Brazil: CVM Changes Investment Fund Regulations

In recent years, the Brazilian government has implemented various measures to attract national and foreign investors to the Brazil’s financial and capital markets. One example is the government’s decision to lift the tax burden, on certain conditions, for foreign investors resident or domiciled outside Brazil (with the exception of those countries considered to be tax havens under Brazilian law) on income from investments in investment funds restricted to foreign investors and in equity investment funds, enacted in Law 11,312/2006. Following this lead, on March 30, 2007 the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) published Instruction 450, amending Instruction 409/04, which governs investment funds in the Brazilian market.

According to the CVM, the changes introduced by Instruction 450 are intended to bring the regulation governing the Brazilian investment fund industry into line with the current scenario in the capital market, where lower yields on government paper – for many years the mainstay of Brazilian fixed income funds – has caused investors to migrate to variable income funds, while part of the fixed income funds’ portfolios has moved to private debt instruments, among other assets that carry a higher return, but also greater risk.

Instruction 450 brings significant changes to the Brazilian investment fund market, particularly with respect to better information on the funds, greater freedom for fund managers in investing the funds’ resources, and the increased liability of fund managers as a result of the greater freedom in investment decisions.

Among the changes that are intended to improve the information provided to investors on the types of investment funds, some of the more important are: (i) a reformulation of the issuer limits, with the creation of a new limit of 5% of the fund’s assets for investment in issuers which are natural persons or private companies that are not financial institutions or listed companies; (ii) new limits for each type of financial asset, which apply cumulatively with the issuer limits; (iii) special rules for investment or mutual funds that have more than 50% of their assets invested in private sector debt instruments or public debt instruments issued by government entities other than the federal government of Brazil.

With respect to the greater freedom accorded to fund managers in their investment decisions, the most striking change is that, provided certain conditions are met, any of the funds governed by Instruction 450 can now acquire foreign assets, without any restriction as to the type of investor belonging to the fund. Aside from funds classified as External Debt, which already could invest up to 100% of their resources in foreign assets, Multimarket Funds are now authorized to hold up to 20% of the fund in foreign-traded securities, while other classes of funds can now allocate up to 10% of the fund to foreign assets. However, the acquisition of assets outside Brazil by the various types of funds still depends on changes to the currency exchange legislation, since currently there is no provision for Brazilian investment funds to transfer money outside Brazil for the purpose of acquiring foreign securities.

Another measure that brings greater flexibility to investment funds is the elimination of concentration limits based on the issuer and type of asset in the case of larger financial investments and in exclusive funds, along with a reduction of the blackout period for sensitive transactions or positives to 30 days for the traditionally more conservative classes of funds, although the former period of 90 days is maintained for all other funds. However, the period can be extended to up to 180 days in exceptional cases, where authorized by the CVM.

The increase in the liability of fund managers and administrators comes as a consequence of their greater freedom. The CVM created standards of conduct for administrators and managers, in order to establish clearly the liability of each. To reinforce these liabilities, changes were made to Instruction 306, which regulates administrators of securities portfolios.

Instruction 450 came into force on the date of its publication, but investment funds have a period of 90 days to adapt to the new rules. As in the past, the CVM waive the need for a meeting of fund investors to approve the necessary changes to the fund regulations, although investors must be informed of the amendments to the fund regulations.

Instruction 450 represents a significant advance in the regulation of investment funds, in step with the increasing globalization of the sector. The CVM’s policy of internationalization of Brazil’s capital markets will allow not only the entry of new financial resources, but also the adoption of new instruments and new ethical standards for investment fund management and administration.

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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