The National Securities Commission of Brazil instituted regulatory amendments modernising the domestic investment funds industry whilst striving for greater harmonisation with international precedents. The revised statues, focusing on the governance of Brazilian investment vehicles, were made by the Authority on 23 December 2022 within Resolution No. 175 (henceforth “RCVM 175”).
Brazilian fund governance new aspects
RCVM 175 assimilates legislative innovations ushered by the 2019 Economic Liberty Act whilst responding to industry modernisation. Additionally, the revised framework incorporated long-standing recommendations by Commission officials regarding the Brazilian investment funds sector.
RCVM 175 provides overarching rules applicable to all Brazilian investment funds, whilst creating bespoke regulatory appendices to govern each vehicle type individually. It divided into regimes for financial funds (hitherto governed by 555 Commission Ordination) and credit rights funds (previously overseen per 356 Commission Ordination).
Parties contemplating the creation of Brazilian investment funds should note additional appendices were adopted in early 2023 regarding property and private equity funds.
Key innovations under the Brazilian investment fund regulations
Limitation of liability for quota holders
Brazilian funds can limit investor liability, providing protection against fraud, dishonesty, or negative net asset value. Investors must designate their liability status.
Multi-tiered quota structures
Introduction of multi-tiered quota structures, including segregated portfolios. Quota subclasses allow varied fee structures, depreciation policies, and profit-sharing mechanisms. Mixing open and closed subclasses is prohibited.
Administrators and managers share prescribed liquidity management obligations to protect investor interests. Additional diligence is required for credit fund formations or receivables due diligence.
Emergent asset classes
Recognition of emergent asset categories, including eligibility of cryptocurrency assets traded on approved platforms. Utility tokens linked to securities do not qualify. Locally regulated carbon credits (CBIOs) can be held when registered with sanctioned systems or exchanges.
Social and environmental funds
Stricter criteria for Brazil-domiciled funds marketing as ESG-focused. Tangible, outcomes-based application of environmental and societal selection factors is required. Nomenclature alone is insufficient.
Other notable changes
Streamlined internal governance processes.
180-day compliance-free portfolio reporting suspensions.
Class-specific insolvency regimes to mitigate contagion risks.
Increased overseas asset allowances, up to 100% of NAV.
Expanding access to credit funds under Brazil’s new regulations
A notable development within the RCVM 175 framework has been enabling participation in selling assets of accounts receivable funds (FIDCs), that previously targeted only sophisticated investors. However, heightened safeguards now apply, compelling retail-focused FIDCs to meet more stringent standards that account for the complexity these vehicles pose for nonqualified investors.
Overall, the changes demonstrate regulatory commitment of democratising alternative investments whilst balancing appropriate oversight to avoid participatory mis-selling.
Implementing Brazil’s new fund regulating regime
RCVM 175 represents the culmination of extensive consolidation and modernisation efforts by Brazilian regulators to update the funds' management landscape. Rollout milestones for the sweeping changes entail:
- (I) RCVM 175 took full effect on 3 April 2023;
- (II) Maximum allocation rate provisions enacted 1 October 2023;
- (III) Multi-class and subclass admissibility changes effective 1 April 2024.
Transitional regimes are projected through 2024, with specific investment fund types in Brazil subject to bespoke adaptation timelines. Financial funds in Brazil assumed prescribed capital risk requirements from 1 October 2023. Most vehicles have until 31 December 2024 to align with RCVM 175, whereas credit funds (FIDCs) in Brazil face an accelerated 31 December 2023 deadline.