Brazil: New Rules For Non-Resident Investors In The Brazilian Capital Market

Last Updated: 9 April 2015
Article by Walter Stuber

On March 27, 2015 the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 560 (CVM Instr. 560/2015), that updates the rules on registration, transactions and disclosure of information about non-resident investors in Brazil in accordance with the regulations approved by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) through CMN Resolution No. 4373, of September 29, 2014.

I. Registration

Previously to start any transaction in Brazil, a non-resident investor must be duly registered with CVM. This registration is made through a representative. Individual persons or legal entities, funds or other collective investment entities, with residence, head office or domicile abroad, may require registration as individual or collective investor.

According to Exhibit I to CVM Instr. 560/2015, the following information must be submitted to the Institutional Investor Relations Superintendence (Superintendência de Relações com Investidores Institucionais - SIN) about the non-resident investor: (i) name or corporate name; (ii) whether the investor is an individual or a legal entity; (iii) if the investor is an individual: (a) name of his/her mother; (b) sex; (c) date of birth; and (d) nationality; (iv) complete address; (v) electronic address (e-mail); (vi) country of tax domicile; (vii) indicate the nature of the investor's account: (a) own account's holder; (b) omnibus account's holder; or (c) omnibus account's participant, identifying the account; (viii) qualification; (ix) tax representative; (x) custodian; (xi) data of the contact person designated by the representative to give such information, containing his/her name, phone number and e-mail.

The investor qualification may be classified in any of the following categories: (i) central bank; (ii) government or governmental entity; (iii) sovereign fund or investment company controlled by sovereign fund; (iv) multilateral organism; (v) commercial bank, investment bank, savings and loan association, global custodian and similar institution regulated and supervised by a competent governmental authority; (vi) insurance company regulated and supervised by a competent governmental authority; (vii) company or entity which has as its goal to distribute the issuance of securities or act as an intermediary in the trading of securities, acting on its own, registered and regulated by an organ recognized by CVM; (viii) pension fund regulated and supervised by a competent governmental authority; (ix) non-profit institution regulated and supervised by a competent governmental authority; (x) any entity whose objective is the application of resources in the financial and capital markets, which has the participation solely of individuals and legal entities resident and domiciled abroad, provided that: (a) it is registered and regulated by an organ recognized by CVM; or (b) its portfolio is discretionary managed by a professional administrator registered and regulated by an entity recognized by CVM; (xi) fund or collective investment entity; (xii) entity constituted in the form of trust or other fiduciary vehicle; (xiii) company incorporated with bearer shares; (xiv) legal entity constituted abroad not framed in any of the previous categories; or (xv) individual resident abroad. Only the investor that is classified in categories (i) to (xii) herein can hold an omnibus account.

For the purposes of the provisions of items (vii) and (x) of the previous paragraph, "an organ recognized by CVM" shall meet at least one of the following requirements: (a) it must be located directly or indirectly in a jurisdiction that is not classified by the Financial Action Task Force (FATF) as non-cooperative, high-risk, or holds strategic deficiencies in combating money laundering prevention and terrorist financing and other related threats to the integrity of the international financial system; and (b) it undergoes to the supervision of a securities market regulator which has entered into with CVM a mutual cooperation agreement which will allow the exchange of financial information about investors, or it is a signatory of the multilateral memorandum of understanding of the International Organization of Securities Commissions (IOSCO).

As already mentioned, the non-resident investor can be registered as: (a) own account's holder – in this case the investor will only operate in its/his/her name; (b) omnibus account's holder – the investor can operate in the name of other non-resident investors admitted as participants of the same omnibus account; or (c) omnibus account´s participant. Own resources can be operated in an omnibus account opened in the non-resident investor´s name, provided that such investor is also registered as participant in this account.

The non-investor registry will be granted automatically by SIN, within one business day upon presentation of the information required by Exhibit 1 to CVM Instr. 560/2015.

II. Representation

The representative of the non-resident investor must be a financial institution or other entity duly authorized to operate by the Central Bank of Brazil (Banco Central do Brasil – Bacen). Such representative must exercise its activities with good faith, diligence and loyalty.

It is the duty of the representative: (i) to provide the information necessary for the registration of the non-resident investor with CVM; (ii) to keep updated the information about the non-resident investor which is required by Exhibit 1 to CVM Instr. 560/2015; (iii) to submit to CVM whenever requested the following documents: (a) contract of constitution of representative (contract of representation); and (b) custody services agreement entered into between the non-resident investor and a legal entity authorized by CVM to provide such services; (iv) to provide to CVM the requested information in respect of non-resident investors represented by it; (v) to communicate to SIN the extinction of the contract of representation. The information provided about the non-resident investor must be true, complete and consistent.

III. Reports

As of January 1st, 2016, the representative shall provide to CVM the following reports, indicating the modifications and consolidated applications of resources of the omnibus account participants and of the own account holders represented by it: (i) monthly report to be delivered up to ten business days after the close of each month; and (ii) half-yearly report to be delivered until 15 business days after the end of each semester.

The monthly report must contain the following information1: (i) the data of the participant's omnibus account or holder's own account, indicating: (a) name and code; and (b) reference date of the document; (ii) movement of resources, specifying: (a) the value of resource inputs and outputs that have occurred during the period; and (b) the movements of resources in the period, which must be segregated among: (1) resources transferred between investment modes; (2) resources received from other representative; and (3) resources transferred to another representative; (iii) resources application stating: (a) type of application classified by category; (b) market value (fair value Level 1) on the last business day of the month of reference or, in its absence, acquisition cost2; and (c) net notional value on the last business day of the month of reference of the applications classified in categories 14 to 23 in the next paragraph; and (iv) net worth.

According to the type, the application is classified into one of the following categories: (1) stocks and equity securities, comprising: (a) shares and securities certificates or depositary receipts; (b) shares and other securities transferred on loan; and (c) other variable income applications; (2) fixed-income debt instruments - federal public securities; (3) fixed-income debt instruments - state or municipal public securities; (4) fixed-income debt instruments issued by a financial institution or by any entity authorized to operate by Bacen; (5) fixed-income debt instruments issued by a non-financial institution; (6) units of investment fund – stock portfolio; (7) units of investment fund – fixed-income securities portfolio; (8) units of real estate investment fund; (9) units of private equity investment fund; (10) units of credit rights investment fund; (11) units of other portfolio investment fund; (12) gold; (13) availability in cash; (14) interest rate futures contracts; (15) currency or exchange coupon futures contracts; (16) foreign exchange swap contracts with periodic adjustment; (17) stock index futures contracts; (18) other futures contracts; (19) interest rate options; (20) currency options; (21) stock index options; (22) other options; (23) other derivative instruments; and (24) other applications.

The half-yearly report must contain the following information3: (i) the data of the participant's omnibus account or holder's own account, indicating: (a) name and code; and (b) reference date of the document; (ii) movement of resources, specifying: (a) the value of resource inputs and outputs that have occurred during the period; and (b) the movements of resources in the period, which must be segregated between: (1) resources transferred between investment modes; and (2) resources received from other representatives and resources transferred to another representatives; (iii) resources application stating, with respect to the invested securities or financial assets: (a) type; (b) species; (c) code; (d) initial date of the application; and (e) market value (fair value Level 1) on the last business day of the month of reference or, in its absence, acquisition cost; and (iv) net worth.

The central depositories, custodians, administrators of organized market entities, register entities, settlement systems, book-entry transfer agents and managers of investment funds will have to provide the representative with the necessary information for the preparation of the reports referred to above in relation to the securities and financial assets owned by the non-resident investor that it represents. This obligation, however, does not exempt the representative from delivering the reports on the terms set forth by CVM Instr. 560/2015.

IV. Custodian

The custodian must be a legal entity duly authorized by CVM to provide the custody services related to financial assets and securities.

The non-resident investor may hold or participate of one or more accounts. If the non-resident investor decides to maintain financial assets and securities in separate custody accounts or in more than one custodian, the custody services agreement must contain a clause regulating the operational procedures for movement between these accounts, including the information to be provided to the account´s holder and the representatives.

The revocation or cancellation of the custody services agreement without indication by the non-resident investor of a new custodian must be communicated immediately by the custodian to SIN.

The registry number assigned by CVM must be included in all transactions carried out on behalf of every investor who/which is an omnibus account's participant or an own account's holder, to allow identification of the final principals in such transactions and to ensure segregation between the orders of the account's holder and each of the participant's account.

Whenever the non-resident investor acts through a foreign institution, the custody services agreement can be signed by the intermediate foreign institution on behalf of the non-resident investor. In this event the custodian must ensure that the non-resident investor is duly registered in the foreign intermediary institution in the form of the applicable legislation of the investor's country of origin.

V. Transactions outside of the Organized Market

The acquisition or disposal of securities outside of the organized market is allowed in the following events: (i) subscription; (ii) bonus; (iii) conversion of debentures or other securities into shares; (iv) redemption or repayment in cases provided for by law; (v) payment of dividends on securities; (vi) subscription, redemption or rescue of units of investment funds regulated by CVM; (vii) assignment or transfer of units of open-end investment funds in the cases provided for in the specific regulation issued by CVM; (viii) free or onerous assignment of earnings due and not yet paid to the non-resident investor with the purpose of terminating the custody account; (ix) free transfer of subscription receipts, as assignor/transferor or assignee/transferee; (x) legal transaction at court and judicial, arbitration or administrative decision; (xi) sale of securities for which the authorization for trading on organized market has been cancelled or suspended; (xii) sale of shares due to the exercise of a right or obligation set forth in a shareholders ' agreement that has been signed and filed with the CVM for more than six months; (xiii) public offer of securities distribution; (xiv) public offer for the acquisition of shares (oferta pública de aquisição de ações – OPA), in cases where CVM authorizes that the offer be made by a different procedure than the auction in the organized market, pursuant to specific rules; and (xv) put option for the remaining shareholders in OPA.

In addition to those cases listed in the preceding paragraph, upon reasoned prior request CVM may authorize that the external resources sent to Brazil be allocated in transactions of acquisition or disposal of securities outside of the organized market in other hypotheses, in accordance with the specific regulations issued by CMN.

The subscription of securities outside the organized market is permitted regardless of whether or not arising from the exercise of first refusal provided for in article 171 of Law No. 6404 of December 15, 1976 (the Brazilian Corporation Law - BCL)4.

Except in the event of a court order, the institution authorized to provide bookkeeping services must only register the sale of securities carried out on behalf of the non-resident investor with the consent of the representative, who is responsible for assessing compliance of the transaction with the applicable rules of CVM Instr. 560/2015.

VI. Transfer between Non-Resident Investors

Position transfers between non-resident investors from abroad are accepted, provided they derive from: (i) consolidation (fusão), spin-off (cisão), merger (incorporação), incorporation of shares (incorporação de ações) and mortis causa succession (sucessão causa mortis); and (ii) other corporate transactions that do not result in modification of the final holders of the assets and change in the total of financial assets and securities belonging directly or indirectly to each of the investors involved in the operation.

Upon reasoned prior request CVM may authorize position transfers between non-resident investors from abroad in different hypothesis of those listed in the precedent paragraph, with due observance of the other specific rules about this matter.

Any such position transfer must be informed to CVM by the representative of the investor whose position is transferred, accompanied by the evidentiary documentation, along with the monthly report.

VII. Additional Considerations

The representative shall keep for a period of at least five years, or for a longer period is so determined by CVM, all documents and information required by CVM Instr. 560/2015. These documents and information can be stored in physical or electronic means. The replacement of documents by their scanned images is expressly permitted.

The non-compliance with the deadlines provided for in CVM Instr. 560/2015 for the submission of the monthly and half-yearly reports would subject the representative to pay a daily fine of R$ 500.00.

The information provided for in Exhibit 1 will be required in the registry applications requested submitted as from January 1, 2016. While Exhibit 1 is not required, the representative may instruct the registry application for non-resident investor with the information currently contained in the electronic system provided by the CVM for registration of non-resident investor.

The representatives must update the registration information for all the represented non-resident investors, as per the content set out in Exhibit 1, until January 1, 2016.

The monthly and half-yearly reports will only have to be delivered by the representative to CVM at the beginning of next year. During this interim period, the representative shall forward the following information according to the content currently set out in the electronic system provided by CVM for information delivery:

  1. monthly consolidated report by holder - up to five business days after the end of each month;
  2. monthly consolidated report for representative - up to five business days after the end of each month;
  3. half-yearly report for passenger – up to the 15th day of the month following the end of the semester; and
  4. report on the position transfers between non-resident investors, whenever any such transfer occurs.
  5. This information is contemplated in Exhibit 14-B to CVM Instr. 560/2015.

1 This information is contemplated in Exhibit 14-A to CVM Instr. 560/2015.

2 The applications measured at market value (fair value Level 1) must be segregated of those measured at acquisition cost.

3 This information is contemplated in Exhibit 14-B to CVM Instr. 560/2015.

4 Article 171 of BCL regulates the right of first refusal as follows:

"Article 171. The shareholders shall have a right of first refusal in the subscription of an increase in capital in proportion to the number of shares they own.

Paragraph 1. The following rules shall apply where the capital is divided into different types or classes of shares and the increase is made by the issue of more than one type or class:

(a) in the case of an increase of the number of shares of all existing types and classes in the same proportion, each shareholder shall have a right of first refusal to shares of the same type or class as those he owns;

(b) if the shares issued are of existing types or classes but the respective proportions in the capital are altered, the right of first refusal shall be offered in respect of the shares to the holders of the same types or classes, and the offer may only be extended to the holders of another type or class if the former shares are insufficient to assure the shareholders the same proportion in the increase as they had in the capital before the increase;

(c) should shares of a new type or class be issued, each shareholder shall have a right of first refusal to all types and classes of shares created by the increase, in proportion to the number of shares he owns. Paragraph 2. If an increase is made by the capitalization of credits or a subscription in property, the shareholders are assured to have the right of first refusal and, as the case may be, any sum paid by them shall be delivered to the owner of the credit to be capitalized or of the property to be incorporated.

Paragraph 3. The shareholders shall have a right of first refusal to subscribe to issues of convertible debentures, subscription bonuses and convertible founders' shares which are to be sold by the corporation; but the conversion of such securities into shares or the granting or exercising of an option to purchase shares, shall not give rise to any right of first refusal.

Paragraph 4. The bylaws or a general meeting shall establish a period of not less than thirty days within which a right of first refusal may be exercised.

Paragraph 5. Where shares are held on usufruct or trust, if the right of first refusal has not been exercised by the shareholder ten days prior to the end of the period, it may be exercised by the usufruct beneficiary or trustee. Paragraph 6. A shareholder may assign his right of first refusal.

Paragraph 7. In a publicly held corporation, whichever body which is responsible for the decision to issue securities by private subscription shall also decide what course of action should be followed if any of the securities are not underwritten, and may:

(a) direct their sale on a stock exchange, for the benefit of the corporation; or

(b) if the bulletin or subscription list so indicates, allot them, in proportion to the amounts underwritten among the shareholders who have requested a reservation of any remainder in the subscription offer or list; any balance shall be sold on a stock exchange, as provided for in the preceding item.

Paragraph 8. In a private corporation, the allotment shall be as provided in paragraph 7 (b) and any balance, may be underwritten by third parties in accordance with the criteria established by the general meeting or by the administrative bodies."

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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Walter Stuber
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