Brazil: The New CVM Instructions (Nos. 554 And 555)

In 2014, the Brazilian Securities and Exchange Commission ("CVM") presented to a public hearing a draft of an Instruction that proposes to change the definition of the category of "qualified investors" of CVM Instruction No. 409, dated of August 18th 2004 ("CVM Instruction 409″), which provides of rules for investment funds, related to CVM Instruction No. 539, dated of November 13th 2013 ("CVM Instruction 539″).

With this proposal, the definition of "qualified investor" of the article 109 of CVM Instruction 409 has suffered a rupture, yielding two concepts of investors: (i) the Professional Investors, defined as people who have investments greater than R$20,000,000.00 (twenty million reais) and that act directly in the financial market or that due to a great amount of equity, may hire service providers that are able to assist them in make decisions to diversify their investments; and (ii) qualified investors, represented by the people who have investments greater than R$1,000,000.00 (one million reais) and that requires a broader regulatory protection than the professional investors do.

According to the draft, in addition to the subjects quoted above, the following will be considered included in the definition of professional investors: (i) financial institutions and other institutions authorized to operate by the Central Bank of Brazil; (ii) the insurance and capitalization companies; (iii) the open and closed pension funds; (iv) investment funds; (vi) investment clubs, provided that their investment portfolio is managed by a securities portfolio manager authorized by CVM; (vii) independent investment agents, investment portfolio managers, analysts and securities consultants authorized by CVM, regarding their own investments; and (viii) non-resident investors.

The concept of qualified investors extends to the following cases, in addition to the ones quoted above: (i) professional investors; (ii) individuals who have been approved in technical qualification tests or who have certifications approved by the CVM as requirements for the registration of independent investment agents, investment portfolio managers, analysts and securities consultants, regarding their own investments, (iii) investment clubs, provided that the investment portfolio is managed by one or more shareholders, who are qualified investors.

Thus, besides the creation of the concept of professional investors and the alteration of the concept of qualified investors, the draft amends the equity criterion, no longer using the threshold amount of financial investments greater than R$300,000.00 (three hundred thousand reais) for its definition and taking into account estimates of (i) a minimum amount of equity that would allow these investors to have access to service providers to assist them in managing their resources and (ii) equity value that would make sense that an average investor devote significant portion of his time to the administration of his financial investments and thus begin to better understand the capital market.

The public hearing received many proposals for adjustments/amendments to the draft, most of them requesting the reduction of the values of investments that are considered to objectively qualify the professional investor and qualified investor, because the way they were proposed will greatly restrict access of such investors to operations and products in the capital market, discouraging new potential investments.

On December 17th 2014, CVM issued the Instructions No. 554 and No. 555, which will become effective from July 1st 2015, given that (i) the CVM Instruction No. 554 introduces the new concept of qualified investor and professional investor, which are now foreseen in CVM Instruction No. 539 and (ii) the CVM Instruction No. 555 deals with the incorporation, management, operation and information disclosure of investment funds and already considers in its provisions the new concepts of qualified investor and professional investor.

Noteworthy that CVM Instruction No. 554 brought changes to the draft of the instruction previously proposed in the public hearing, because it reduced the minimum amount of the investments necessary for a person to be considered a professional investor from R$20,000,000.00 (twenty million reais) to R$10,000,000.00 (ten million reais); the concept of qualified investor kept the threshold value of financial investments greater than R$1,000,000.00 (one million reais) as originally proposed. Additionally, it is necessary in both cases that investors confirm, in writing, their positions as professional investors or qualified investors, according to the attachment provided by Instruction No. 554.

Furthermore, CVM begins to recognize as qualified investors the individuals who were approved in technical qualification tests or who have certifications approved by CVM as requirements for the registration of independent investment agents, investment portfolio managers, analysts and securities consultants, regarding their own investments.

The special social welfare policies established by the Union, by the States and by the Federal District, or by the Municipalities will be considered as professional investors or qualified investors only if recognized as such, according to the specific regulation of the Ministry of Social Welfare.

As we may conclude, CVM (i) abolished the rule of minimum investment in certain regulated securities, which varied according to the type of securities offered (often focused on an investor with better understanding of the capital market) and also (ii) updated the minimum values of financial investments to be made by investors, in order to better tailor them to the current Brazilian economic reality, opting therefore to restrict the securities trading by qualified investors.

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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