Brazil: Public Offering Distribution Of Brazilian Structured Operations Certificates (COE)

Last Updated: 4 November 2015
Article by Walter Stuber

On October 14, 2015, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 569 (ICVM 569/2015), dealing with the distribution of the Structured Operations Certificates (Certificados de Operações Estruturadas – COEs), created by Law No. 12,249, of June 11, 2010, and regulated by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) Resolution No. 4,263, of September 5, 2013 (CMN Res. 4,263/2013).

I. Introduction

The COE is similar to the structured note as adopted  in other jurisdictions, which is a hybrid security that includes several financial products, typically a stock or bond plus a derivative, and it allows to offer investments with alternative profiles of risk and have a fixed and variable (stock market) income as return.

For CVM this new product is important to disseminate the culture of long-term investments in Brazil and, taking into account the wide range of underlying assets and allowable indexers, makes it accessible to investors a greater diversification of risks.

II. Features of the COE

The COE brings advantages over certain operations known as structured borrowings (captações estruturadas), which were the existing alternative to combine the features of fixed and variable income prior to the entry into force of CMN Res. 4.263/2013.

Part of these structured borrowings was held by combining the transactions with the registration of several derivatives contracts (alone and in dispersed form) so that the individual results of each contract, when combined, represented the payout structure previously agreed between the parties.

With the possibility to issue the COE, there is a reduction of certain expenses such as transactional costs and those related to records, controls and supervision because the rights and obligations of the parties involved in an operation of this complexity are consolidated in a single certificate.

Another route that has been used until then for this type of operation involved the structuring of a multi-strategy investment fund (fundo de investimento multimercado), usually with protected capital, submitted to the regime of CVM Instruction No. 409, of August 18, 2004. However, the formation and operation of an investment fund involve various extra charges, which impact the final return of the investor.

As a result of the consolidation of rights and obligations into a single instrument, it is possible to develop a secondary market of COE, unlike structured borrowings, which are based on combining the results of various bilateral agreements and are conditioned to the interest of repurchase of the instrument by the financial institution and consequently have less liquidity.

ICVM 569/2015 was elaborated with the goal of ensuring the protection of the investors of that new product, focusing on adequate information disclosure, fair treatment and mitigating regulatory arbitration.

III. International Context

An extensive review of the international regulation supported the drafting of ICVM 569/2015. In this regard, CVM has assessed regulatory approaches used by the European Union[1], United Kingdom[2], France[3], Portugal[4], Australia[5], United States[6] and Canada[7].

Additionally CVM also consulted the Final Report "Regulation of Retail Structured Products" of December of 2013 of the International Organization of Securities Commissions – OICV/IOSCO (IOSCO). This work presents tools available for the regulation of structured products, including a detailed study of the pros and cons of each approach.

Most of these international standards and recommendations are very recent, reflecting the dynamics of developments in structured products, the recent increase of its participation in the capital markets of these jurisdictions, and the regulators' concerns, particularly in relation to more complex structured products after the crisis of 2008.

ICVM 569/2015 and, in particular, the introduction of the Essential Information Document of the COE (Documento de Informações Essenciais do COE - DIE), hereinafter simply referred to as DIE, follows the approach introduced in the European Union (EU) when the European Parliament and the Council of the EU approved in April 2014 a new regulation for structured products aimed at retail investors known as "Key Information Documents for Packaged Retail and Insurance Based Investment Products – PRIIPS".

The key point of that rule is to provide investors with a simplified and harmonized document, with all the information necessary to understand and compare the structured products, regardless of their legal form (investment funds, structured banking products or insurance products with elements of investment). This document has been named Key Information Document (KID).

CMN Res. 4,263/2013 established that the most likely results from the COE, whether positive or negative, must be in volume significantly lower than the initial investment[8]. Therefore, CMN Res. 4,263/2013 prevents the investors from taking leveraged positions and also does not permit the offer of COE referenced in credit operations, securities, securitization instruments and credit derivatives (except debentures, private debt securities issued in the international market and internal and external public debt securities issued by the Brazilian Treasure, which are allowed provided they are publicly offered and actively and frequently traded). For this reason, the standard adopted by the CVM is greatly simplified compared to the other standards found abroad.

IV. Waiver from Registration of Issuer and Distribution

CVM considered that the requirements contained in the regulation issued by CMN, in conjunction with the supervision exercised by the Central Bank of Brazil (Banco Central do Brasil - Bacen), focused on the permanent assessment of the financial capacity of the issuer of the COE of honoring the commitments to the investors, allow the establishment of a system of exemption from the issuer's registration at CVM.

Article 7 of CVM Instruction No. 480, of December 7, 2008, was amended to make it clear that the issue of COE does not oblige financial institutions to require an issuer registration with CVM in addition to the requirements already fulfilled vis-à-vis Bacen.

Taking into account the speediness that is essential between the structuring and the sale of this type of product (COE), CVM also considered that it is also appropriate to apply to the COE a similar distribution regime to the one attributed to the units (cotas) of the publicly-held investment funds governed by CVM Instruction No. 409, of August 18, 2004, by means of waiver of the distribution registration.

ICVM 569/2015 provides that the distribution of COE does not depend on the prior registration with CVM and will be made by intermediary institutions duly accredited to operate as members of the Brazilian securities distribution system[9].

The intermediary institution or the issuer operating as intermediary institution must: (i) deliver to the investor the DIE before the acquisition of the COE; and (ii) keep a term of adherence and risk acknowledgement (termo de adesão e ciência de risco), dated and signed by the holder, with the following words "I received a copy of the Essential Information Document – DIE prior to the acquisition of the COE and I am aware of its operation and risks".


The main purpose of the DIE is that all investors receive the same package of essential information of this new product, regardless of how the COE is offered. The issuer must prepare the DIE, in order to allow investors to gain the broad understanding on the operation of the COE, their payment flows and the risks incurred.

The complexity of these instruments makes it necessary to require the dissemination of clear and objective information on the structure of remuneration, its mode of operation, the risks involved, as well as on the underlying asset itself, among others[10].

The disclosure of the information must be in easy to understand language in a document accessible and fairly standardized. Thus, ICVM 569/2015 outlines the requirements that must be met by the issuer regarding the DIE, created for the protection of the investor of the COE.

The DIE must: (i) contain true, complete and consistent information and do not induce investors to error; (ii) to be written in plain language, clear, objective, concise and appropriate to their nature and complexity; and (iii) to be useful to the evaluation of the COE[11].

Furthermore, the DIE must present the following items[12]:

I – issuer name and number of the National Register of Legal Entities (Cadastro Nacional de Pessoas Jurídicas – CNPJ);

II – warning that the receipt of amounts due to the investor is subject to the credit risk of the issuer of the certificate;

III - description of the nature and essential features of the certificate highlighting whether the COE is of the "Nominal-Valued Investment Mode Protected" or "Investment with Nominal Value at Risk", as well as detailing the particularities inherent to the respective modality, especially as regards the possibility of loss of the invested capital;

IV – the minimum initial investment or the nominal value, if any;

V – the conditions of periodic payments of the income, if any;

VI – the maturity date or the term of the transaction;

VII – the portion of the nominal value of the protected investment, with warning on the need for immobilization of capital for certain period for the existence of this protection, if applicable;

VIII – the underlying assets used as benchmarks and the information on the means of obtaining the value of the indexes, rates or prices of these benchmarks by the investors;

IX – warning that it is not a question of direct investment in the underlying asset;

X - complete data on all the possible scenarios of COE's performance in response to the alternatives of behavior of the underlying assets, including warning that such results are valid at maturity;

XI - the specification of the rights and obligations of the holder and the issuer, respectively, that can influence the conditions of remuneration;

XII - the conditions for repurchase or redemption before the agreed maturity;

XIII - warning about the conditions of physical delivery of the underlying asset, if applicable;

XIV - warning about the conditions involving the extinction of the certificates before the agreed maturity date, if applicable;

XV – warning about investment liquidity conditions, including information about admission to trading of the COE in the secondary market and on the market maker, if any;

XVI – statement and a brief description of the major risk factors;

XVII – warning that the COE is not guaranteed by the Credit Guarantee Fund (Fundo Garantidor Credor - FGC);

XVIII - indication of the organized market management entities that maintain registration systems in which the COE will be issued;

XIX – warning that offer was dismissed of registration by CVM and that the distribution of the COE does not imply on the part of the regulators, guarantee accuracy of the information provided or of the fitness of the certificate to the legislation in force or judgment about the quality of the issuer or of the intermediary institution;

XX – information on any other factor that can significantly affect the contracting conditions of the transaction;

XXI – description of the applicable taxation; and

XXII – guidance on how to submit a complaint or to clarify doubts regarding the COE.

VI. Advertising Material

The use of any advertising material must follow principles enshrined in other regulations of CVM. For example, the material cannot be inconsistent with the contents of the DIE.

CVM considers of particular importance to be given a balanced disclosure between the various possible scenarios for the return on investment, and the persons responsible for the disclosure must refrain from emphasizing the best-case scenario without giving the same treatment to other possible scenarios, which may not always be favorable to the investor.

A command was introduced to standardize the references to rates of return on the basis of the various periods of possible duration of the COE. Thus, for better understanding by the public, the corresponding annual effective rate base of the COE must always be calculated and disseminated.

VII. Other Forms of Distribution of the COE

With the entry into force of ICVM 569/2015, in addition to the waiver of distribution and delivery to the client of the DIE, there will be two other possible options for placing the COE,  which currently already exist: (i) through public offerings distributed with restricted efforts, pursuant to CVM Instruction No. 476, of January 16, 2009, limited to qualified investors; or (ii) through public offerings of securities distribution, pursuant to CVM Instruction 400, December 29, 2003, if the purpose of the issuer is to register a public offering of securities in the most classical way.

[1] European Securities and Markets Authority – ESMA – Economic Report nº1/2013 (ESMA/2013/326) – "Retailisation in the EU" ‐ July of 2013; Opinion (ESMA /2014/332) "Structured Retail Products – Good Practices for Product Governance Arrangements" – March of 2014.  The European Parliament and The Council of the European Union – Regulation on "Key Information Documents for Packaged Retail and Insurance Based Investment Products – PRIIPS" – version adopted by the Parliament of the European Union in April of 2014.

[2] Financial Services Authority – FSA  (United Kingdom) – Guidance: "Retail Product Development and Governance – Structured Product Review" – March of 2012.

[3] Autorité des Marchés Financiers – AMF (France) – AMF Position 2010‐05 "Marketing of Complex Financial Instruments", version of September 20, 2013 with amendments.

[4] Regulamento da Comissão do Mercado de Valores Mobiliários de Portugal – CMVM nº 2/2012 (Portugal) – "Deveres Informativos Relativos a Produtos Financeiros Complexos e Comercialização de Operações e Seguros Ligados a Fundos de Investimento".

[5] Australian Securities and Investments Commission – ASIC  (Australia) – Report 384 "Regulating Complex Products" ‐ January of 2014; Report nº 377 "Review of Advice on Retail Structured Products" – December of 2013; Report 341 "Retail Investor Research into Structures Capital Protected and Capital Guaranteed Investments" – May of 2013; Report 340 "Capital Protected and Capital Guaranteed Retail Structured Products" – May of 2013.

[6] United States Securities and Exchange Commission – SEC (United States) – "Staff Summary Report on Issues identified in Examinations of Certain Structures Securities Products Sold to Retail Investors" ‐ July of 2011. Financial Industry Regulatory Authority – FINRA – Regulatory Notice 12‐03, January of 2012.

[7] The Minister of Justice of Canada (Canada) – Consolidation "Principal Protected Notes Regulations" SOR/2008‐180 ‐ version of November 1st, 2011 with amendments.

[8] Paragraph 1 of article 2 of CMN Res. 4,263/2013.

[9] Article 2 of ICVM Instr. 569/2015.

[10] In this line, the duty of suitability was also inserted into the text of CMN Res. 4,263/2013, and it is detailed extensively in CVM Instruction nº 539, of November 13, 2013.

[11] Article 6 of ICVM 569/2015.

[12] Article 7 of ICVM 569/2015.

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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