Country Report Brazil

October/2016

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Contents

1. Economic and financial background ....................................................................................... 3

2. Data on funds under management and portfolios .................................................................. 3

3. Key trends in flows and assets under management .............................................................. 5

4. Product developments ............................................................................................................... 6

5. Regulatory and self-regulatory developments (including tax) ............................................. 6

6. Corporate governance – major developments ..................................................................... 13

7. Fund governance ...................................................................................................................... 13

8. Other major issues and developments .................................................................................. 13

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1. Economic and financial background

2. Data on funds under management and portfolios

Source: ANBIMA

Key Indicator 2016(*) 2015 2014 2013 2012 2011Population (Milion) NA 205 203 201 199 197GDP (Current US$ billion) NA 1,768 2,415 2,461 2,459 2,613Real GDP growth -3.1 -3.8% 0.1% 2.7% 1.8% 3.9%Interest Rate 13.50% 14.25% 11.75% 10.00% 7.25% 11.00 %Inflation Rate 7.2% 10.7% 6.41% 5.91% 5,84% 6,50%Unemployment Rate 11.3% 8.1% 5.0% 5.1% 5.4% 5.5%Stock market capitalization (US$ billion) 732.3 (#) 489.7 844,5 1,031 1,235 1,223Number of Companies 353 (#) 359 366 363 362 373Saving deposit (US$ billion) 198.3 (#) 169.0 250.3 256.1 243.3 224.4Time deposit (US$ billion) 178.2 (#) 141.4 205.7 250.9 314.5 381.2Trade Balance (US$ bilion) 49.4 19.7 -4.0 2.3 19.4 29,8Total international reserves (US$ bilion) 370 368.7 374.1 375.8 378.6 352.0Exchange Rate (R$/US$) 3.300 3.900 2.6562 2.3426 2.0435 1.8758Net Public Sector Debt (as % of GDP) 45.04 36.0 33.1 30.6 32.89 34.48

(#) Up to July 2016 - BM&F/BOVESPA and Central BankNotes: (*) ANBIMA's Macroeconomics Comission forecasts August 2016; Source: Central Bank, IBGE.

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Source: ANBIMA

Source: ANBIMA

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3. Key trends in flows and assets under management

Source: ANBIMA

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4. Product developments

Simple Fund

The Brazilian Securities and Exchange Commission (CVM), through the instruction nº 555, which entered into force in October, 2015, created the called “Simple Fund”. The idea is that this new vehicle is a gateway for Brazilian investors in the investment fund industry by the fact that it will adopt a conservative strategy. This fund is designed to attract new investors to the fund industry, seeking to attract investors that are looking for:

• Low-risk: as at least 95% of the fund’s liquid assets should be invested in government bonds, fixed income securities of banks that have risk equivalent to government bonds, and repo transactions;

• Lower costs investment: as it’s forbidden for this fund the charging of performance fees, and also because all communication with the client, as well as all information exchanged, should be done through electronic means.

COE – Structured Operations Certificates

The Brazilian Securities and Exchange Commission released a public hearing on November, 2014 that deals with the distribution of the Brazilian Structured Operations Certificates known as COE. The COE is similar to the structured note, widely used in the United States and Europe. It is a hybrid security that includes several financial products (stocks, bonds, derivatives) allowing investors to have a mix between fixed income and variable income within a single instrument.

In October, 2015 the Brazilian Securities and Exchange Commission released the Instruction nº 569, which regulates the public offering of the COE. The new rules meet a set of claims that have been sent to the regulator in order to expand and strengthen the market for structured products, and enables financial institutions to commercialize the product to their customers through public distribution. This includes, for example, the possibility of using advertising materials.

Fixed Income ETF

The Ministry of Finance published in May, 2016 the Ordinance nº 163, which regulates the calculation of Average Repricing Period (PRC) of the Fixed Income ETF. Besides that, in the same month it was released by the Brazilian IRS the normative instruction nº 1.637, presenting the appropriate tax treatment for Fixed Income ETF in the secondary market. Since the publications, ANBIMA is constantly working in conjunction with its associates and the stock exchange in order to verify the operationalization of the product.

5. Regulatory and self-regulatory developments (including tax)

ANBIMA

In 2015, the Association’s main goal was the strengthening of the capital market. Simultaneously, the three strategic priorities set back in 2013 were maintained, being: promote tax improvement in the financial and capital markets, strength the representation and coordination of the interests of the associates locally and internationally, and promote financial education.

In order to guide ANBIMA’s actions in 2016, five priority themes were defined aiming to build an increasingly strong and representative entity:

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• Taxation • Pension plans • Distribution • Internationalization • Innovation

Specifically regarding the strengthening of the capital market, it was set five strategic objectives:

• Primary market (agility and efficiency) • Secondary market (transparency and liquidity) • Increase of the investor’s base (diversity of agents). • Tax and regulatory improvements (simplicity and symmetry) • Education (qualification of the market agent and information to investors).

As the Association speaks in name of 280 institutions that operate in the market, such as banks, managers, brokers, distributors, and administrators, in order to maintain a close relationship with these institutions and continue the self-regulatory developments, visits are often conducted in order to better understand these institution’s needs, to get their opinion among several themes of discussion, to answer questions and take information about ANBIMA, and other. Until june/2016, 24 visits were already conducted.

Number of visits to the associates:

Source: ANBIMA

Partnership ANBIMA / CVM – Securities and Exchange Commission of Brazil

The Association maintains a close relationship with CVM, the Securities and Exchange Commission of Brazil, and in 2015 several discussions were conducted, including:

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• Analysis, discussion and communication of large groups of regulatory reforms through dialogue between teams, multidisciplinary workgroups and workshops;

• Contributions for regulatory improvements in public hearings, and also requests concerning the implementation of new rules;

• Approach in discussing themes related to leverage within funds and the implementation of the CVM Instruction nº 558.

In 2016, in order to assist the market in the adaptation to the new rules for investment funds, ANBIMA had an intense dialogue with CVM. During the first semester of the year, a series of webinars were conducted with the participation of members from the Brazilian Securities and Exchange Commission so that the remaining doubts from the associates were clarified.

New Regulations

The regulatory improvements that should be highlighted are:

CVM Instruction 555 regarding Investment Funds – the reformulating of this Instruction allowed (1) Brazilian shareholders to invest bigger amounts in offshore funds, (2) the NAV to be calculated in accordance with the fund’s liquidity, not necessary on a daily basis (3) all of the information and statements of the fund to be release only electronically and in a more standardized way. This instruction entered into force in October, 2015.

CVM Instruction 558 regarding the professional management of securities portfolios – the new instruction provides for two separate activities, with the corresponding categories “Portfolio Manager” and “Fiduciary Administrator”. It also brings new requirements and deadlines for obtaining registration, new requirements with regard to the disclosure of periodic and occasional information, new determinations with respect to rules of conduct, policies, procedures and internal controls and risk management, and granted authorization to the managers to distribute shares in investment funds. This instruction entered into force in July, 2016.

CVM Instruction 577 regarding the accounting plan for investment funds – the instruction nº 577 was released in July, 2016 changing the accounting plan for investment funds. The main changes relates to the review of the criteria for the measurement of assets and liabilities, converging them to those provided in international accounting standards issued by the International Accounting Standards Board (IASB).

Regulatory Developments

CVM has been conducting a great reform process, which started in 2013, continued in 2014, 2015 and will continue through 2016, by means of public hearings, publication of studies and new rules. The most important regulatory developments made in the last years are:

• Implementation of CVM Instruction nº 539 – Suitability

• Implementation of CVM Instruction nº 554 – Qualified Investor

• Implementation of CVM Instruction nº 555 – Investment Funds

• Implementation of CVM Instruction nº 558 – Asset Managers

• Implementation of CVM Instructions nº 542/543 – Custodians and Transfer Agents

• Implementation of CVM Instruction nº 577 – Accounting Plan for Investment Funds

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• Implementation of CVM Instruction nº 569 – COE (Structured Operations Certificates)

ANBIMA has also responded to the Public Hearing nº 03/16, that was released by CVM on February, 2016, proposing changes to the CVM Instructions nº 543 (transfer agents) and 555 (investment funds).

Tax Agenda

In 2015, the objective was to work on the improvement of tax rules, focusing on simplification and reduction of asymmetries between products and investors, and to obtain a greater effectiveness in the articulation of the tax agenda. The progress made in relation to these objectives were:

• Development of a tax proposal for submission to the Brazilian IRS: NAT – New Tax Framework (initials in portuguese). Based on the assumptions set out in the strategic planning of the Association – simplicity, symmetry and focus on longer terms – a set of proposals was prepared in order to review the taxation of assets and financial transactions. The new tax framework that was drawn suggest measurers to promote simplification of the current structure by reducing the differential treatment between products.

• Improvement in the regulation of LCI (Real Estate Letter of Credit) and LCA (Agribusiness Credit Bills).

• Creation of investment fund with exempt assets to foreign investors. • Extinction of IOF (Tax on Financial Operations) in ADR (American Depositary Receipts). • Strengthening of the dialogue with the Ministry of Finance and with the Brazilian IRS.

In 2016, strengthening the dialogue with the involved parts on this matter is a priority for ANBIMA. The aim continues to be the enhancement of tax rules through the simplicity and symmetry in the regulatory and tax framework. This way, the Association keeps strengthening the dialogue with the Ministry of Treasury and Brazilian IRS.

Certification and Education

Promote the financial education was one of the strategic priorities of 2015, when the objectives were to generate and provide knowledge on investment for all associates, to expand financial education through partnerships, and to raise the standard of professional qualification certificates. Examples of progress made in relation to these objectives are:

• Workshop with Associates about communication with the investor. • Workshop with certified professionals and HR departments of banks. • Research with professional certificate. • Information Center of the Brazilian Investor: the platform specification phase was completed in 2015,

and should be launched by the end of 2016. The Center is an online environment that will gather data and information on the brazilian investor, originating from research, studies and analysis carried out by companies or individuals from all over the country.

In 2016, education keeps on the spotlight, being one of the five strategic objectives set for the year, focusing on the qualification of the market agent and on the availability of information to investors.

In order to continue evolving regarding this matter, ANBIMA offers a number of courses on topics of financial and capital markets through its Continuing Educational Program. The goal is to track the certified professional in the evolution of his career, providing content that enable them throughout their working life. In 2015 the Continued Certification Program completed 13 years, and reached the mark of 409.000 issued certifications, and more than 725.000 tests applied, numbers that continued to grow whithin 2016.

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Consolidated Number of ANBIMA Certification Exams until June/2016:

Source: ANBIMA

CPA-10: It aims to certify professionals of the participating institutions involved in prospecting or selling investment products directly to the investor, including in bank agencies or service platforms.

CPA-20: It aims to certify professionals of the participating institutions involved in prospecting, selling investment products or investment portfolio maintenance directly with investors that are met in the following segments: Retail High Income, Private Banking, Corporate and Institutional Investors.

CGA: It aims to certify professionals of the participating institutions that perform professional management of third party funds. The Security and Exchange Commission of Brazil recognizes this certification in order for the professional to obtain the register to act as a manager.

CEA: It aims to certify professionals of the participating institutions who advise account managers of individual investors account in investments, being able to indicate investment products. In 2015 it was defined the certification update pilot project.

Currently the Continuing Educational Program is going through a major redesign. Previously, the certification tests were focused on the product that the professional deals with and its legislation, however, over the past years it has been verified the need to change the program in order to also address the activities, functions and responsibilities of the activity performed by each professional – with greater focus on conduct and not just in the product.

Besides that, ANBIMA is a senior associate at the IBCPF (Brazilian Institute for the Certification of Financial Professionals), entity that grants the CFP certification (Certified Financial Planner). This certification is indicated for all professionals that work in the development of individual or family planning, or in one of its areas of expertise: investment and risk management, pension, retirement planning, insurance, succession planning and tax planning. It’s important to note that the CFP is not a mandatory certification, but it is a way for professionals to standout from others. The last numbers indicates that 2,136 professionals currently hold the certification in Brazil.

The Association also has an initiative which the purpose is to offer current and potential investors adequate, didatic and easy access information so they can make mature decisions and conscious investments. Having this in mind, ANBIMA launched the “How to invest in you” project, that is an online course, produced by the Association, which will lead financial education to college students. Throughout the course, students have contact with various concepts of personal investments, such as guidelines to create a saving and start investing. By the end of 2015, 6,726 students from several universities have already completed the course.

Self-regulatory Supervision

As the Association believes in the market self-regulation efficiency, ANBIMA has among its main institutional guidelines the commitment to coordinate the voluntary self-regulation process, with rules drawn up by the market – self-regulation codes – met by the market, returning in favor of the market itself.

TOTAL

Inscriptions 794.740

Exams Performed 597.977 95% 151.422 94% 1.274 94% 5.024 96% 755.697

Approvals 336.892 56% 85.462 56% 402 32% 2.057 41% 424.813

Absences 29.696 5% 9.046 6% 87 6% 214 4% 39.043

CPA-10 CPA-20 CGA CEA

627.673 160.468 1.361 5.238

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In order to verify compliance with the rules set by the market itself, the technical staff from the Association performs the supervision of the institutions that are adherent to the self-regulation codes. There are two kinds of supervision:

• Indirect: Continuous monitoring of compliance with the rules and methods set out in the self-regulation codes by the participating institutions. This is performed through document analysis, statistic filters routine, and thematic supervision (when one specific matter is chosen to be looked closer).

• Periodic: Application of questionnaires focused on the business of the participants of the self-regulation codes, searching for the understanding of the process and control environment of the institution. After this, on-site visit can be performed with an emphasis on specific issues, optimizing its performance and making it more effective and targeted. This supervision model has a preventive focus, not acting only in the fact (i.e. not being compliance with the code) but also in the cause of the problem.

Supervision’s statistics

Source: ANBIMA (jun/16)

In 2015 the Association released the SSM (Markets Supervision System), an online environment through which ANBIMA’s market supervision exchange information with members of institutions adherents to the self-regulation codes. The platform’s goal is to improve the exchange of data, gaining speed and efficiency. 2.346 users from 657 institutions already use the platform.

Investment Fund and Qualified Services Code

The self-regulatory codes contains all rules that were discussed and built in committees in order to improve the functioning of the market, and in this way, ANBIMA ensures that the rules and good practice suggestions are appropriate to the Brazilian market reality.

Between 2015 and the first semester of 2016 the most relevant implementations in these codes were:

• Investment Fund Code adaptation to the new documents required by the implementation of CVM Instruction nº 555;

CodesAdhrent

InstitutionsInvestigations

Clarification Requests

PAI (Process of Investigating Irregularities)

Initiated Process

Guidance letters

Objective Fines

Letters of Recommendation

Commitment Agreement

Warning letters

Certification 812 26 2 0 80 6 3 0 0Investment Funds 642Investment Funds

(Category Distributor) 117

FIP/FIEE 311 14 0 0 31 0 0 0 0Manager of

Financial Assets 29 16 0 0 8 0 0 0 0Trading of Financial

Instruments 133 75 0 0 54 10 0 0 0Public Offering 274 6 2 0 28 10 2 0 0

Retail 75 34 0 0 61 0 0 0 0Private Banking 18 23 0 0 11 0 0 0 0

Qualified Services 49 25 1 0 20 5 0 1 0

Investigations and Applied Penalties

281 3 2 213 274 1 6 0

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• Qualified Services Code adaptation to the new rules of the CVM Instruction 542 (custody) and inclusion of the transfer agents activities in the self-regulation rules;

• Detailing the internal policy for the selection, contracting and monitoring of the services providors contracted by the administrator;

• Establishment of minimum criteria for the elaboration of the risk policy adopted by the manager, policy that is requested due to the implementation of CVM Instruction nº 558.

Besides that, in the beginning of 2016 it was conducted internally in the Association an initial work related to a reformulation in the Investment Fund Code, seeking to restructure the document and verify the need to address new topics. The subject will continue to be discussed whithin the Association with the cooperation of the associates.

New Funds Classification – ANBIMA

After two years of discussion, the new funds classification entered into force in October, 2015. The new ANBIMA classification of investment funds seeks to put together investment funds with the same characteristics, identifying their strategies and risk factors in order to facilitate the comparison of performance between products. Its structure was built with the purpose of facilitating the investment decision process and to increase market transparency.

The new model has three levels of detail, seeking to reflect the logic of disinvestment process. As a result, it promotes an easier understanding without loss of technical depth, with clear risk factors and strategies. It was inspired by international standards, preserving the characteristics of the local industry.

In October, 2015, it was also created a specific classification for real estate investment funds, with the purpose of facilitating comparision between this funds and promote more transparency for investors.

The new model has two levels of details. The first one is called “mandate”. It determines the fund’s objective in accordance with the purpose of the investment, while the second level classifies the fund by type of management: passive or active. The ANBIMA type is the combination of these two levels. In addition, institutions should also define the business segment of the fund.

Sustainability

With the recognition of the growing importance of the topic sustainability in the financial market, ANBIMA created a forum for exchange of experiences between fund managers that are signatories of the PRI (Principles for Responsible Investment). These principles attest the commitment of these companies towards environmental, social and corporate governance (ESG) in choosing their portfolio and assets.

The goal is to maintain an active agenda of initiatives in order to spread the ESG integrated management work of all associated assets.

Cybersecurity

Recently, ANBIMA developed a cybersecurity guide describing effective practices to guide the implementation of a cybersecurity program by the institutions and contribute to the improvement of cybersecurity controls in the financial and capital markets of Brazil. The objective of this document is to disseminate practices and procedures for developing a cybersecurity policy, considering the experience of the local market and what is being done internationally.

The initiatives described in said document are recommendations in order to serve as a reference for those responsible for implementing these policies, and also for the education of the professionals.

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6. Corporate governance – major developments

It was created a workgroup in order to analyze the impacts brought by CVM Instruction 555. Among many other suggestions made by the group, it was proposed a new classification of investment funds. During the months of March and April 2015, due to the new instruction the group made several adjustments on the investment funds code and submitted its new version to public hearing. The new version of the code, containing between its adjustments the new classification of investment funds, entered into force on October 01, 2015. A similar process happened with the discussion regarding the implementation of CVM Instruction nº 558, when a workgroup was also created in order to evaluate its impacts. Due to the new instruction, several amendments were suggested on the investment funds code, and the document was submitted to public hearing between January and February 2016. The new version of the code, containing, among other amendments, the establishment of minimum criteria for the elaboration of the risk policy by the manager, entered into force in July, 2016

7. Fund governance

ANBIMA leaded discussions among market participants regarding the CVM public hearing nº. 4/14, whose draft replaced CVM Instruction nº. 409 to CVM Instruction nº 555.

The new Instruction resulted in a number of substantial changes to Brazilian investment funds industry. The objective was to modernize aspects that relate to the administration, operation and disclosure of information regarding investment funds. In this context, some items on analysis preach the relaxation of investment limits in some financial products, reducing the number of types of funds, optimization of mandatory operational processes in addition to proposals on the commissions and performance fee.

The rule was published on December 17, 2014, and entered into force on October 01, 2015.

ANBIMA also leaded discussions among market participants regarding the CVM public hearing nº. 10/14, whose draft replaced CVM Instruction nº. 306 to CVM Instruction nº 558.

The new instruction provides for two separate activities, with the corresponding categories “Portfolio Manager” and “Fiduciary Administrator”. It also brought stricter requirements on the qualification of professionals and transparency in the provision of resources for managing the accounts.

The rule was published on March 26, 2015, and entered into force on July 01, 2016.

8. Other major issues and developments

ANBIMA continues to arrange a series of meetings with regulators. The Association worked to create an agenda with regulators such as Brazilian Central Bank, Security and Exchange Commission of Brazil, Brazilian IRS, Superintendence of Complementary Private Pension (Previc), BNDES (The Brazilian Development Bank), Brazilian National Treasury, among others, aiming to keep the relationship closer and have an easier way to treat specific matters. In 2015 there were over 92 meetings with regulators in order to discuss improvements to the market.