MEMORANDUM TO CLIENTS
22/10/2009
Newsletter - Pension Funds
New Rules for Pension Funds in Brazil
1. Introduction
On 24 September 2009, CMN (National Monetary Council) Resolution no. 3792 (the “New Resolution”) was issued and revoked CMN Resolution no. 3456 of 1 June 2007, CMN Resolution no. 3558 of 27 March 2008 and CMN Resolution no. 3652 of 17 December 2008 (jointly the “Former Rules”).
The New Resolution amends and restates the guidelines and principles governing the investment of the resources that secure plans managed by Pension Funds (“EFPCs”).
We highlight below the general conditions of the New Resolution and the main changes brought about by the new regulation.
2. General Rules, Guidelines and Investment Policy
In the same manner as the Former Rules, the first chapters of the New Resolution deal with introductory and general issues concerning the investment of moneys by EFPCs, such as principles and internal controls to be observed by their management.
Among the introductory issues, section 2 of the New Resolution clarifies that the guidelines implemented by it do not apply to moneys relating to the funding of health plans duly registered with the National Supplemental Health Agency which should be segregated from the moneys that secure all other plans managed by an EFPC.
In terms of the guidelines for the management of EFPCs, in line with the Former Rules the New Resolution determines observance of principles such as security, solvency and transparency and provides that the activities of such managers should be based on good faith, diligence, loyalty and high ethical standards.
In relation to administrative liability, an EFPC can still appoint a Qualified Manager Appointed under its Regulation (“AETQ”) for each investment segment. However, the New Resolution requires any such manager to be accredited by 31 December 2010 by an entity recognized by the national financial markets. Additionally, the accreditation requirement will extend to other managers, as well as to other persons participating in the decision making process involved in EFPC investments. For such purpose, the New Resolution sets out deadlines for the progressive accreditation of managers until the accreditation of 100% of the persons involved on 31 December 2014.
As concerns internal controls and risk assessment, the New Resolution contains the general rules applicable to EFPCs and replicates the Former Rules. As such, because the matter is not treated in a new manner, the specific rules applicable to the matter while the Former Rules were in force have survived, in particular CGPC (Pension Funds Management Council) Resolution no. 13 of 1 October 2004 and SPC (Pension Funds Supervisory Authority) Instruction no. 26 of 1 September, 2008.
The New Resolution does not contain any novelties in relation to custody and the qualification of such service providers. It is still mandatory to retain a custodian registered with the Brazilian Securities Commission (“CVM”), and any providers of management, analysis, and consulting services retained by EFPCs also have to be registered with the CVM.
Finally, in relation to the format of the investment policy, the New Resolution requires it to expressly inform whether or not the issuers of the assets comprising the portfolio of the EFPC comply with social and environmental responsibility principles.
3. Investment Segments
The New Resolution has been praised for its investment rules since it contains clearer rules and adopts a more modern structure, thus allowing a better understanding of how moneys are invested.
The first important novelty is the inclusion of two new investment segments: structured investments and overseas investments. Therefore, the investments comprising the portfolios of EFPCs are now categorized in the following segments: (i) fixed income; (ii) variable income; (iii) structured investments; (iv) overseas investments; (v) real estate; and (vi) transactions with participants. We highlight the main changes below.
| SEGMENT | WHAT IS NEW |
| Fixed Income | The first important structural change in this segment is the departure from the subdivision into low, medium and high credit risk. Additionally, there are two important changes of a particular nature. In the first place, the inclusion of Export Credit Notes (“NCE”), Export Credit Bills (“CCE”) and Real Estate Receivable Certificates (“CRI”) issued by securitizing companies in the list of fixed income securities. Secondly, the list of investments has been established as an open list and it has been provided that other securities that are not listed may be purchased as fixed income securities provided that: (i) the investment is guaranteed by a financial institution; (ii) the investment is insured and the insurance cover does not exclude acts of God and force majeure, guaranteeing payment within 15 (fifteen) days of the maturity of the security; or (iii) in case of Agribusiness Warrants (“WA”), they are issued by a certified warehouse. |
| Variable Income | In the variable income segment, we highlight the inclusion of units in index funds referenced to baskets of shares issued by listed companies and certificates of Certified Emission Reduction (“RCE”) or carbon credits from the voluntary market admitted to trading on a stock exchange, on a commodities and futures exchange, in the organized over-the-counter market, or registered with a registration, custody or financial settlement system duly authorized by the Central Bank of Brazil (“Bacen”) or the CVM. |
| Structured Investments | This segment did not exist under the Former Rules and it now incorporates Real Estate Funds (“FII”) previously included in the real estate segment and three types of investment formerly included in the variable income segment: (i) Private Equity Funds (“FIP”) and Funds of Private Equity Funds (“FICFIP”); (ii) Emerging Companies’ Funds (“FIEE”); and (iii) Multimarket Funds (“FIM”) and Funds of Multimarket Funds (“FICFIM”). In relation to FIM and FICFIM, two important remarks need to be made: (i) only a fund whose regulation complies with CVM regulations and the limits, requirements and qualifications applicable to nonqualified investors under CVM regulations may receive investments; and (ii) FIM and FICFIM do not need to be structured as open-ended funds. |
| Overseas Investments | This investment segment did not exist either under the Former Rules, but some of the assets included herein were already accessible to EFPCs. It is the case of investment funds categorized as external debt which were formerly categorized as fixed income. The following have moved from variable income to overseas investments: (i) BDRs (Brazilian Depositary Receipts) – securities deposit certificates backed by shares issued by a listed or a similar type of company headquartered overseas and (ii) shares issued by foreign companies headquartered in the Common Market of the South (Mercosur or Mercosul). A novelty comes in the inclusion of (i) assets issued overseas belonging to portfolios of funds formed in Brazil; and (ii) units in investment funds referenced to foreign indices and admitted to trading on a Brazilian stock exchange. |
| Real Estate | In the real estate segment the New Resolution kept basically the same assets as provided under the Former Rules. There is one exception, namely the above mentioned transfer of FII to the Structured Investment segment. |
| Transactions with Participants | The transactions with participants segment replicates the “Loans and Financing Segment” of the Former Rules. However, there are stricter requirements for the entering into of agreements with participants, in particular the following requirements: (i) savings reserve transfer clause; (ii) clause creating security interest (alienação fiduciária) over the real estate financed; and (iii) insurance against death, permanent disability and physical damages to the property. |
4. Main Innovations on Asset Requirements
The New Resolution brought about relevant changes in terms of requirements for the assets in which EFPCs invest.
Firstly, it is no longer necessary for the assets to be offered under a public offer registered with the CVM. Therefore, securities offered under a public offer with limited placement efforts under CVM Instruction no. 476 of 16 January 2009 may now comprise the portfolios of EFPCs.
Secondly, the Former Rules used to segment fixed income assets on the basis of the level of risk of the assets. This methodology was abandoned by the New Resolution. Now the level of risk of all investments will be determined with the assistance of a rating agency or as approved by the relevant EFPC’s investment committee and will not interfere with the allocation of moneys in the context of the portfolios.
Specifically in relation to investment in funds that charge a performance fee, the New Resolution provides that capital contributions are conditional upon compliance with all rules applicable to nonqualified investors under CVM regulations.
5. Limits
The New resolution divided investment limits into (i) allocation limits; (ii) allocation limits on the basis of issuers; (iii) concentration limits on the basis of issuers; and (iv) concentration limits on the basis of investments. Such limits are in addition to, and should be complied with together when calculating, the maximum limit in respect of each transaction.
Without going into the specificities of each limit, we highlight the most important changes: (i) in the variable income segment, EFPCs may now invest up to 70% of the capital in shares of companies listed on BM&FBovespa’s “Novo Mercado” segment; and (ii) given the new overseas investments segment, it is now possible to invest up to 10% of the managed capital in this segment.
EFPCs should always match the limits applicable to them. However, among the events of “Passive Mismatch” – not deemed a violation of the limits set out in the New Resolution – the New Resolution has included mismatches resulting from corporate restructuring. Moreover, the deadline for rematching has been extended from 360 (three hundred and sixty) days to 720 (seven hundred and twenty) days.
6. Limits applicable to EFPC investment vehicles
In case an EFPC invests through an investment vehicle, the general rule adopted in the Former Rules and also in the New Resolution is to consolidate the investments of its own portfolio with those of the funds in which investments are made in order to check whether financial limits are complied with. However, there are important exceptions. The New Resolution considers the units in certain funds to be final investments that do not need to be consolidated.
Pursuant to the New Resolution, investments in the following investment funds do not need to be consolidated with the investments of EFPCs: (i) Funds and Funds of Funds classified as external debt; (ii) credit-rights Investment Funds (FIDC) and Funds of credit-rights Funds (FICFIDC); (iii) Index Funds referenced to baskets of shares issued by listed companies; and (iv) Funds and Funds of Funds classified as structured investments.
Moreover, the New Resolution considers that investment funds categorized as short-term, referenced, fixed income or equity funds may be regarded as final investments. For such purpose, in addition to complying with certain specific limits set forth in section 48, the funds have to (i) be open-ended and nonexclusive; (ii) respect the limits, requirements and conditions applicable to nonqualified investors under CVM regulations; and (iii) in the regulation, establish a provision that it will send the data on the portfolio and the transactions of the fund to the Pension Funds Supervisory Authority from time to time.
7. Derivatives
In order for EFPCs to effect derivatives transactions, certain requirements need to be observed, some of which were already provided in part in the Former Rules. The main innovations are: (i) margin deposits limited to 15% of the position in federal government bonds, securities issued by financial institutions authorized to operate by Bacen and Bovespa Index shares of the portfolio of each plan or investment fund; and (ii) aggregate amount of option premiums limited to 5% of the position in federal government bonds, securities issued by financial institutions authorized to operate by Bacen and Bovespa Index shares of the portfolio of each plan or investment fund.
8. Prohibitions
In terms of prohibitions, the New Resolution has practically maintained the same prohibitions applicable to EFPCS as in the Former Rules. However, two relevant changes should be mentioned.
Firstly, as concerns EFPCs there has always been a prohibition on day trading. This prohibition has been kept as a rule, but day trading is now possible if justified in a report certified by the AETQ or the manager of the investment fund.
Secondly, the prohibitions applicable to EFPCs apply as a rule to the investments of their own portfolios and the investment funds in which they invest. However, the New Resolution exempted certain types of investment fund from the rule, namely (i) Funds and Funds of Funds classified as External Debt; (ii) Credit-Rights Investment Funds and Funds of Credit-Rights Investment Funds; (iii) Private Equity Funds and Funds of Private Equity Funds; and (iv) Emerging Companies’ Funds.
Such funds now enjoy more investment freedom, and remain bound only by CVM regulations. In relation to Real Estate Funds and Multimarket Funds, specific exemption rules apply.
The prohibitions on the following do not apply to Real Estate Funds: (i) investment in assets that are not listed in the New Resolution; (ii) investment in securities issued by companies that are not registered with the CVM; and (iii) investment in companies that are not admitted to trading on BM&FBovespa’s “Novo Mercado”, “Level 2”, or “Bovespa Mais” segments.
In their turn, the prohibitions on the following do not apply to Multimarket Funds: (i) investment in companies that are not admitted to trading on BM&FBovespa’s “Novo Mercado”, “Level 2”, or “Bovespa Mais” segments; (ii) holding short positions or positions that may expose to losses greater than the value of the net assets of the portfolio or the fund in derivatives markets either directly or through investment funds; (iii) day trading; and (iv) investment overseas other than as provided in the New Resolution.
Finally, the Former Rules did not permit investment in shares issued by companies that were not admitted to trading on the following trading levels: “Novo Mercado”, “Level I”, “Level II”, or “Bovespa”. However, the Former Rules allowed companies that were not listed on such segments to receive capital contributions from EFPCs if their initial public offering had taken place by 30 May 2007. This rule is more restrictive under the New Resolution and the exception only applies to companies whose initial public offering happened before 29 May 2001.
9. Transitory and final provisions
The New Resolution does not establish a maximum period in which to adequate possible mismatches resulting from it; it only provides that EFPCs can keep their current investments until their relevant maturity dates. They must not however effect new investments that aggravate the excesses so identified.
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