By means of CVM Instruction No. 512, issued on December 20, 2011 (CVM Instr. 512/2011), the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) amended CVM Instruction No. 409, of August 18, 2004 (CVM Instr. 409/2004), that contains the general rules governing the constitution, administration, operation and disclosure of information on Brazilian Funds ("Fundos de Investimento") which invest in stock funds (fundos de investimento em ações).

The amendments now introduced includes the Level I Brazilian Depositary Receipts (BDR Level I)1 in the list of assets that can be considered to comply with the limits laid down in Article 95-B, paragraph 1, item I, of CVM Instr. 409/2004, provided that such Investment Funds are intended solely to qualified investors and use on their name the term "Fundo de Ações - BDR Nível I" (Stock Fund - BDR Level I).

The qualified investors authorized to acquire BDRs Level I comprise: (i) financial institutions; (ii) insurance companies and capitalization societies; (iii) private welfare opened or closed pension funds; (iv) individuals or legal entities that hold financial investments in an amount superior to R$ 300 thousand and that additionally attest in writing their qualified investor condition according to an own term; (v) investment funds directed exclusively to qualified investors; (vi) portfolio administrators and securities consultants authorized by CVM, in relation to their own monies; and (vii) own social security regimes instated by the Federal Government, the States, the Federal District or the Municipalities.

The above-mentioned provision establishes that:

"Art. 95-B. The Funds classified as "Stock" shall have as their principal risk factor the variation of the shares prices listed on the Stock Exchange or on the organized over-the-counter spot markets.

Paragraph 1. In the Funds set forth in the caput:

I – at least 67% (sixty seven percent) of their equity shall be set by the following assets:

(a) shares listed on the Stock Exchange or the organized over-the-counter markets;

(b) bonus or subscription receipts and certificates of deposit of shares admitted in the entities referred to in letter "a" above;

(c) quotas of stock funds and quotas of index funds of shares traded in the entities mentioned in letter "a" above; and

(d) Brazilian Depositary Receipts classified as Level II and III, according to article 3, Paragraph1, items II and III of CVM Instruction No. 332, of April 4, 2000."

The securities traded as BDR Level I are depositary receipts of shares of foreign companies issued and traded in Brazil. However, these companies are not registered in Brazil and therefore they do not have the typical obligations of other issuers to provide information on the standards required by the CVM and in Portuguese. Information about these foreign issuers is provided in the standard required by the regulators in their country of origin and in the language used therein.

In view of these characteristics and considering that the BDR Level I market is still incipient in Brazil, these assets are generally less liquid than shares and other assets equivalent to shares. Therefore, the Brazilian Funds that have investment policies contemplating the relevant application in BDR Level I should surround themselves with appropriate mechanisms to deal with this reduced liquidity, such as more extensive deadlines to redeem their units (cotas) and more stringent risk controls. Right now, there is no special rule for monitoring the levels of liquidity and adequate term for redemption.

This change represents another step in the direction of the CVM gradual release of overseas investments by allowing qualified investors to invest in Brazilian Funds whose assets are backed 100% abroad. The Brazilian regulator believes that this type of application is normally beneficial because it represents another option for allocating resources, providing investors access to risk factors other than those which can be found in Brazil.

Furthermore, CVM has added item III to paragraph 7 of article 2 of CVM Instr. 409/2004 to clarify that units of the Stock Funds - BDR Level I can be acquired by other investment funds, being considered as a domestic investment provided that they met the same conditions of the Stock Fund - BDR level I.

CVM Instr. 512/2011 also amends CVM Instruction No. 438, of July 12, 2006, which deals with the Account Plan of Investment Funds (Plano Contábil dos Fundos de Investimento – COFI) and increases the level of information that must be given by investment funds in Brazil. In this regard, CVM modified the content of certain periodical documents, such as Daily Newsletter (Informe Diário) and Monthly Profile (Perfil Mensal), which are required under item I and item II, letter "c" of article 71 of CVM Instr. 409/2004.

Despite already being widely disseminated by administrators, these reports were not yet regulated. The new rules determine that the administrators must inform the degree of liquidity of the investment funds´ portfolios. According to CVM, in times of crisis, when the unitholders want to redeem their investments, it is important that the liquidity be compatible with the period of redemption of the units. CVM will supervise this compatibility. Investment funds also must do simulations of stress based on scenarios published by the Brazilian Exchange, and inform these simulations to the investors and to CVM. This disclosure allows the investors to know better the risk of their investments.

Among the new information which will now be required, it should be mentioned the sensitivity of the value of the units of the investment fund to the market swings, the gross notional value of derivative contracts, the amounts of transactions with related parties and with private credits and the level of liquidity available in the investment fund´s portfolio.

The provisions that amend the models of these two documents (Daily Newsletter and Monthly Profile) will come into force on July 2, 2012, in order to give a period of approximately six months to the administrators of the investment funds to adapt their reports to the new requirements.


The main characteristics of BDRs Level I are: (a) trading is limited exclusively to the non-organized over-the-counter (OTC) market or in specific segments for BDR Level I of an entity of the organized OTC market or of Stock Exchanges and only between the authorized investors listed by CVM; (b) disclosure of financial information on a regular basis in accordance with the regulation to which the issuing foreign company is submitted (in the Portuguese language); (c) it is not necessary to register the issuing foreign company with CVM; and (d) exclusive acquisition by the authorized investors listed by CVM.

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.