Resolution 175 of the Brazilian Securities and Exchange Commission (CVM) was issued on 12/23/2022 and has recently come into effect, bringing substantial news in the regulation of investment funds in Brazil.
Main investment funds regulations
2001 - CVM Instruction 356
2004 - Instruction 409
2014 - Instruction 555
2023 - Resolution 175 - marks a new stage for investment funds.
The novelties brought by resolution 175 observed 5 important guidelines:
1) To incorporate the economic freedom law;
2) To adapt resolution 356;
3) To consolidate CVM administrative judgments and understandings;
4) To reduce the cost of compliance
5) To reduce the number of sparse norms, to facilitate the experience of the capital market user, both issuers and investors.
The main objective was to modernize and consolidate the implementation of Brazilian investment funds.
For now, the resolution contemplates FIFs (Financial Investment Funds) and FIDCs (Receivables Investment Funds). For the next few months, amendments are expected for FIIs (Real Estate Investment Funds), FIPs (Participation Funds), among other categories.
Several significant changes were brought by resolution 175, and among them we highlight those that we believe have the greatest impact:
Distribution of responsibilities between administrator and fund manager
Resolution 175 made clear the attributions of the essential service providers, which are the asset managers and the administrators.
Legally, it is constituted as a condominium. And, because it is a condominium, it requires the hiring of service providers. Until resolution 175, the only essential service provider of the investment fund was the administrator, responsible for hiring the other service providers, including the manager, that is, the administrator was the great centralizer of responsibilities of the investment fund.
With resolution 175, the manager gains protagonism, because he also becomes an essential service provider.
The big difference is that the administrator is responsible for the general functioning of the fund, with respect to the hiring of the custodian, external auditor, accounting, among others, and the manager is responsible for the business decisions, in other words, the actual investments.
In summary, we can divide, in a more general way, the fiduciary responsibility of the administrator and the manager, being that the administrator is the operational fiduciary responsible and the manager, the business fiduciary responsible.
Creating Classes and Subclasses
Resolution 175 also brought the possibility of segregating the assets of the fund into classes and subclasses, with the classes being used to organize the arrangement of assets, i.e. how the manager uses an investment strategy, and the subclasses being used to organize the arrangement of liabilities, what the fees will be, the redemption period, among others.
Although this was not the objective of the resolution, this change brought the structure of the funds in Brazil closer to the fund structures abroad.
This subdivision of funds allows several strategies to exist within a single fund, each one encapsulated in its respective class, greatly simplifying communication with the investor.
Within the scope of classes and subclasses, the limited liability of each shareholder now exists. Now, the shareholder's liability may be limited to the value of his shares, and the suffix "Limited Liability" must be added to the denomination of the share class that adopts this rule. Remembering that the investment fund is a condominium, then, in the past, if the fund were to become negative, the quota holder could be called to recompose the fund, but the new wording of the Civil Code allows for this liability to be limited.
New technologies and sustainability
Resolution 175 also sought to privilege the issue of sustainability, bringing in provisions to ensure that funds claiming to be ESG and sustainable really are, as well as provisions that allow direct investment in funds with assets such as cryptos and carbon, decarbonization, and methane credits. In the case of cryptocurrencies, investment is allowed as long as through exchanges authorized by financial regulators.
Until Resolution 175, these investments were made through investment funds and COEs (certificates of structured transactions) that invest in carbon credit futures contracts or regulated market assets or in ETFs (index investment funds) traded on the American and European markets. Now there may be a product that directly replicates an index linked to this type of asset in Brazil.
Retail investors may now invest in FIDCs
This type of investment will no longer be exclusive to qualified and professional investors.
Generally explaining about the FIDCS and some changes brought by resolution 175:
FIDCS - Credit Rights Investment Fund, created in 2001 by national monetary council resolution 2907.
In the past, the resolutions that dealt with FIDCS had at their core a dynamic of buying rights in physical form, that is, negotiating paper, documents, contracts, in fact. From 2013 on, there was a process of digitalization of credit. Today, we know that almost everything works electronically, and the role of the service providers was somewhat outdated, especially the custodian. Today, the role of each service provider has been updated according to the new dynamics of transactions and the manager has also entered as an essential service provider. He gained a role of structurer of the FIDC.
The administrator gained some responsibilities, among them the control of the financial settlement of the fund, which was previously the role of the custodian, who had his function emptied, also because resolution 175 brought a new player to the market, the entity registering credit rights.
About the issue of the subdivision into class and subclass, until then there was already a form of division within the FIDC, which are the senior, mezzanine and subordinate classes. So, with the new resolution 175, the already existing division will be able to receive a differentiated treatment, also, segregating the investors' assets. Imagining for an open FIDC, in the senior class of an open FIDC, maybe it will be possible, for example, to subdivide it into subclasses 1 and 2.
The players will have a certain period to adapt to the new rules. It is believed that the novelty will boost the investment fund market in the country.