CVM publishes resolution that facilitates the investment in BDRs

On August 11, 2020, the Brazilian Securities and Exchange Commission (CVM) issued a resolution (CVMR) that regulates the issuance and trading of certificates of deposit of securities representing securities of foreign issuers (BDRs).

The following innovations deserve to be mentioned: the change in the definition of a foreign issuer; the provision for the purchase of Level-I BDRs by non-qualified investors; the issuance of BDRs backed by fractional ownership of index funds, such as exchange-traded funds (ETFs); and the possibility of issuing BDRs backed by securities other than shares.

Definition of a Foreign Issuer

In order to make it possible for local investors to invest in securities of issuers operating in Brazil, but which have made public offerings abroad, and to allow such issuers to carry out part of the intended funding also in the local market, the CVM has changed the definition of a foreign issuer from what was in a previous regulation in 2009.

Under CVMR, the BDRs can be backed by shares of foreign issuers (ie issuers whose headquarters are located outside Brazil) that have less than 50% of their assets and revenues in Brazil, or whose main trading market, which must be a stock exchange:

• is headquartered outside Brazil, in a country whose regulatory authority has adopted and signed the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions – IOSCO; and
• is classified as a “recognized market” in the regulation of an entity managing the organized securities market approved by the CVM.

Additionally, the main trading market of foreign issuers is considered to be the one in which their shares or certificates of deposit of shares have the highest volume in the last 12 months or if they are in the process of conducting an initial public offering, the market in which it occurs the listing request and in which the issuer captures most of the proceeds of the ongoing offering.

As intended by CVM itself in a public hearing, which gave rise to the edition of CVMR, the normative changes promoted by the new resolution can make BDR offerings from foreign issuers feasible considering “only the location of the headquarters” of these issuers and that, under certain conditions, access to the Brazilian market is allowed “even if the assets or revenues are located or originated mainly in Brazil”.

According to the CVM, in addition to representing a restriction on funding to the issuers themselves, the previous limitation also deprived Brazilian investors of the opportunity to invest in such issuers.

Investors authorized to purchase Level-I BDRs

Another innovation is the permission for any investor to purchase Level-I BDRs (sponsored or not), previously restricted to qualified investors, or employees of the sponsoring company or another group company.

According to CVMR, any investor can purchase Level-I BDRs, provided that most of the trading volume of these assets, in the last 12 months, takes place in a “recognized market” according to the regulation of an entity managing the organized securities market approved by the CVM; and the issuer of the securities that serve as guarantee for the BDRs must be supervised by the regulatory entity of such market. Besides, the new regulation emphasizes that the acceptance of orders for trading Level-I BDR by intermediaries is subject to verification of the investment’s compatibility with the investor’s profile, under CVM’s instruction.

BDRs backed by fractional ownership of index funds

The resolution also introduces the figure of BDRs backed by fractional ownership of investment funds in the market index. To guarantee the BDRs, the fractional ownership of such funds must necessarily be identified with an international securities identification number (ISIN) and admitted to trading on an organized market and held in custody by an institution headquartered abroad and authorized by a regulatory body that has adopted and signed the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions – IOSCO

Funds whose fractional ownership back BDRs will be subject to the same restrictions as Brazilian index funds, especially those that refer to the requirements of the benchmark index and the prohibition against funds being reversed, leveraged, or synthetic.

BDRs must be issued within a program expressly authorized by the fund’s legal representative, by a depository institution that must maintain a website where the information on a CVM’s regulation is made available in the language of the fund’s country before the opening of negotiations in the next day – unnecessary if done in Portuguese – and in Portuguese within five days of the original publication – unnecessary if the BDR program is restricted to qualified investors. The registration of the BDR program will be automatically granted by the CVM through the protocol of the documents listed in the CVM’s regulation.

BDRs backed by fractional ownership of index funds may be purchased by any investors, provided that the same conditions applicable to the stock-backed BDRs, mentioned above, are met. In other cases, investing t in these BDRs is restricted to qualified investors.  Still in this issue, investors may instruct the depository institution to exercise the right to vote on the fractional ownership of investment funds in the market index they hold. When the characteristics of the program prevent this direction, the depository institution must necessarily vote in the best interest of the BDRs’ holders.

The transfer of a BDR program backed by fractional ownership of index funds traded abroad to another depository institution will be permitted, provided that the transfer is communicated to investors at least 60 days in advance and the characteristics of the BDRs are not changed.

Also, CVMR brought three innovations to Brazilian index funds:

• the possibility for index funds to buy shares in other investment funds on the same market index;
• authorization for publication retrospectively at each rebalancing of the index, not only the weights of each financial asset but also the composition of the index and other parameters that allow its replication;
• the simplification of necessary disclosure information on the fund’s website.

In addition, the regulation limited the period for the retrospective publication of the index’s composition and the weights of each financial asset that comprise it after each rebalancing of the reference index up to three months from the date to which they refer.

BDRs backed by securities other than shares

CVMR will also allow the issuance of BDRs backed by instruments other than shares. The “gradual flexibility” intended by the CVM is to ensure that local investors have the opportunity to invest in other assets originally issued abroad.

As mentioned in the public hearing notice, CVM aims to make foreign issuers access the Brazilian securities market via debt instruments. Thus, the issuance of BDR backed by securities representing the debt of issuers whose assets, revenues, and headquarters are in Brazil was permitted, provided that they are listed or admitted to trading on the stock exchange market or on an electronic trading platform with headquarters in a country whose regulatory body has adopted and signed the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions – IOSCO. It is also necessary that it is classified as a “recognized market” in the regulation of an entity managing the organized securities market approved by the CVM.

CVM’S resolution takes effect on September 1, 2020.

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