Resolution CVM 175: A New Era for Investment Funds in Brazil
Investment funds in Brazil are about to undergo unprecedented regulatory innovation and modernization through Resolution CVM 175/22. The Brazilian Securities and Exchange Commission (CVM) published the resolution on December 23, 2022, creating a new regulatory framework for the sector.
Resolution CVM 175 will come into effect on October 2, 2023. All investment funds created hereafter shall be in full compliance with this regulation from the beginning. Existing investment funds will have until December 31, 2024, to adapt to the new regulations. However, Investment Funds in Credit Rights (FIDC) will have a shorter deadline, until April 1st, 2024, to comply with the new rules.
Currently, Resolution CVM 175 is being supplemented by annexes for Financial Investment Funds (FIF) and FIDCs, with the possibility of further supplementation for other fund categories in the future.
CVM intends to include various regulatory annexes by April 2024, including those related to Real Estate Investment Funds (FII), Pension Investment Funds, Exchange-Traded Funds (ETFs), Mutual Funds of Incentivized Stocks,
and FIDC-FIPS.
Resolution CVM 175 will be updated as necessary through successive annexes, ensuring the maintenance of a consistent and objective regulatory framework over time. The resolution introduces several noteworthy changes.
Essential Service Providers
The new Resolution CVM 175 brings significant changes to the structure of investment funds, with a clearer division of responsibilities between essential service providers — the administrator and the manager. The regulation empowers the manager, who is now responsible for hiring the offer distributor, rating agency, and specialized consultant, tasks that were previously the administrator’s responsibilities. Additionally, the previous regulation that provided for joint liability among service providers has been restricted.
Cryptocurrencies and Environmental Assets
The new rule includes cryptocurrencies and environmental assets such as carbon credits and decarbonization credits, which can now be acquired by FIF. This represents progress in promoting investments in cryptocurrencies and the green and low-carbon economy.
Foreign Investment
Under the new resolution, assets classified as “Fixed income- Foreign bonds” and assets destined exclusively for professional investors are allowed to allocate 100% of their capital abroad. Assets that don’t fall under these categories should limit allocation abroad to 40% of their capital if such asset is exclusively destined to qualified investors, and 20% of the capital if such asset is destined to the general public.
Segregation of Units
It is now permitted to create segregated assets by class in investment funds, enabling the distinction of rights and obligations of each class and the response with the corresponding assets. This measure brings efficiency to the market, as a single fund can encompass different classes with distinct characteristics without the need for multiple fund formations, opening up opportunities for different product structures and new possibilities for the sector.
FIDC for Retail Investment
The main change in a FIDC, long-awaited by the market, is the possibility of creating a FIDC whose units are intended for the general public (retail) provided certain criteria and characteristics are met, rather than being restricted only to qualified investors (financial institutions, individuals with over R$ 1 million invested and/ or individuals certified by Brazilian regulatory agencies as technically able).
Mandatory Registration of receivables in FIDCs
As of the 2nd of October, new FIDC vehicles (and the pre-existing ones by April 1st, 2024) will be required to electronically register all credit rights pledged to the fund with a registering entity, such as CERC. This provision will likely boost the usage of electronic duplicatas (like trade receivables), drastically reducing the risk of fraud and double pledging. This comes ahead of the Brazilian Central Bank’s resolution BCB 399 of 24th of August 2023, which regulates how duplicatas will, in the future, be required by law to be registered electronically at a receivables processor and clearing services house, regardless of the fund structure. Today this is already the case for credit card receivables. The duplicatas market however is a substantially larger, multi-trillion dollar market.
The points mentioned above are just some significant changes for the investment fund market, modernizing it and bringing it closer to international markets. These innovations are an important step towards promoting the growth and development of the sector.
The Securities and Exchange Commission of Brazil (CVM) is the securities market authority in Brazil. It regulates the capital markets and all of its participants. This includes stock exchanges, public companies, financial intermediaries and investors. It is an independent agency linked to the Ministry of Finance (Brazil)
The information contained herein is for general informational and marketing purposes only and should not be considered legal advice. For accurate and tailored legal advice, please consult a qualified legal professional.
