On February 6, 2013, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 531 (CVM Instr. 531/2013), amending: (i) CVM Instruction No. 356, of December 17, 2001 (CVM Instr. 356/2001), which regulates the incorporation and operation in Brazil of credit rights investment funds (fundos de investimento em direitos creditórios – FIDCs) and investment funds which invest in units of such credit rights investment funds (fundos de investimento em cotas de fundos de investimento em direitos creditórios – FICFIDCs); and (ii) CVM Instruction No. 400, of December 29, 2003 (CVM Instr. 400/2003), which deals with securities´ distribution public offerings.

The FIDC is an investment fund that acquires receivables and securities representing credit rights and it is an adequate vehicle to carry out securitization operations.

CVM Instr. 531/2013 introduces the definition of co-obligation. Co-obligation is the contractual obligation or any other form of substantial credit risk retention of the asset acquired by the FIDC assumed by the assignor or a third party, in which the risks of exposure to cash flow variation of the asset remain with the assignor or third party.

The new regulation also aims to mitigate the structures that facilitate the occurrence of conflict of interest, in which the undue concentration of functions by the same participant or by related parties may adversely affect the good governance of the FIDC. It also improves the controls on the part of the main gatekeepers of the FIDC, namely the administrator (administrador) and the custodian (custodiante), as well as of the other major service providers to the FIDC. CVM Instr. 531/2013 defines clearly the role and responsibilities of the different market´s players of the FIDC industry.

The FIDC´s investment policy shall specify the possibility of realization of operations in which the administrator acts as the counterparty of the FIDC, with the sole purpose of performing cash management and liquidity of the FIDC.

I. Assignment conditions and eligibility criteria.

The supervision of the FIDC industry by CVM revealed a growing use of credit assignment conditions by the FIDCs, to the detriment of the framing of such conditions as eligibility criteria. Unlike the latter, the assignment conditions were not subject to a procedure of validation by the custodian, which generates a regulatory arbitrage potential harmful to desirable controls to industry.

A mapping performed by CVM on a sample of custodians and several administrators of the FIDCs evidenced that several features used by the industry are allocated either as eligibility criteria, subject therefore to the validation by the custodian, or as assignment conditions, under the responsibility of other industry participants such as the administrator, the expert consultant (consultor especializado), the assignor (cedente), the trustee (fiel depositário) and the billing agent (agente de cobrança), with less transparency and control.

In order to eliminate such imbalance and recognizing that many of the clauses that were called as assignment conditions, although could provide higher quality to credits, would not be subject to validation by the custodian, CVM determined that:

  1. the investment policy mentioned in the FIDC´s regulation shall discriminate the credit assignment conditions, if any, as it happens with the eligibility criteria;
  2. the conditions of assignment shall be validated when the credit assignment is made to the FIDC, with an indication of the institution responsible for this validation, instituting a process of control already existing to the eligibility criteria;
  3. the attributes of credit rights that can be validated from the information held or available to the custodian shall necessarily be treated as eligibility criteria, and not as conditions of assignment; and
  4. if there are conditions of assignment, the administrator of the FIDC shall establish appropriate rules and procedures in writing and subject to verification, which allow the administrator to certify the fulfillment by the institution responsible for the obligation to validate the credit rights in relation to the conditions of assignment laid down in the FIDC´s regulation.

The attributes of receivables that should be admitted as eligibility criteria are those validated from information that: (i) is under the control of the custodian; (ii) is under the control of service providers contracted by the custodian; or (iii) which may be obtained through reasonable efforts. An example of information obtained through reasonable efforts, without exclusion of any other, is any information provided by credit protection services.

II. The Role of the Custodian.

From now on, the custodian must check the ballast of credit rights represented by financial, commercial and service transactions in two instances: (i) upon transfer of the credit rights to the FIDC; and (ii) during the permanence of the credit rights in the FIDC, which shall occur quarterly1.

The other existing prerogatives were maintained. The custodian must continue to check the ballast by sampling in any FIDC where there is a significant amount of assigned credits and expressive diversification of debtors or even no checking of ballast, if the low average value of credit rights does not justify making this procedure (checking by sampling) either in the entry of the receivables or over the stock of credit rights.

The validation of credit rights with respect to eligibility criteria shall be made by the custodian upon the assignment of rights to the FIDC, to prevent the entry of credit rights that do not align with the predefined criteria.

The funds received by the custodian on behalf of the FIDC must be deposited directly into an account owned by the FIDC or an escrow account2 at a financial institution. This determination is to ensure control of the custodian on the ordinary financial flows relating to the assets held in the name of the FIDC.

Without prejudice to its responsibilities, the custodian may employ contractors (service providers) to check the ballast of credit rights and to keep the custody of the documentation relating to credit rights3. However, the following persons cannot be retained for this function: (i) the originator (originador); (ii) the assignor; (iii) the expert consultant; (iv) the manager (gestor); and (v) any related party (parte relacionada) thereto4.

For the purpose of CVM Instr. 531/2013, "documentation relating to credit rights" means: (i) original issued in analog support; or (ii) in digital form issued from the characters created in computer or equivalent technical means with the signature of the issuer using certificate admitted by the parties as valid; or (iii) scanned and certified in accordance with the specific law and regulation.

The rules and procedures adopted for the fulfillment of the duty of care on the part of the custodian must be verifiable5 and available in updated version in the e-mail address of the administrator of the FIDC and when appropriate included in the offer prospectus of the FIDC and in the relevant service agreement. The publication of these rules and procedures enables the assessment of mechanisms of custody of the documentation and verification of the ballast of the credit rights by all interested parties.

The deadlines for the validation of credit rights in relation to eligibility criteria and to receive and verify the documentation showing the ballast of receivables represented by financial, commercial and service transactions must: (i) be defined in regulation of the FIDC; (ii) be compatible with the nature and characteristics of the receivables; and (iii) be the closest possible of admission of the credit rights in the FIDC. This analysis should include the receivables´ portfolio of the FIDC and non-performed and replaced credits during the relevant quarter period. This obligation is waived when the custodian receives and verifies the documentation in an individualized and integral manner, provided that such waiver is provided for in the regulation of the FIDC.

III. The Role of the Administrator

Without prejudice to its responsibilities and of those of the Director or designated Managing Partner, by means of a resolution of the General Assembly of joint owners of the FIDC or as determined by the FIDC´s regulation, the managing institution that administrates the FIDC (the administrator) may hire the following services: (i) expert consultancy (consultoria especializada) to support and subsidize the administrator and, if applicable, the manager, in their activities of analysis and selection of credit rights to integrate the FIDC´s portfolio; (ii) management of the FIDC's portfolio with third parties authorized by CVM in accordance with the provisions of regulations applicable to securities portfolios´ administrators; (iii) custody; and (iv) billing agent to charge and receive on behalf of the FIDC delinquent credit rights´ amounts6.

In order to avoid the confusion and overlapping between the functions of management and consultancy usually observed, the role of expert consultant is now more defined and delimited than in the previous scenario, in which the consultant used to accumulate a series of assignments not designed for it.

The consultant's role is restricted merely to assist in the analysis and selection of credit rights, giving support and subsidies to the administrator and, if applicable, to the FIDC´s manager, in their activities. The expert consultant that would like to also act as fund´s manager must be duly registered with CVM as securities portfolio administrator to be authorized to manage the FIDC.

Both the consultant and the assignor may engage in the activities of collecting delinquent amounts and validation of credit assignment conditions.

CVM Instr. 531/2013 contains a prohibition seeking to reinforce the structure of mutual and independent controls and governance of the FIDC industry and to inhibit structures that favor the occurrence of situations of conflict of interest. Therefore, the administrator, the manager, the expert consultant and the custodian or any related parties can no longer assign credit rights to the FIDC where they act. Such prohibition inhibits the occurrence of structures of the "originate to distribute" (originar para distribuir) type between parties belonging to the same economic group and seeks to prevent misalignment of interests and incentives between the various participants in the structuring and sale of the securitization operation and the final investors.

CVM decided to allow the administrator to also provide management and custody services to the FIDC, without having to contract an independent third party accredited institution for this purpose. If the administrator accumulates the functions of management and custody of the FIDC, it should maintain total segregation of such activities in accordance with the rules applicable to securities portfolio administrators.

There is also a specific obligation related to the duty of care for the administrator, contemplating the establishment of rules and procedures in writing and subject to verification to determine compliance by the expert consultant, the manager, the custodian and the billing agent of their respective obligations.

The FIDC can purchase up to the limit of 20% of its net worth value credit rights and other assets of the same debtor, or with the co-obligation of the same individual or legal entity. This percentage of 20% may be raised when: (i) the debtor or co-obligator is duly registered as a publicly-held corporation; and is either a financial institution or equivalent entity authorized to operate by the Central Bank of Brazil (Banco Central do Brasil – Bacen) or a business company (sociedade empresarial) that has its financial statements relating to fiscal years immediately preceding the date of the incorporation of the FIDC prepared in accordance with the provisions of Law No. 6,404, of December 15, 1976 (the Brazilian Corporation Law), and the regulations issued by the CVM, and audited by an independent auditor registered with the CVM; and (ii) the investments are restricted to (a) federal public bonds; (b) repo operations (operações compromissadas) involving federal public bonds; and (c) units (cotas) of a fund whose investment policy requires exclusive allocation in federal public bonds or repo operations involving such bonds.

The financial statements of the debtor or co-obligator and the independent auditor´s opinion must be filed by the administrator at CVM and shall be updated annually until the closing date of the FIDC or until the year in which the liability of the debtor or co-obligator for the receivables no longer represents more than 20% of total credit rights that form the net worth value of the FIDC. This filing should take place within a maximum period of up to three months after the close of the fiscal year, or on the same day that the financial statements and the independent auditor´s opinion are delivered to the partners of the business company, if this occurs earlier.

The filing will be waived, however, if the units of the FIDC: (i) are sold in connection with a public distribution offering exclusively to companies within the same economic group and to their respective administrators and controlling shareholders, being prohibited the trading of the units in the secondary market; or (ii) have unit value equal to or greater than R$ 1 million, and are sold in connection with a public distribution offering for subscription by no more than 20 investors.

In order to reduce the space for the occurrence of conflict of interest in the operations of buying and selling between the managing institution that administrates the fund and the FIDC all the assumptions on which the FIDC could acquire other assets issued or with the co-obligation of the administrator and the manager or any related parties in the amount exceeding 20% of the FIDC´s net worth value were eliminated by CVM.

The existing FIDCs and FICFIDCs must adapt their regulations to the provisions of CVM Instr. 531/2013 up to February 1st, 2014, or immediately if they carry out a public offering of units registered or exempted from registration with CVM.


1 CVM identified that most of the custodians of the FIDC use to examine the documentation on a quarterly basis. This is because the quarterly report prepared by the Director or Managing-Partner of the institution which is the FIDC´s administrator is based on the verification activity of the ballast of credit rights performed by the custodian over the previous quarter. Despite the quarterly frequency of the report, CVM believes that the new approach as to the time and the frequency of verification of the ballast documentation will allow: (a) on one hand, to inhibit the entry or facilitate the immediate replacement of credit rights without their respective supporting documentation; (b) on the other hand, to ensure that in the case of a FIDC with a credit rights´ portfolio with reduced average time, there is a greater control over the effective ownership of assets held by the FIDC.

2 An escrow account is a special account established by the parties with a third party under contract, designed to accommodate deposits to be made by the debtor and there kept in custody, for release only after the fulfillment of certain specified requirements.

3 The custodian must undertake due diligence to ensure that the contractors eventually hired exercise their delegated activities regarding the verification of the ballast and the custody of the documentation.

4 This prohibition seeks to prevent risks arising from a conflict of interest when one of the above-mentioned parties mentioned carries out the activity of custody documentation of the credit rights or of verification of the ballast, to minimize the occurrence of weaknesses in the structure of the FIDC which may allow fraud such as double assignment of credit rights.

5 The custodian must have appropriate rules and procedures in writing and verifiable to: (i) enable the effective control by the custodian over the movement of documentation relating to the receivables and other assets from the portfolio of the FIDC under custody of the contracted service provider; and (ii) to ensure compliance by the contracted service provider with regard to the analysis of the ballast of the credit rights and the custody of the documents.

6 The list of service providers to be hired by the administrator, mentioned in items (i) to (iii), was increased by the billing agent for delinquent amounts, which is referred to in item (iv). The ordinary collection activity by the custodian is different from that contracted by the administrator for the collection and recovery of matured credits.

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.