Brazilian Securities Commission enacts new regulatory framework for investment funds

On December 23, 2022, the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) enacted CVM Resolution No. 175, establishing a new regulatory framework for investment funds in Brazil.

The resolution brings together Brazil’s investment funds regulatory framework into a single rule, with a general section applicable to all types of funds and annexes with specific rules applicable to each type of fund. Two of those annexes have just been released, regulating Financial Investment Funds – FIF (a new designation for the funds currently governed by CVM Instruction No. 555) and Receivables Investment Funds (FIDC – currently governed by CVM Instruction No. 356). Other annexes regulating the remaining types of investment funds, such as Real Estate Funds (FII) and Private Equity Funds (FIP), are expected to be released by April 3, 2023.

CVM Resolution No. 175 will also take effect on April 3, 2023, revoking CVM Instructions No. 356 (FIDC), 444 (Non-Standardized Receivables Investment Funds – FIDC-NP), 472 (FII), 555 and 578 (FIP). Investment funds that are operational on this date have until December 31, 2024, to adapt to this new regulatory framework, other than FIDCs and FIDC-NPs, which must adapt by December 31, 2023.

Common market practices established as rules

Reflecting important concepts in Brazil’s Economic Freedom Law (Law No. 13,874/2019 ‒ LLE), the resolution formalizes already adopted general market practices, providing a consolidated regulatory framework with more uniform, flexible, and modern rules. It brings the local industry closer to best international practices and standards – making it more attractive to international investors – and gives local investors access to more diversified and sophisticated investment opportunities.

The CVM has also simplified and standardized the disclosure regime applicable to registered funds, which is expected to reduce bureaucracy and costs associated with creating and maintaining these investment vehicles. It should also ensure greater transparency, improve the quality of the information available and enhance comparability between funds.

Furthermore, the reformulated regulatory framework should further strengthen legal certainty for Brazilian funds industry service providers and local and international investors. The allocation of attributions and responsibilities is now clearer, and the rules relating to the civil insolvency process of funds and liquidation are set out in greater detail. These developments represent an important milestone for Brazil’s BRL 7.4 trillion funds industry, which has a significant impact on the Brazilian economy and only continues to grow.

Resolution CVM No. 175/2022 introduces various new changes, among which the following should be highlighted:

General Section (Resolution)

• Quotaholders’ limited liability is regulated – in line with a similar provision in the LLE limiting quotaholders’ liability to the value of their quotas; this rule does, however, provide for limited, specific hypotheses in which investment funds will not be able to bestow limited liability on their quotaholders;
• Creating classes with segregated portfolios and subclasses is possible – classes of quotas with distinct rights and obligations can be issued with segregated portfolios for each class, in which each segregated portfolio is liable only for (and linked only to) the obligations of its respective class. The new rules also allow for the formation of funds of any type with subclasses subject to distinct rights and obligations, even if they share the same portfolio;
• Investment fund insolvency – in a significant step forward from what was initially proposed in the draft resolution, the enacted resolution provides that each specific class of quotas may subject itself to civil insolvency when the assets of a given class of quotas are insufficient to pay its respective obligations (the draft resolution provided for applying the insolvency regime to the fund as a whole). Moreover, the resolution provides more detailed rules on administrating insolvent classes during the period for collecting assets and paying outstanding obligations;
• Role of service providers – the resolution formally recognizes the central role played by investment fund portfolio managers, reflecting a position the CVM has already taken in several other specific contexts. As such, a fund’s portfolio manager and fiduciary administrator are now considered ‘essential service providers’ – central figures for the formation, registration, and operation of the funds, and responsible for engaging other service providers. Another consequence, in line with a recurrent demand from the industry, is the confirmation that responsibilities between managers and fiduciary administrators should be segregated, who are no longer jointly liable for all types of funds;
• More flexible governance – there is greater freedom to structure governance arrangements between quotaholders and service providers, as well as greater flexibility in defining quorums for quotaholders’ meetings;

FIF Annex

• More flexible investment guidelines for FIFs – the resolution provides for new flexible options for investments made via FIFs, including:
  • Higher concentration limits by type of financial asset;
  • The possibility for FIFs offered to the general public to invest up to 100% of their portfolio in assets outside of Brazil (previously limited to 20%);
  • Investment in cryptoassets, provided certain applicable requirements are met; and
  • The possibility of investing in ‘environmental assets’, which closely aligns with the international environmental agenda and Brazil’s strong potential in this segment.
• Leverage limits – regarding exposure to capital risk, the new regulations limit the maximum exposure of a fund’s portfolio according to the type of FIF class: 20% NAV exposure for the fixed income class, 40% maximum NAV exposure for the foreign currency or stock classes, and 70% maximum NAV exposure for the multimarket class – note that these limits do not apply to classes intended for professional investors;

FIDC Annex

• Redefined roles for FIDC service providers and receivables registration – the duties of service providers have been redistributed, giving portfolio managers more autonomy and responsibility. Moreover, service providers are obligated to register their eligible credit rights with a registration entity authorized to operate by the Central Bank of Brazil;
• Distribution of FIDC quotas to retail investors – in line with market demands, FIDC quotas can be distributed to investors in the general public, provided certain requirements are observed. Along the same lines, the rule allows federal judicial payment orders (precatórios federais) – previously qualified as ‘non-standard’ credits – to be classified as ‘standard’, thus permitting the quotas linked to the FIDC classes that invest in this type of asset to be distributed to the retail investors;
• Some restrictions were lifted – Among others, the prohibition on origination and assignment of credits by the manager, consultant, fiduciary administrator and related parties has been lifted; also, FIDC quotas offered to qualified and professional investors no longer need to be rated, while the originator or assignor is exempt from holding evidentiary documents.

With seven partners and over 40 professionals in our Asset Management Services & Investment Funds practice, Mattos Filho is the only full-service law firm in Brazil with a team exclusively dedicated to the industry.

We remain available to assist with exploring the details, new aspects and impacts of the new regulatory framework, as well as guide industry participants throughout the stages of understanding, transitioning and adapting to the new rules. For further information, please contact Mattos Filho’s Asset Management Services & Investment Funds practice area.