Brazil: Decree Regulates The Brazilian Sovereign Wealth Fund

At the end of last year, the Executive Branch issued Decree No. 7.055, of December 28, 20091, regulating the Brazilian Sovereign Wealth Fund (Fundo Soberano do Brasil – FSB)2 created by Law No. 11.887, of December 24, 2008.

This Decree establishes that the Secretariat of the National Treasury3 of the Ministry of Finance shall: (i) make transactions, performs acts related to the FSB´s purpose and exercise any rights inherent to the assets and rights of the Fund, by acquiring and selling securities that form its portfolio, in compliance with the legal and statutory provisions and the resolutions of the Decision-Making Council of the FSB (Conselho Deliberativo do Fundo Soberano do Brasil – CDFSB)4; and (ii) assist the CDFSB and the Minister of Finance in any matters related to the operation of the FSB, giving to them any requested information. In this regard, the Secretariat of the National Treasury must act always in the sole and exclusive benefit of the Union, using in the defense of the Union´s rights the diligence required by the circumstances and performing the acts which may be necessary to secure such rights, as well as managing judiciously the FSB´s resources.

The FSB´s investments shall comply with its purpose as determined by law5, with due observance of the following parameters:

  1. any investment in financial assets abroad shall have a minimum return equivalent to the London Interbank Offered Rate (Libor) for six months;
  2. any investment in the domestic financial assets shall have a minimum return equivalent to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo – TJLP, determined by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN)6; and
  3. the FSB will only buy investment-grade assets rated by at least two rating agencies.

The budgetary and financial execution of the FSB will be made at a specific management unit in the Integrated System of Financial Administration (Sistema Integrado de Administração Financeira – SIAFI)7, where all the management acts will be individually registered. The FSB will have its accounts audited by bodies of control of the federal public administration. Its fiscal year will coincide with the civil year, starting on January 1st and ending on December 31st of each year.

The FSB´s financial statements will be divulgated every six months and must contain the following explanatory notes: (i) market value of the assets; (ii) information about the costs with the Fund´s management fee and respective percentages in relation to its average half-yearly net worth value; and (iii) information about expenses related to its operation.

Every six months the Secretariat of the National Treasury will prepare a management report of the FSB, which must contain, at least: (a) a description of the transactions done during such six-month period, specifying regarding each transaction the purpose, the amount of the investments made, the revenues received and the origin of the invested resources, as well as the return obtained during the same period; (b) the investment guidelines approved by the CDFSB; (c) information about the economic scenario of the financial market segment where the transactions of the FSB have been concentrated, regarding the ended six-month period and the macroeconomic scenario to be adopted for the subsequent six-month period; (d) the return of the last four calendar semiannual periods; and (e) a list of all the charges debited to the FSB in each of the last two fiscal years, specifying the amount and percentage in relation to the half-yearly net worth value of each fiscal year.

The CDFSB will authorize the maximum percentage for each class of assets that the manager of the FSB is empowered to maintain, directly or indirectly, in the Fund´s portfolio.

This Decree expressly authorizes the Minister of Finance to pay in the units (quotas) of the Fiscal Fund of Investments and Stabilization (Fundo Fiscal de Investimentos e Estabilização – FFIE)8, with the due observance of the legal and budgetary provisions.

The performance report to be submitted to the National Congress by the Minister of Finance every three months shall contain, at least, the market value of the assets that form the FSB´s portfolio, segregating the assets located abroad and the domestic assets, as well as its accrued variation during the respective three-month period and in the last 12 months, as the case may be. This report shall be delivered up to the last day of the subsequent three month-period.

According to Law 11.887/2008, the FSB cannot give, directly or indirectly, any guarantee whatsoever because this has been expressly prohibited by the applicable legislation. The FSB shall pay its own operational expenses. The proceeds obtained with FSB redemptions shall be exclusively used to soften the effects of the economic cycles and destined in accordance with the annual budgetary law. These proceeds cannot be linked or used for continued mandatory expenses. The law provides that the resources of the FSB can be formed by: (i) funds of the National Treasury, corresponding to appropriations assigned to the FSB in the annual budget, including those arising out of public debt bonds´ issues; (ii) shares of federal mixed-economy companies that exceed the number which is necessary for keeping the company´s control with the Union and other rights with net worth value; and (iii) earnings of financial investments made to its account. While such resources are not destined for the purpose contemplated in the law, they must be deposited at the National Treasury´s Sole Account.

Footnotes

1. This Decree came into full force and effect on the date of its publication in the Official Gazette of the Union (Diário Oficial da União – DOU), which happened on December 29, 2009.

2. The FSB is very unique and peculiar, with its own characteristics substantially different from those of the traditional sovereign wealth funds existing in other nations. Unlike other sovereign wealth funds, the FSB is not financed with budget surpluses as Brazil runs a deficit. The FSB is frequently compared by those politicians, economists and journalists who question and criticize its creation to the jabuticaba – a very appreciated fruit that only grow up in Brazil and does not exist in any other part of the world.

3. The Secretariat of the National Treasury (Secretaria do Tesouro Nacional – STF) is the central accounting body of the federal administration in Brazil.

4. The CDFSB is constituted by the Minister of Finance, the Minister of Planning, Budget and Management and the President of the Central Bank of Brazil (Banco Central do Brasil – Bacen).

5. Pursuant to article 1 of Law 11.887/2008, the FSB is a special fund of accounting and financial nature, linked to the Ministry of Finance, with the purpose of: (a) promoting investments in assets in and outside Brazil; (b) forming a public saving; (c) softening the effects of the economic cycles; and (d) fostering projects of strategic interest to the country located abroad. The resources of the FSB shall be exclusively used to make investments, financial or otherwise, to accomplish its purpose, in the purchase of offshore financial assets, either through a deposit at a special remunerated account at a federal financial institution or directly, by the Ministry of Finance, or by means of paying in units (quotas) of a private investment fund know as Fiscal Fund of Investments and Stabilization (Fundo Fiscal de Investimentos e Estabilização – FFIE. In this regard, please refer to note 8 below.

6. The TJLP is the basic cost of the loans granted by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES). This rate is set every quarter by the CMN and corresponds to 6% per annum since July of 2009.

7. SIAFI is the main instrument used for registry, follow-up and control of the budgetary, financial and equity execution of the Federal Government and an information system centralized in Brasilia, linked by teleprocessing to the various bodies of the Federal Government distributed in Brazil or abroad.

8. Law 11.887/2008 authorized the Union to participate, with the resources of the FSB, as the sole and exclusive quotaholder of the FFIE, a private investment fund having its own assets segregated from the assets of its quotaholder (the Union), subject to its own rights and obligations, and incorporated with the same purpose of the FSB. By means of Decree No. 6.173, of December 29, 2008, the already approved amount of the units of the FFIE to be paid in is of up to R$ 14,244,000,000.00. The FFIE is liable for its own obligations. These obligations will be secured by the goods and rights which form the FFIE´s assets and consequently its quotaholder (the Union) will not respond for the obligations assumed by the FFIE. The only obligation of the Union as a quotaholder of the FFIE is to pay the subscribed units of the FFIE. The winding up of the FFIE shall occur in the form contemplated in its by-laws and upon termination of the FFIE its funds will return to the FSB. By force of law, there will be no federal tax or social contribution on the credit, exchange and insurance transactions or on the earnings and profits of the FFIE. The FFIE shall prepare its accounting statements in accordance with the legislation in force and as contemplated in its by-laws.

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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Authors
Walter Stuber
 
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