficient functioning of the securities market or to the integrity of the financial system.
Role of service providers
Managers have always played a central role in the development of investment fund activities in Brazil. However, it was only in Resolution 175 that managers and administrators began to be considered “essential service providers”, responsible for hiring other service providers.
A long-standing demand from the industry was also met with regard to the segregation of responsibilities between managers and administrators, which is no longer mandatory for all types of funds;
FINANCIAL INVESTMENT FUNDS – FIF
This is the new name for funds regulated by the former ICVM 555 which, depending on their investment policy, may be: Equity Investment Funds, Foreign Exchange Investment Funds, Multimarket Investment Funds or Fixed Income Investment Funds.
There was news regarding these funds since, inspired by Guidance Opinion number 40, the CVM allowed them to acquire crypto assets that represent the financial assets described in the standard.
Furthermore, we can highlight the following innovations:
Flexibility of investment rules for FIF
Making investments within the scope of Financial Investment Funds was flexible because:
- possibility of FIFs intended for investors in general to invest up to 100% of their assets abroad (previously limited to up to 20%) and crypto assets, provided that certain applicable requirements are met
- possibility of investing in “environmental assets”, very much in line with the international environmental agenda in relation to Brazil’s potential in the sector;
Leverage limit
The new rule provides for maximum exposure limits according to the type of FIF class:
- 20% of the fixed income class equity,
- 40% of the equity of the exchange classes or shares and
- 70% of the multimarket class assets, noting that such limits will not apply to classes intended for professional investors;
CREDIT RIGHTS INVESTMENT FUNDS – FIDCs
FIDCs are one of the main methods of discounting receivables in the market, instruments necessary for everyday Brazilian business.
We can highlight the following changes in these investment funds:
Redefining the roles of FIDC service providers
Managers began to concentrate obligations that were previously the responsibility of custodians: verifying that credit rights comply with the eligibility criteria set out in the Fund's regulations and verifying the collateral of credit rights in the portfolio, and may hire, under their responsibility, a third party to verify the collateral, including the registration entity, the custodian or specialized consultancy, provided that the contractor is not their related party.
redistribution of competences among service providers, granting more autonomy and responsibilities to the manager, and mandatory contracting of a service for registering credit rights that can be registered with a registration entity authorized to operate by the Central Bank of Brazil;
Receivables registration
The FIDC administrator is now required to contract a credit rights registration service with a registration entity authorized by the Central Bank of Brazil, noting that the registration entity cannot be a related party of the manager or specialized consultancy, and may debit these expenses directly from its share classes.
Distribution of FIDC to retail investors
With the aim of expanding access to FIDCs to the general population, the regulation made it possible for FIDC shares to be distributed to the general investing public, provided that certain requirements are met. This is an important change, as this type of fund was previously restricted to qualified investors.
Other relevant flexibilities
Federal court orders have been reclassified. Previously, they were considered “non-standardized,” and stricter regulations were applied to funds that held them. Now, federal court orders are classified as “standardized” and, therefore, FIDC shares that invest in this type of asset can, in light of the new rule, be distributed to the general public;
This new rule brought several changes to the investment fund scenario in Brazil, demanding attention from market participants.
Our office is available to advise market participants in this new phase of transition and adaptation.