On December 17, 2014, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 555 (CVM Instr. 555/2014) that governs the incorporation, management, operation and disclosure of information of investment funds (fundos de investimento), including restricted funds (those funds exclusively dedicated to qualified1 or professional investors2 and pension funds), and revokes CVM Instruction No. 409, of August 18, 2004 (CVM Instr. 409/2004), that formerly regulated investment funds.
The definitions of qualified and professional investors are contained in CVM Instruction No. 554 of December 17, 2014 (CVM Instr. 554/2014), which will come into full force and effect on July 1st, 2015.
According to CVM Instr. 555/2014 there are only four classes of investment funds: (i) Fixed Income Fund (Fundo de Renda Fixa); (ii) Equities Fund (Fundo de Renda Variável); (iii) Multimarket Fund (Fundo Multimercado); and (iv) Foreign Exchange Fund (Fundo Cambial3).
Three types of restricted funds are regulated by CVM Instr. 555/2014, as follows: (i) funds for qualified investors; (ii) funds for professional investors; and (iii) pension funds (fundos previdenciários). Pension funds will not be analyzed herein.
The restricted fund must be exclusively destined to a certain category of investor to be considered as a "qualified investor" or "professional investor", as the case may be, and the fund´s regulation must be explicit and require the exclusive participation of such investors as unit holders.
Restricted Funds for Qualified Investors
In funds for qualified investors unit holders who do not fit this requirement may stay in the fund, provided that such unit holders have joined the fund in accordance with the criteria previously in force to be admitted and remain as unit holders.
The employees or partners of institutions responsible for the administration or management of a fund for qualified investors, which are expressly authorized by the Director in charge of the institution before CVM, may be admitted as unit holders of such fund.
The fund intended solely to qualified investors, as long as foreseen in its regulation, may: (i) admit the use of financial assets in the payment and redemption of units, with the establishment of detailed and precise criteria for adoption of these procedures; (ii) waive, in the distribution of units of closed-end funds, the preparation of prospectus and publication of announcement of starting and closing of distribution; (iii) charge administration fee and performance fee4, as established in its regulation; (iv) establish deadlines for unit conversion and for redemption payments different from those provided for in CVM Instr. 555/2014; and (v) provide personal guarantee (fiança), aval, acceptance (aceite) or assume joint obligation (co-obrigação) of any form on behalf of the fund, regarding transactions directly or indirectly related to the fund's portfolio, which requires the agreement from unit holders representing at least two-thirds of the units issued by the fund.
Restricted Funds for Professional Investors
Similarly with what happens with the funds for qualified investors, in funds intended to professional investors, unit holders who do not fit this requirement may stay in the fund, provided that such unit holders have joined the fund in accordance with the criteria previously in force to be admitted and remain as unit holders.
The following persons may also be admitted as unit holders of such fund: (i) the employees or partners of institutions responsible for the administration or management of a fund for qualified investors which are expressly authorized by the Director in charge of the institution before CVM; and (ii) other investors related to the professional investors for family or corporate relationship, provided that at least 90% of the units of the fund are held by such investors.
As long as expressly contemplated in the fund´s regulation, a fund for professional investors is exempt from many requirements of CVM Instr. 555/2014, such as compliance with specific rules to calculate the performance fee and concentration and diversification limits, among others.
CVM Instr. 555/2014 contemplates the possibility of an investments fund not intended solely for qualified investors to invest up to 20% of its net worth in an investment fund intended solely to qualified investors or a fund of funds intended solely for qualified investors. Within this threshold (20%), up to 5% of the net assets of the fund can be invested in units of: (i) Non-Standardized Receivables Investment Funds (Fundos de Investimento em Direitos Creditórios Não-Padronizados – FIDC-NP) or fund of funds that invest in FIDC-NP; and (ii) units of investment funds, or funds of funds, intended solely for qualified investors.
The 20% limit is not applied, however, when the funds invest in: (i) funds classified as Fixed Income – Foreign Debt (Renda Fixa – Dívida Externa); (ii) funds intended solely to professional investors; and (iii) funds intended solely for qualified investors, provided that, among other requirements, the fund´s regulations established that at least 67% of the net worth is to be composed of offshore financial assets and has detailed information about the assets that the fund intends to acquire. In all these cases the fund is allowed to invest 100% of its net assets in offshore financial assets.
For the other funds intended solely for qualified investors not referred to above, the offshore investments are limited to 40%.
Investment funds are allowed to invest up to 20% of their net worth in offshore financial assets, i.e. assets located abroad (outside Brazil). These assets must comply with at least one of the following requirements: (i) be registered in the registration system, object of bookkeeping of assets, custody or central deposit, in all cases, by institutions authorized in their home countries and supervised by a recognized local authority; or (ii) having its existence diligently checked by the administrator or by the custodian of the fund, as defined in the fund´s regulation, provided that such assets are recorded or held in custody, in both cases by an entity duly authorized to carry out the activity of bookkeeping or custody by the regulator of a signatory of the Asunción Treaty (i.e. any Mercosur country) or of any other jurisdiction whenever supervised by a recognized local authority.
Offshore derivatives contracts are also permitted investments provided that the transactions meet at least one of the following conditions: (i) are recorded in registration systems, subject to proper bookkeeping, held in custody or registered in a clearing system, in all cases by duly authorized systems in their countries of origin supervised by a recognized local authority; (ii) are informed to the local authorities; (iii) are traded on exchanges, electronic platforms or settled through a central counterparty; or (iv) have, as counterparty, a financial institution or its affiliated entity that complying with Basel Accords is classified as low credit risk by the portfolio manager´s evaluation and it is supervised by a recognized local authority.
Furthermore, the fund that invests in funds or offshore investment vehicles must comply with the following conditions: (i) the administrator, directly or through the custodian of the fund, will have to make sure that the custodian or the register and transfer agent of the offshore investment vehicle has infrastructure, processes and adequate internal controls to perform the activities provided for in CVM Instr. 555/2014; and (ii) the portfolio manager must ensure that the investment fund or offshore investment vehicle complies with all the requirements expressly provided for in CVM Instr. 555/2014, including those when it has directly or indirectly influence on investment decisions of funds or other offshore investment vehicles.
The activities provided for in CVM Instr. 555/2014 are the following: (i) service of custody or bookkeeping of assets, as applicable; (ii) perform the activity in good faith, diligence and loyalty, holding practices and procedures to ensure that the interest of the investors prevails on the service provider´s own interests or those of related persons; (iii) perform the good guard and regular movement of assets held in custody or, in the case of bookkeepers, attest to the legitimacy and accuracy of the records and ownership of assets; and (iv) verify the existence, the good guard and the regular movement of assets that form the portfolio of the fund or offshore investment vehicle.
In order to comply with the requirements provided for in CVM Instr. 555/2014, the fund or offshore investment vehicle must: (i) be incorporated, regulated and supervised by a recognized local authority; (ii) have the value of the unit calculated for each redemption or investment and at least every 30 days; (iii) have an administrator, a manager, a custodian or a service provider that performs equivalent functions, trained, experienced, reputable and duly authorized to carry out their duties by CVM or by a recognized local authority; (iv) have custodian supervised by a recognized local authority; (v) have the financial statements audited by an independent audit firm; and (vi) have risk control policy and leverage limits compatible with the policy of the investor fund.
When the investor fund has directly or indirectly influence on investment decisions of funds or other offshore investment vehicles, the following additional conditions must be observed: (i) the manager must detail the assets that form the invested funds´ portfolios in the monthly statement of portfolio composition and diversification, on the same frequency and in conjunction with the disclosure of the positions held by their respective portfolios in financial assets traded in Brazil, under the terms of CVM Instr. 555/2014; (ii) the funds or other offshore investment vehicles can only trade with derivatives that meet the conditions specified above, in the paragraph which refers to the offshore derivatives contracts; and (iii) for control purposes of the leverage limits, the exposure of the local fund's portfolio will be consolidated with the fund´s or offshore investment vehicle´s portfolio, considering the value of margins required on secured transactions aggregated to the potential margin of derivative unsecured transactions. The calculation of the potential margin of derivative unsecured transactions must be performed by the administrator, either directly or through the manager, and cannot be compensated with the margins of secured transactions.
When the manager of the local fund does not have directly or indirectly influence on investment decisions of funds or other offshore investment vehicles, the calculation of the margin must consider the maximum possible exposure in accordance with the features of the invested fund.
The manager of the fund intended solely for professional investors is not subject to the above-mentioned requirements.
For the purposes of CVM Instr. 555/2014: (i) the financial assets traded in countries which are signatories of the Treaty of Asunción have the same treatment of those traded in the Brazilian market; (ii) the Brazilian Depositary Receipts (BDRs) classified as level I (nível I) are equivalent to the offshore financial assets5; and (iii) the units of Equities Funds classified as Shares – BDR Level I (Ações – BDR Nível I) are also equivalent to offshore financial assets6.
1 The following entities are considered qualified investors: (i) professional investors; (ii) individuals or legal entities that hold financial investments in an amount superior to R$ 1 million and that additionally attest in writing their qualified investor condition according to an own term, set forth in Annex 9-B to CVM Instruction No. 539, of November 13, 2013 (CVM Instr. 539/2013); (iii) individuals that have been approved in examinations of technical qualification or who have certifications approved by CVM as requirements for the registration of autonomous investment agents and securities´ portfolio managers, analysts and consultants, in relation to their own monies; and (iv) investment clubs, provided they have their portfolio managed by one or more unit holders, that must be qualified investors.
2 The following entities are considered professional investors: (i) financial institutions and other institutions authorized to operate by the Central Bank of Brazil (Banco Central do Brasil - Bacen); (ii) insurance companies and capitalization societies; (iii) private welfare opened or closed capital organizations; (iv) individuals or legal entities that hold financial investments in an amount superior to R$ 10 million and that additionally attest in writing their qualified investor condition according to an own term, set forth in Annex 9-A to CVM Instr. 539/2013; (v) investment funds; (vi) investment clubs, provided they have the portfolio managed by a securities´ portfolio administrator authorized by CVM; (vii) autonomous investment agents and securities´ portfolio administrators, analysts and consultants authorized by CVM in relation to their own monies; and (viii) non-resident investors.
3 CVM Instr. 555/2014 also authorizes the adoption of multiple sub classifications as follows: Simple (Simples), Indexed (Referenciado), Foreign Debt (Dívida Externa), Short Term (Curto Prazo), Long Term (Longo Prazo) and Offshore Investments (Investimento no Exterior).
4 Pursuant to paragraph 1 of article 86 of the CVM Instr. 555/2014, the collection of performance fee must meet the following criteria: (i) be linked to an index of verifiable reference, originated by independent source, compatible with the fund's investment policy and with securities that effectively compose the fee; (ii) be equal to or greater than 100% of the benchmark index; (iii) be charged for at least a half-yearly period; and (iv) be only charged after deducting all expenses, including the administration fee. However, item I of article 86 establishes that the funds intended solely to qualified investors are not required to comply with this provision, provided that this flexibility is contemplated in the fund´s regulation.
5 If the BDRs Level I are hold by Equities Fund named Ações – BDR Nível I they will be treated as financial assets traded in the Brazilian market.
6 The same comment of the previous footnote is also applicable herein.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.