Brazil: CVM Modifies Rules Regulating Investment Funds

Last Updated: 4 February 2015
Article by Carlos Lobo, Julio Dubeux and Alan Parker

On December 17, 2014, the Brazilian Securities and Exchange Commission ("CVM") enacted two important new Rules in connection with investment funds: CVM Rule No. 555/14 ("ICVM 555") and CVM Rule No. 554/14 ("ICVM 554").

ICVM 555

The ICVM 555 will replace CVM Rule No. 409/04, still in effect, which, for more than 10 years, has governed the incorporation, administration, functioning and disclosure of information related to Brazilian investment funds.

The ICVM 555 was enacted with the purpose of modernizing the Brazilian investment funds industry, responding to long time demands from the market, which actively participated in CVM's public hearing process prior to the enactment of the new Rule.

The new Rule also has the purpose of reducing the costs of the funds, to encourage market competition and to promote more transparency and efficiency in the disclosure of periodic and eventual information about the funds, among others.

We highlight the following major modifications to be implemented by the ICVM 555:

  1. The electronic form will be used as the main form of communication and disclosure of information by the funds to their investors, provided that such method is expressly provided for in the By-Laws of the investment funds;
  2. The rules that authorize the investment funds to invest abroad will become more flexible, including with respect to "retail" funds; for this type of fund, the investments in assets located outside of Brazil may correspond to up to 20% of their net worth, against the current threshold of 10%; on the other hand, the investment funds addressed to professional investors, qualified investors (provided that certain requirements are complied with) and the "Fixed Income – Foreign Bonds" (Renda Fixa – Dívida Externa) funds, may invest up to 100% of their net worth in assets located abroad;
  3. The adoption of "rebate fees" within investment funds which invest in quotas of other investment funds (FICs), as currently permitted under the rules still in effect, will be prohibited; the purpose of this measure is to avoid advantages that may potentially negatively affect the independence of the investment decision of the funds; however, the new rule allows exceptions in the following cases: (i) FICs that invest more than 95% of their net worth in one single investment fund; and (ii) investment funds addressed exclusively to professional investors, provided that such investors sign the "term of acknowledgment" detailed in the new regulation;
  4. The existing types of investment funds under the regulation in effect will be reclassified into only 4 types of investment funds, to wit: (i) Fixed Income (Renda Fixa); (ii) Stocks (Ações); (iii) Multimarket (Multimercado); and (iv) Foreign Exchange (Cambial); the new Rule also provides for the creation of the "Simple Fund", addressed to investors that desire low risk investments with reduced costs; the "Simple Fund" has the purpose of attracting new investors to the investment funds industry, and it will have at least 95% of its net worth invested in public bonds, fixed income bonds issued by financial institutions with rating at least equivalent to a sovereign rating, or buyback transactions based on such bonds;
  5. The investment funds must specify the applicable rules in case the administrator retains more than one investment manager; in this case, the services agreement with each manager must provide for: (i) joint liability between the two investment managers in case of joint management; (ii) authorization to issue orders for the custodian agent of the fund, but limited to the specific market operated by each investment manager; and (iii) authorization for the administrator to act as arbitrator in case of any conflict between the two investment managers; in addition, the By-Laws of the investment funds must expressly provide that the funds are managed by more than one investment manager and also detail the acting parameters of each of them; the "term of adhesion and acknowledgment of risk" to be signed by investors must explain the reasons for the adoption of the multiple investment management structure, as well as the associated risks; and
  6. Investors' meetings may be performed through electronic systems, according to specific rules that may be set out in the By-Laws of the each investment funds; the current regulation does not provide for any rules with respect to the performance of investors' meetings through electronic systems.

ICVM 554

The ICVM 554, on the other hand, modified the definition of qualified investors and created the definition of professional investors. As a result of the new definitions, the new Rule also modified several other Rules enacted by CVM which are in effect. Among others, it modified CVM Rule No. 539/13, which requires that market entities must verify the suitability of their products with the profile of their clients.

We highlight the following major modifications to be the implemented by ICVM 554:

  1. Investors with financial assets exceeding R$ 1 million will be deemed as qualified investors;
  2. Investors that are approved in technical exams or that have certifications approved by CVM will be deemed as qualified investors; and
  3. Investors with financial assets exceeding R$ 10 million will be deemed as professional investors.

It is worth pointing out that both Rules (ICVM 555 and ICVM 554) will be in full force and effect as of July 1, 2015. Investment funds existing on the effective date of the new Rules will have until January 4, 2016 to perform the necessary modifications to comply with the new Rules.

Note that the information above is highly summarized. Our Capital Markets team is at your disposal should you need further clarification or information.

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.

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