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The AssetManagement
Review
Law Business Research
Third Edition
Editor
Paul Dickson
The Asset Management Review
The Asset Management Review Reproduced with permission from Law Business Research Ltd.
This article was first published in The Asset Management Review - Edition 3(published in September 2014 – editor Paul Dickson).
For further information please [email protected]
The Asset Management
Review
Third Edition
EditorPaul Dickson
Law Business Research Ltd
THE MERGERS AND ACQUISITIONS REVIEW
THE RESTRUCTURING REVIEW
THE PRIVATE COMPETITION ENFORCEMENT REVIEW
THE DISPUTE RESOLUTION REVIEW
THE EMPLOYMENT LAW REVIEW
THE PUBLIC COMPETITION ENFORCEMENT REVIEW
THE BANKING REGULATION REVIEW
THE INTERNATIONAL ARBITRATION REVIEW
THE MERGER CONTROL REVIEW
THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW
THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW
THE CORPORATE GOVERNANCE REVIEW
THE CORPORATE IMMIGRATION REVIEW
THE INTERNATIONAL INVESTIGATIONS REVIEW
THE PROJECTS AND CONSTRUCTION REVIEW
THE INTERNATIONAL CAPITAL MARKETS REVIEW
THE REAL ESTATE LAW REVIEW
THE PRIVATE EQUITY REVIEW
THE ENERGY REGULATION AND MARKETS REVIEW
THE INTELLECTUAL PROPERTY REVIEW
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THE ASSET MANAGEMENT REVIEW
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PUBLISHER Gideon Roberton
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Published in the United Kingdom by Law Business Research Ltd, London
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ISBN 978-1-909830-22-6
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i
The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
ACKNOWLEDGEMENTS
ADVOKATFIRMAET BA-HR DA
AL TAMIMI & COMPANY
ANDERSON MŌRI & TOMOTSUNE
ARTHUR COX
BARBOSA, MÜSSNICH & ARAGÃO
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HENGELER MUELLER
J SAGAR ASSOCIATES, ADVOCATES & SOLICITORS
Acknowledgements
ii
KIM & CHANG
KING & SPALDING LLP IN ASSOCIATION WITH THE LAW OFFICE OF MOHAMMAD AL AMMAR
LENZ & STAEHELIN
MANNHEIMER SWARTLING ADVOKATBYRÅ AB
MAPLES AND CALDER
ROPES & GRAY LLP
SLAUGHTER AND MAY
STIBBE
STIKEMAN ELLIOTT LLP
TSMP LAW CORPORATION
UDO UDOMA & BELO-OSAGIE
URÍA MENÉNDEZ
iii
Editor’s Preface ..................................................................................................viiPaul Dickson
Chapter 1 EUROPEAN OVERVIEW .........................................................1Michael Sholem
Chapter 2 AUSTRIA ..................................................................................39Martin Zuffer and Roman Hager
Chapter 3 BELGIUM ................................................................................54Jan Peeters, Fran Ravelingien, Wim Panis and Giovanni Smet
Chapter 4 BERMUDA ...............................................................................69Anthony Whaley and Elizabeth Denman
Chapter 5 BRAZIL.....................................................................................82Anna Carolina Malta and Carla Vilmar da Motta Veiga
Chapter 6 CANADA ................................................................................100Alix d’Anglejan-Chatillon and Jeffrey Elliott
Chapter 7 CAYMAN ISLANDS ..............................................................116Jon Fowler, Anna Goubault and Krista-Lynn Wight
Chapter 8 CHINA ...................................................................................130Richard Guo and Zhen Chen
Chapter 9 FINLAND...............................................................................145Janne Lauha, Leena Romppainen, Hannu Huotilainen
Chapter 10 FRANCE .................................................................................159Arnaud Pince
CONTENTS
iv
Contents
Chapter 11 GERMANY .............................................................................173Thomas Paul and Christian Schmies
Chapter 12 HONG KONG .......................................................................186Jason Webber, Peter Lake and Ben Heron
Chapter 13 INDIA .....................................................................................203Dina Wadia, Jay Gandhi and Swati Mandava
Chapter 14 IRELAND ...............................................................................217Kevin Murphy, David O’Shea, Jonathan Sheehan, Sarah McCague, Elizabeth Bothwell and Jennifer McCarthy
Chapter 15 ITALY ......................................................................................230Giuseppe Rumi, Daniela Runggaldier, Riccardo Ubaldini and Michele Dimonte
Chapter 16 JAPAN .....................................................................................246Naoyuki Kabata and Takahiko Yamada
Chapter 17 KOREA ...................................................................................266Jean Lee, Chisoo Kim and Soobin Ahn
Chapter 18 LUXEMBOURG ....................................................................277Jacques Elvinger, Joachim Kuske and Olivier Gaston-Braud
Chapter 19 MALTA ...................................................................................295André Zerafa and Stephanie Farrugia
Chapter 20 NETHERLANDS ...................................................................307Joost Steenhuis and Lotte Boon
Chapter 21 NIGERIA ................................................................................319Dan Agbor, Folake Elias-Adebowale and Christine Sijuwade
Chapter 22 NORWAY ...............................................................................332Peter Hammerich and Markus Heistad
v
Contents
Chapter 23 PORTUGAL ...........................................................................347Carlos Costa Andrade, Marta Pontes, Miguel Stokes, Diogo Tavares and Gerard Everaert
Chapter 24 QATAR ...................................................................................360Rafiq Jaffer and Dina Al-Wahabi
Chapter 25 RUSSIA ...................................................................................369Pavel Karpunin, Anastasia Fomicheva and Dmitry Churin
Chapter 26 SAUDI ARABIA .....................................................................383Nabil A Issa and James Stull
Chapter 27 SINGAPORE ..........................................................................394Stefanie Yuen Thio and Dayne Ho
Chapter 28 SOUTH AFRICA ...................................................................404Johan Loubser and Andrea Minnaar
Chapter 29 SPAIN .....................................................................................420Juan Carlos Machuca Siguero and Tomás José Acosta Álvarez
Chapter 30 SWEDEN ...............................................................................440Emil Boström and Jonas Andersson
Chapter 31 SWITZERLAND ....................................................................452Shelby R du Pasquier and Maria Chiriaeva
Chapter 32 UNITED KINGDOM ...........................................................466Paul Dickson
Chapter 33 UNITED STATES ..................................................................506Jason E Brown, Leigh R Fraser and John M Loder
Appendix 1 ABOUT THE AUTHORS .....................................................523
Appendix 2 CONTRIBUTING LAW FIRMS' CONTACT DETAILS .....547
vii
EDITOR’S PREFACE
Following several challenging years in the wake of the damage wrought by the global financial crisis, in 2013 markets showed signs that the tentative economic recovery is beginning to take hold. The asset management industry has seen some of the positive effects, with global funds under management at an all-time high. In the private equity sector, 2013 saw the highest aggregate amount of capital raised since 2008 and a record number of private equity buyout deals. With the global population becoming larger, older and richer, as well as government initiatives (such as the UK’s automatic enrolment of employees into employer-sponsored pension schemes) potentially increasing funds under management even further, Bank of England Chief Economist Andrew Haldane’s suggestion that we are entering an ‘age of asset management’ seems well justified.
The activities of the financial services industry remain squarely in the public and regulatory eye and the consequences of this focus are manifest in ongoing regulatory attention around the globe. Regulators are continuing to seek to address perceived systemic risks and preserve market stability through regulation, including, in Europe, the revised Markets in Financial Instruments package and the Alternative Investment Fund Managers Directive. Further scrutiny on a global level also appears likely. The Financial Stability Board and the International Organization of Securities Commissions recently consulted on proposed methodologies to identify global systemically important nonbank, non-insurer financial institutions (including investment funds). Industry stakeholders agree that regulatory change – in particular the volume, scope and complexity of new requirements – continues to be one of asset management’s greatest challenges.
It is not only regulators who have placed additional demands on the financial services industry in the wake of the financial crisis; a perceived loss of trust has led investors to demand greater transparency around investments and risk management from those managing their funds. Investors and regulators are also demanding greater clarity on fees and commissions charged by fund managers for services provided.
This continues to be a period of change and uncertainty for the asset management industry, as funds and managers act to comply with new regulatory and investor requirements and adapt to the changing geopolitical landscape. There does appear,
Editor’s Preface
viii
however, to be some cause for optimism. Confidence has begun to return across a number of areas and more positive assessments of the global economic outlook, reflected in a strong performance in equity markets over the period, raise the prospect of increased investment and returns. Although the challenges of regulatory scrutiny and difficult market conditions remain, there have also been signs of a return of risk appetite. The industry is not in the clear, but prone as it is to innovation and ingenuity, it seems well placed to navigate this challenging and rapidly shifting environment.
This third edition of The Asset Management Review includes coverage of a number of additional jurisdictions, reflecting the global importance of the industry and this practice area. The publication of this edition is a significant achievement, which would not have been possible without the involvement of the many lawyers and law firms who have contributed their time, knowledge and experience to the book. I would also like to thank Gideon Roberton and his team at Law Business Research for all their efforts in bringing the third edition into being.
The world of asset management is increasingly complex, but it is hoped that the third edition of The Asset Management Review will continue to be a useful and practical companion as we face the challenges and opportunities of the coming year.
Paul DicksonSlaughter and MayLondonSeptember 2014
82
Chapter 5
BRAZILAnna Carolina Malta
and Carla Vilmar da Motta Veiga1
I OVERVIEW OF RECENT ACTIVITY
The Brazilian financial market has improved its macroeconomic stability, built up foreign reserves and reduced its debt profile.
Despite slower growth in the past few years, the government implemented a series of more expansionary monetary and fiscal policies – such as tax benefits for investments in the infrastructure sector – that have made Brazil an attractive destination for foreign investors.
After a decade of consistently positive trends, Brazil is now experiencing some ups and downs. With the upcoming presidential elections and rising interest rates, the country has seen popular protests that may well continue until the next government outlines its plans for the coming four years.
As an emerging market, however, high interest rates and uncertainty around the new economic strategies should not impair structural reforms that will tend to brighten the economic outlook, attracting funds from foreign institutional investors and hedge funds. The 2016 Olympics and the regulatory package that the federal government has already put in place should also enhance these improvements to the country’s infrastructure.
1 Anna Carolina Malta is a partner and Carla Vilmar da Motta Veiga is an associate with Barbosa, Müssnich & Aragão.
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II GENERAL INTRODUCTION TO THE REGULATORY FRAMEWORK
i Legal and regulatory structure of the Brazilian securities marketsThe Brazilian capital and financial markets are regulated and supervised by the National Monetary Council (CMN), Brazilian Central Bank (BACEN) and the Brazilian Securities and Exchange Commission (CVM).
In Brazil, the creation and operation of organised securities markets and custody and settlement systems require prior authorisation by either the CVM or BACEN, depending on the market. The CMN, created by Federal Law 4595/1964, is the most important regulatory agency within the national financial system. The CMN’s responsibilities include ensuring the availability of credit and the payment of credit transactions, establishing operating limits for financial institutions, and issuing regulations on foreign investment and foreign exchange in Brazil.
All the members of the national financial system, including BACEN and the CVM themselves, must comply with the rules issued by the CMN.
BACEN is responsible for implementing the monetary and credit policies established by the CMN, regulating the foreign exchange market and capital flows, authorising the incorporation of new financial institutions, supervising existing institutions, and overseeing transactions by public financial institutions as well as private sector players, and applying penalties.
Brazil’s securities market regulator, the CVM, was created by Federal Law 6385/1976. Its duties include:a ensuring the proper functioning of the stock exchange and over-the-counter
(OTC) markets;b protecting all securities holders against fraud and illegal actions performed by
company managers, controlling shareholders or mutual fund managers;c preventing or inhibiting fraud or manipulation that may give rise to artificial
price formation in the securities market;d ensuring public access to all relevant information on traded securities and issuers;e ensuring that the market participants adopt fair trading practices;f stimulating the formation of savings and their investment in securities; andg promoting the expansion and efficiency of the securities markets and the
capitalisation of Brazilian publicly held companies.
ii Foreign investmentGenerally, investments made by non-residents – either legal entities or individuals – in Brazil do not face a broad range of legal restrictions. There are no requirements regarding minimum investment in Brazilian companies, although foreign investment in certain regulated sectors, such as financial institutions, insurance companies, press and broadcasting companies, is either limited or prohibited.
The general legislation applicable to foreign investments in Brazil is Federal Law 4131/1962. In addition, the CMN, BACEN and the CVM have all issued regulations to establish procedures for registration of the different types of foreign investment in Brazil.
Under the foreign investment regulations, non-resident investors must comply with the requirements of one of the following regulations to invest in Brazil:
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a CMN Resolution 2689/2000 and CVM Instruction 325/2000, which govern investment in the Brazilian financial and capital markets (portfolio investments) and which are currently being reviewed by the CVM and BACEN; or
b CMN Resolution 3844/2010, which governs foreign direct investment.
Portfolio investmentsUnder CMN Resolution 2689/2000, non-residents have the right to invest in Brazilian financial and capital markets using the same mechanisms available to resident investors. Non-resident investments in these markets must be registered electronically with BACEN so that any sums generated in connection with the investment can be remitted abroad.
Depending on their nature, the portfolio investment must be registered, held in custody, kept in a deposit account with a financial legal entity, or registered in the proper registration, clearing and custody systems.
In addition, in general, the assets must be issued by public companies and traded on the stock exchange and organised OTC markets, with some exceptions, such as the conversion of bonds into shares and subscription rights. Consequently, portfolio investment assets may only be transferred by regular transactions on the stock exchange or organised OTC markets. As an exception to this rule, transfers may take place abroad if they result from a corporate restructuring or the death of the investor.2
Foreign direct investmentDirect equity investments in Brazilian companies must be registered electronically with BACEN. BACEN’s record of the investment covers basic data relating to the invested company and the investor (prior to actual inflow of funds) and the basic terms and conditions of the investment.
The amount registered with BACEN as foreign investment includes the original investment (whether in cash or in kind), subsequent additional investments and potential reinvestments. The aggregate amount constitutes the basis for capital repatriation and computation of any capital gain for tax purposes.
There are no restrictions on the distribution and remittance of profits abroad, or on the capital repatriation of foreign investments duly registered with BACEN.
iii Registration requirements
As a general rule, the securities markets in Brazil are not open to foreign agents attempting to access Brazilian residents. Under Brazilian law, anyone who offers securities or provides
2 Pursuant to CMN Resolution 2689/2000, non-residents investing in the Brazilian financial and capital markets must perform the following acts prior to the actual inflow of funds:
a appoint a representative in Brazil (generally a financial legal entity). Among other duties, the representative must register the portfolio investment with BACEN and the CVM, and keep its registration up to date;
b submit a completed CMN Resolution 2689/2000 Annex Form to BACEN containing basic information regarding the non-resident, his or her representative and his or her tax status; and
c register with the CVM.
This rule is currently being reviewed and changes are expected soon.
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investment management services to Brazilian residents must be registered with the CVM. Additionally, all transactions must be carried out or registered in regulated markets, in compliance with suitability rules. To register the transaction, the registrant must be a member of the Brazilian distribution system (for securities registration) or qualified to render investment advisory services (for asset management registration). In both cases, the foreign entity must incorporate a company in Brazil to obtain the registration and, depending on the kind of registration, the entity would be subject to requirements such as minimum capital stock, services to be provided and physical structure.
For this purpose, foreign investors attempting to access Brazilian residents usually establish a local presence in Brazil by acquiring an existing Brazilian company or incorporating a new company.
Among the different types of organisation, corporations and limited liability companies are the two most common in Brazil. The choice of company type will take into account, inter alia, the desired ownership structure and legal flexibility, cost, and confidentiality considerations.
Registration of a Brazilian subsidiary does not, however, authorise the foreign investor to offer foreign securities or investment management services in Brazil. The foreign securities themselves, if considered to be a public distribution in Brazil, must also be registered. A securities offering in Brazil will be considered a public distribution: if it employs any kind of notice, offering circular or other form of standardised communication addressed to the public in general; if an underwriter of the securities is engaged; if the securities are made available at any business or other premises open to the public; or if any form of spoken or written advertising is used to promote the sale of the securities. The type of security offered is not relevant to the question of whether its offering constitutes a public distribution in Brazil.
As mentioned above, only members of the distribution system registered with the CVM are authorised to carry out activities involving securities in the Brazilian market, including broker or dealer services. Accordingly, foreign financial institutions or other agents are not allowed, as a general rule, to offer, sell or intermediate the sale of securities to Brazilian residents, or to access the Brazilian market without the proper registration with the CVM.
The CVM has issued two Guidance Letters setting out the guidelines to be followed in the offering of securities issued and traded abroad to Brazilian potential investors.3
3 Guidance Letter No. 33 issued on 30 September 2005 states that: a only entities duly registered with the CVM may distribute securities in Brazil; b authorisation by a foreign authority to offer securities abroad under foreign laws does not
grant any person or entity the right to offer securities in Brazil; c a foreign party that intends to offer securities issued abroad to a Brazilian resident must
obtain the applicable registration with the CVM or engage a person who is already registered with the CVM to offer the securities; and
d the foreign securities to be offered or their issuer are subject to registration with the CVM.
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Foreign agents that offer foreign securities to Brazilian residents contrary to Brazilian law (especially if the investment requires the outflow of funds from Brazil) are exposed to administrative proceedings that can result in the banning of the foreign agent from the Brazilian securities market and fines of up to 500,000 reais, 50 per cent of the amount of the securities issue or the irregular transaction, or three times the amount of the economic advantage gained or loss avoided due to the violation.
iv Asset managementAccreditation by the CVMCVM Instruction 306/1999 governs the entire asset management registration and accreditation process, from the documents that must be submitted to the CVM, to rules of conduct and manager responsibilities. The Instruction is currently being reviewed by the CVM, and changes are expected soon.
As a general rule, all asset management firms are required to appoint one officer or managing partner as the individual answerable to the CVM for the firm’s securities portfolio management activities. The CVM may approve the appointment of more than one responsible officer or managing partner if the asset management firm manages security portfolios that differ in nature, as long as the firm’s management structure establishes a strict division between the portfolios, such that each has its own independent and exclusive management, especially with respect to the investment decision-making process.
The CVM is required to respond to the application within 30 days of filing. If missing or additional documents or information are requested by CVM, the 30-day period will be interrupted, and a new 30-day period will begin to run when the requested documents or information are submitted. Both asset management firms and individuals can apply for authorisation to act as securities portfolio managers at the same time.
Accreditation by the Brazilian Association of Financial and Capital Market EntitiesThe Brazilian Association of Financial and Capital Market Entities (ANBIMA) is a self-regulatory agency with an important role in the control and regulation of the asset management market. It sets even stricter standards than the CVM, thus conferring more
Guidance Letter No. 32 issued on September 30 2005 states that the use of the internet as a mechanism to inform Brazilian residents of a securities offering can also be considered to be a public offering, since the internet allows indiscriminate access to information published on it. Features the CVM considers relevant are:
a the existence of a clear and visible announcement on the website that the offer is made only to residents of other countries (the list of countries must also be available);
b effective measures to prevent Brazilian residents from accessing the website; c the marketing of the website to Brazilian residents through unsolicited e-mail, search engines,
other internet websites or magazines, etc.; and d clear evidence that the website was intended to be accessed by Brazilian residents (e.g.,
information provided in Brazilian currency, or including Brazil or Brazilian companies, will be considered as evidence that the offer was made to Brazilian residents).
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credibility to its associated institutions, and making the financial and capital markets more competitive, better qualified and fairer.
It has become a market requirement that all asset management companies be either accredited by ANBIMA, which means that the asset management company becomes a permanent member of ANBIMA, or adhere to its codes (which is a simpler option for the asset management companies that seek only to comply with financial institution requirements), which involves filing various documents and information with ANBIMA. As a result, most financial institutions that are either accredited by or have adhered to ANBIMA’s codes may only hire asset management companies that are also associated with or have adhered to ANBIMA’s codes.
Since 26 March 2014, ANBIMA requires that professionals appointed by accredited asset management companies as the officer responsible to the CVM hold the ANBIMA manager’s certification.
III COMMON ASSET MANAGEMENT STRUCTURES
In Brazil, most investment funds are governed by CVM Instruction 409/2004, which establishes clear rules on products, participants’ responsibilities and obligations, classification and type of funds, investment policies, concentration limits (including limits on investment in assets traded abroad), and information to be provided to regulators and the public in general. Investment funds governed by CVM Instruction 409/2004 are classified according to the composition of their portfolio.
The following table contains a brief description of the main types of funds governed by CVM Instruction 409:4
ClassesPortfolio composition
Conditions3
Description Limit 2 (of net assets)
External debt1
Foreign debt securities. Unlimited
Foreign (10% of net assets) or Brazilian (10% of net assets) derivatives, for hedging only.
Securities representing the external debt of the federal government. Min. 80%
Other credit securities traded in the international market. Max. 20%
Referenced1
Government bonds and fixed income bonds or securities with low credit risk. Min. 80%
Derivatives only for hedging spot positions. Debt securities that directly or indirectly
accompany the fund’s benchmark. Min. 95%
Foreign debt securities. Max. 10%
4 Based on the information made available in ANBIMA’s Non-Resident Investors’ Guide, updated in May 2014 and available at www.anbima.com.br.
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ClassesPortfolio composition
Conditions3
Description Limit 2 (of net assets)
Stock
Stock, stock warrants, units in equity funds and stock index funds, and Brazilian depositary receipts.
Min. 67% Main risk factor must be the variation in the prices of stock traded on the spot market on stock exchanges or the OTC market.Investment in any other kind of assets. Max. 33%
Foreign debt securities. Max. 10%
Multi-market1
Foreign debt securities. Max. 20% Investment policies that involve various risk factors, without a commitment to concentrate on any particular factor.Other investments. Min. 80%
Fixed income1
Fixed income securities and derivatives. Min. 80% Main risk factor of the portfolio must be the variation in domestic interest rates or price indexes, or both.Foreign debt securities. Max. 10%
Foreign exchange1
Securities and derivatives that reflect foreign exchange rates. Min. 80% Main risk factor of the portfolio must
be the variation in the foreign currency rates, or in the foreign exchange coupon.Foreign debt securities. Max. 10%
Short term
Low-risk government and corporate bonds fixed or indexed to BACEN’s special clearance and escrow system rate or any other interest rate, and securities linked to price indexes, with a maximum term of 375 days, and an average portfolio term of less than 60 days.
100% Derivatives only for hedging and for repo transactions backed by federal government bonds.
Foreign debt securities. Max. 10%
Fund of funds
Units in investment funds of the same class. Min. 95%
Multi-market funds of funds may invest in funds belonging to different classes.4
Demand deposits or government bonds, or both, fixed income securities issued by financial institutions and repo transactions.
Max. 5%
1 May include the words ‘long-term’ in the fund name to indicate differentiated tax treatment.
2 Concentration limits per issuer and per asset type also apply.
3 Investment fund units may be registered on Cetip (the organised OTC market).
4 Investment in funds not covered by CVM Instruction 409 is not permitted, except for exclusive investment funds and qualified investor multi-market investment funds.
i Other investment funds
Receivables investment funds Receivables investment funds (FIDCs), governed by CVM Instruction 356/2001, have most of their net assets in receivables generated by transactions in the financial, commercial, industrial, real estate, mortgage, lease and service markets.
CVM Instruction 444/2006 governs investment funds in non-standardised receivables (FIDC-NP), which allows investment in a broader range of receivables, including receivables under supply agreements, Brazilian bonds and litigated claims.
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Emerging businesses mutual funds Emerging businesses mutual funds in Brazil (FIEEs) are governed by CVM Instruction 209/1994. FIEEs must be set up as closed-end funds.
At least 75 per cent of FIEEs’ net assets must be invested in shares, convertible debentures or share warrants issued by emerging businesses, which are defined as companies with annual net revenue of less than 150 million reais. Any remaining funds must be invested in fixed-rate investment funds, bonds or securities traded on a stock exchange or the organised OTC market.
The following table contains a brief description of the main types of investment funds governed by specific regulations. For more on private equity funds and real estate investment funds, see Section V, infra.5
Other investment funds
ClassPortfolio composition
Remarks2Description Limit 1 (of
net assets)
Real estate funds(FIIs)
Any rights in real estate. Any security registered or authorised by the CVM issued by companies doing business in real estate.
Units in private equity funds (FIPs) or FIDCs that invest exclusively in FIIs.
Additional construction rights certificates, real estate receivables certificates, mortgage notes and real estate credit notes.
100%
FIIs that invest more than 50% in equity securities must comply with the concentration limits regarding issuer and security type under CVM Instruction 409.
Receivables funds(FIDCs)
Receivables Min. 50%
Limit of 20% of net assets in receivables and other assets from the same debtor. Investments can be made only in qualified investor funds, with a 25,000 reais minimum.
Federal, state and municipal government bonds, bank deposit certificates, receipts of deposits and other securities, bonds and fixed-income assets.
Repo transactions and derivatives can be acquired for hedging purposes only.
Max. 50%
Emerging businesses (FIEEs)
Stock, convertible debentures and share warrants issued by emerging companies (annual net revenue of 150 million reais or less).
Min. 75%Daily positions in securities of emerging companies may reach 50%, as long as the average is 75% over a 180-day period.
Fixed-income securities, stock, convertible debentures and share warrants issued by non-emerging companies and shares in public companies.
Max. 25%
5 Based on information made available in ANBIMA’s Non-Resident Investors’ Guide, updated in May 2014 and available at www.anbima.com.br.
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Private equity(FIPs)
Stock, debentures, share warrants, and other securities and shares convertible or exchangeable into shares of public or private companies, participating in the decision-making process of the investee company.
Derivatives for hedging only.
100%Only qualified investors may invest in FIPs, with a minimum investment of 100,000 reais.
1 The limits established in the regulation relating to portfolio diversification must also be complied with.
2 Quotas of investment funds may be registered with Cetip. Alternatively, quotas in the FII and FIDC may be registered with the CBLC.
ii Qualified investor funds
Investment funds may be created exclusively for qualified investors. Under current rules, qualified investors are financial institutions, insurance companies and capitalisation companies, pension funds, individuals and legal entities that have investments worth more than 300,000 reais and that attest to this in writing.
An investment fund that requires a minimum investment by the investor of 1 million reais does not need to comply with the concentration limits regarding issuers, type of security, and foreign securities established by the regulations.
The rule that defines qualified investors is currently being reviewed by the CVM.According to a report dated May 2014, more than 2.5 trillion reais is invested in
funds regulated by ANBIMA.6
Distribution by investor amount (in billions of reais)
December 2008
December 2009
December 2010
December 2011
December 2012
May 2013
May 2014
Institutional 1 481 570.1 684.5 763.1 866.7 917 988.7
Corporate2 139.8 208.1 256.4 307.8 331.5 343.1 367.1
Private 148.4 190.8 225.1 261.9 332 342.5 387
Retail 3 247 282 292.4 318.6 346.5 345.3 365.4
Other4 97.9 105.3 131.6 120.9 155.5 167.3 181.6
Public authorities5 77.4 97.9 108,6 152.7 189.8 227.5 252.5
Total 1,191.6 1,454.4 1,698.9 1,925.2 2,222.3 2,342.9 2,542.3
1 Public pension funds, private pension funds, insurance companies, open private pension funds, savings funds investment funds.
2 Corporate, middle market.
3 Retail, retail (high income).
4 Others, foreigners.
5 In March 2008, a new division of public authorities was created that receives amounts from other divisions.
6 The report is available at www.anbima.com.br.
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IV KEY TRENDS
i Infrastructure
Over the past few years, the federal government has created tax benefits attached to infrastructure debentures, infrastructure investment funds and other investments in the sector to promote financing of long-term infrastructure projects in specific sectors, such as logistics and transportation, and other areas the federal government considers to be priorities.7
Currently, the income tax rate is zero for earnings from infrastructure debentures received by individuals resident in Brazil, or by individuals and companies domiciled outside Brazil (unless domiciled in a tax haven), making these earnings effectively tax-free, while earnings received from infrastructure debentures by legal entities domiciled in Brazil are subject to income tax at a rate of only 15 per cent. Likewise, income from investment funds that are set up to invest at least 85 per cent (reduced to 67 per cent in the fund’s first two years) of their net assets in infrastructure debentures is also currently subject to zero-rate income tax when paid to individual investors in Brazil or foreign investors under CMN Resolution 2689/2000 (unless located in a tax haven); income paid to legal entities domiciled in Brazil is taxed at a rate of 15 per cent.
For investors to benefit from these favourable tax rates, the infrastructure debentures must pay interest at a rate fixed in advance and linked to a price index or reference rate. Post-fixed interest rates are prohibited, as are repurchasing by the issuer or any related party within the first two years after issuance, early redemption or prepayment, and commitment by the purchaser to resell the debentures. In addition, if interest will be paid periodically under the debentures, the gap between payments must be at least 180 days, and the average maturity of the debentures must be more than four years. As amended by the Provisional Measure 651/2014, this benefit was extended to infrastructures debentures issued prior to 1 January 2021.
Two types of investment funds also benefit from the favourable tax rate applicable to income from infrastructure debentures or infrastructure debenture funds: infrastructure private equity funds (FIP-IEs), and research, development and innovation private equity funds (FIP-PD&Is). To enjoy this tax benefit, FIP-IEs and FIP-PD&Is must be dedicated to investment in infrastructure projects or intensive economic production in research, development and innovation in fields such as energy, transportation, water supply and basic sanitation, irrigation or other areas considered to be priorities by the federal administration.
ii Private equity
Important changes were made to CVM Instruction 391/2003, which governs the formation, management and operation of private equity funds (FIPs) by CVM Instruction 535/2013. As a result of the changes, FIPs are now able to grant guarantees
7 See, for example, Federal Law 11,478/2007, Federal Law 12,431/2011, Federal Law 12,844/2013, Decree 7,603/2011 and Federal Law 12,715/2002.
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and acceptances, upon approval at a meeting of the fund’s unitholders (with unitholders representing at least two-thirds of the units issued by the fund voting in favour).
CVM Instruction 540/2013 also amended CVM Instruction 391/2003 to encourage investment by FIPs in small and medium-sized companies, by eliminating the requirement that FIPs have effective influence in setting the strategic policy and defining the management of invested companies, when: (1) the invested companies are listed on trading segments with stricter corporate governance standards; and (2) such investments represent no more than 35 per cent of the FIP’s net assets.
iii Investment funds in general
Another important recent change in Brazilian regulation was the amendment of CVM Instruction 409/2004 (which governs the formation, management and operation of the investment funds in general) by CVM Instruction 536/2013. The changes provide for compulsory approval by the CVM of requests for transformation of open-end funds into closed-end investment funds, when the fund has only one unitholder or is directed exclusively to qualified investors. The purpose is to speed up the CVM’s decision on the transformation of the fund, when the transformation has been approved by the unitholders.
CVM Instruction 409/2004 was also amended by CVM Instruction 549/2014, which created the ‘market access investment fund’ (FMA). At least two-thirds of an FMA’s portfolio must be invested in companies listed on certain corporate governance trading segments that allow gradual access to the market. The remainder of the funds may be invested in securities issued by private companies, as long as the FMA has an effective influence in its decision-making process, the company complies with certain standards of corporate governance and as long as the FMA is incorporated as a closed-end fund. The purpose of the FMA is to encourage investment in companies which have not made a public offering of their shares, but intend to or have the potential to go public in the future.
iv Anti-money laundering
Another very important change in the law occurred in 2012, with the enactment of Federal Law 12,683/2012 (the AML Law), which creates the crime of money laundering and establishes administrative obligations for private entities and individuals.
Brazil is a full member of the Financial Action Task Force and therefore follows international standards regarding anti-money laundering rules and procedures.
In 2013, the CVM issued CVM Instruction 534 to support the effort against money laundry practices, requiring asset management companies, investment funds, underwriters, and public companies (among others) to report suspicious financial transactions.
The most noteworthy change made by the AML Law was to revoke the previous list of specific offences and replace it with an open-ended list of money-laundering offences. The AML Law also replaces the term ‘crime’ with the term ‘criminal offence’ in order to include, along with crimes, lesser offences punishable with alternative sanctions.
The regulatory authorities for anti-money laundering matters are those agencies with jurisdiction over individuals and entities that are subject to the AML laws, such
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as BACEN, the CVM, the Private Insurance Superintendency (SUSEP), the National Pension Funds Superintendency (PREVIC) and the Council for Control of Financial Activities. These authorities are responsible for issuing specific regulations under the AML Law, as well as investigating and applying administrative sanctions to offenders.
v Suitability
In November 2013, the CVM established suitability rules under CVM Instruction 539. Among other provisions, the Instruction states that: (1) the product, the service and the transaction must be adequate to the client’s investment objective; (2) the client’s financial condition must be compatible with the product, service and transaction; and (3) the dealer must check to ensure that the client has the necessary financial expertise to understand the risks related to the product, services and transaction.
vi Restricted-efforts offering
Alongside CVM Instruction 400/2003, which governs public offerings of securities in Brazil, there is CVM Instruction 476/2009, which deals with public offerings of securities with restricted sales efforts and the trading of such securities on regulated markets (which include closed-end investment funds). The introduction of ‘restricted-efforts’ offerings under CVM Instruction 476/2009 brought several benefits to the Brazilian market, reducing costs and presenting new financing alternatives for companies that previously could not access the capital market.
However, to qualify as a restricted-effort offering, the offering must comply with certain limits established by the CVM, such as:a the offering must be directed exclusively to qualified investors;b underwriters can only approach a maximum of 50 qualified investors but only 20
can subscribe for or acquire the securities;c the minimum amount for subscription and subsequent trading per investor is
1 million reais;d securities can only be traded on the regulated market after a 90-day lock-up
period; ande issuers cannot make another public offering of the same type of security within
four months of the settlement of the offering.
Securities placed through restricted-efforts offerings can be acquired by foreign investors as a Portfolio Investment under CMN Resolution 2689/2000, described above.
The CVM Instruction 476/2009 is currently being reviewed by the CVM.
V SECTOR REGULATION
i Insurance
A significant element of the Brazilian financial sector, the insurance market is dominated by large insurance companies that are part of banking groups.
The highest administrative authority in the Brazilian insurance sector is the National Private Insurance Council (CNSP), which is responsible for establishing government policies, guidelines and directives. SUSEP, in turn, is the CNSP’s executive,
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regulatory, supervisory and enforcement division. The CMN establishes rules on the quality of the investments made by insurers, which are supplemented by requirements established by the CNSP and SUSEP.
To deal with solvency problems in the insurance sector, SUSEP took a positive step towards modernising capital requirements by moving solvency requirements toward a more risk-sensitive regime.
ii Pensions
Pensions are one of the three pillars of the Brazilian social security system, alongside health and social assistance. They are divided into three main groups: the basic public social security system, for employees in the private sector, the civil servants’ system (which, like the basic public system, is mandatory), and the private system.
The private system is voluntary and privately managed. It is divided in two segments: the individual system, which operates open pension plans and is open to individual employees, self-employed individuals and the unemployed; and the occupational system, which operates closed plans and is restricted to the covered employees of the sponsoring employer.
The CMN periodically issues resolutions concerning closed pension fund investments. The most important regulation is CMN Resolution 3792/2009, which establishes quantitative investment limits for closed pension funds. Closed pension funds are the biggest investors in the Brazilian capital market and, following changes to the regulations, they are now allowed to invest in international markets. PREVIC issues instructions to clarify the applicable legislation and regulations and to assist plan sponsors and pension fund entities.
Additionally, the government grants tax benefits for retirement savings plans and redeemable life insurance plans, in the form of exempt contributions and deferred taxation of reinvested earnings to encourage medium to long-term saving by individuals in Brazil.
iii Real estate funds (FIIs)
FIIs in Brazil are governed by CVM Instruction 472/2008, which has been instrumental in the growth of the real estate investment funds in Brazil.
CVM Instruction 472/2008 brought about an historic change by allowing FIIs to invest in securities and other assets related to the real estate sector. Furthermore, FIIs dedicated to fixed income investments, such as real estate receivables and equity securities, have attracted new participants in the market, such as real estate securities fund managers.
FIIs are subject to specific tax treatment. Withholding taxes paid by the fund can be credited when the fund distributes earnings and capital gains to quotaholders. However, this credit is only applicable to individual investors and not to corporations. Furthermore, the amount of withholding tax paid that may be credited is limited by the proportion of individual unitholders in the fund.
In December 2011, the CVM issued a new regulation on FIIs, CVM Instruction 516/2011, which provides that FIIs are subject to the accounting principles applicable to
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public companies. The exceptions to this rule are related to the valuation criteria of real properties that are classified as investment properties.
iv Hedge funds
Brazilian law does not establish a definition of hedge fund; as in other jurisdictions, this type of fund does not follow a benchmark, but pursues a high-yield return on the fund’s investment. Hedge funds can be structured in the same manner as investment funds governed by CVM Instruction 409.
v Private equity
Brazilian FIPs are governed by CVM Instruction 391/2003.In Brazil, only qualified investors8 (resident or non-resident) can invest in FIPs,
which must be closed-end funds. Although FIP units can be redeemed only when the fund’s term of duration
expires or the fund is liquidated, the units can be traded or transferred at any time, on the market or by private transaction, except in the case of units held by non-resident investors, which can only be traded on a stock exchange or the organised OTC market, pursuant to CMN Resolution 2,689/2000 (see Section II.ii, supra).
Since this type of investment is targeted at qualified investors only, the CVM has made the rules applicable to securities funds more flexible by allowing the unitholders and the manager to establish, in the fund’s regulations, most of the rules governing their relationship.
FIPs can invest in shares, debentures, share warrants or other securities convertible into shares issued by public or private companies, as long as the fund has an effective influence in the decision-making process of the company in which it invests, and defining its management and strategic policy, especially through the appointment of members of the board.
When the invested company is closely held, CVM Instruction 391/2003 provides that it must comply with certain corporate governance rules.
FIPs are not permitted to trade in derivatives of any kind, except for hedging purposes involving options based on, or convertible into, securities held by the fund.
vi Venture capital
In recent years, Brazil has seen the creation of several high-profile firms offering venture capital funds or investments that have had good results in the country. The recent World
8 According to Article 109 of CVM Instruction 409, qualified investors are: a financial institutions; b insurance companies and capitalisation societies; c private welfare investment funds; d natural or legal persons that hold investments worth more than 300,000 reais; e investment funds directed exclusively to qualified investors; and f portfolio administrators and securities consultants authorised by the CVM, in relation to
their own funds.
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Cup and the upcoming Olympics have further elevated the country’s profile. According to research, in 2014, there are more than 10,000 venture capital firms managing around 2 billion reais, which represents a significant increase over previous years.9
The government has intensified initiatives to enhance the venture capital industry.
VI TAX LAW
Broadly speaking, foreign investors holding portfolio investments governed by CMN Resolution 2689/2000 are taxed as follows:a exemption from tax on capital gains on transactions effectively carried out on the
stock exchange, the future and commodities exchange, or on similar entities,10 except for gains earned on transactions structured in such a way as to provide to the investor a pre-determined or fixed return (for instance, this exception applies to box options);
b gains earned on equity fund investments, swap transactions and futures market transactions carried out off the stock exchange are subject to tax at a rate of 10 per cent; and
c income from other transactions, including those classified as fixed income investments (such as investments in Brazilian public bonds registered under the SELIC system and in fixed income funds) are taxed at a rate of 15 per cent.
Brazilian income tax applies only on the gain or income generated on the above-mentioned transactions. No tax is levied on repatriation of the amount originally invested.
As a general rule, the party to the transaction who is responsible for paying the income or gain is responsible for withholding and collecting any income tax that may be due. There are, however, some exceptions, in which case the income tax should be collected by the financial entities appointed by the foreign investor as its representatives and the parties responsible for performing the foreign investor’s tax obligations in Brazil.
Although foreign investors must obtain a federal taxpayer registration number to invest in the financial and capital markets in Brazil, registration with the Brazilian tax authorities does not subject the investor to payment of tax in Brazil on his or her global income; Brazilian taxes will only be levied on transactions carried out in Brazil.
A foreign investor that does no more than invest in the Brazilian capital and financial markets is not required to file a tax return, and is not considered to have a permanent establishment in Brazil.
A financial transaction tax, IOF, is imposed on certain types of financial transactions at varying rates that depend on the maturity terms and the type of transaction:
IOF/Câmbio is levied on the conversion of Brazilian currency into foreign currency. The IOF/Câmbio rate is currently zero, but the Minister of Finance has the power to increase the rate to a maximum of 25 per cent.
9 Information available at the Brazilian Startups Association website: www.abstartups.com.br/.10 ‘Similar entities’ are those whose purpose is similar to the above-mentioned exchanges and
whose activities are under the jurisdiction of the CVM.
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IOF/Títulos is owed on transactions related to the acquisition or disposal of debt and equity securities. The IOF/Títulos is currently zero for:a transactions on the stock exchange, on the future and commodities exchange or
on similar entities; b acquisition and redemption of investments in equity funds; and c swap transactions.
The Minister of Finance, however, has the power to increase the rate to a maximum of 1.5 per cent of the amount of the taxed transaction for each day the investor holds the investment. With regard to fixed income assets (including bonds and funds), there is no IOF/Títulos if the investments are liquidated or redeemed at least 30 days after acquisition.
VII OUTLOOK
i New CMN Resolution 2689/2000
On 5 February 2014, BACEN held a public consultation on proposed changes to the rules on foreign investment in the Brazilian financial and capital markets.
The purpose of the changes is essentially to standardise, simplify and unite in a single regulatory instrument the rules on foreign investment in the Brazilian financial and capital markets, to allow foreign investment in Brazilian currency, and to expand the range of assets that can back depositary receipts programmes.
The proposal not only updates the language of CMN Resolution 2689/2000, but also clarifies certain issues, such as:a foreign investors in Brazil must be represented by a Brazilian financial institution
(or entity authorised by the BACEN), of which the instruments of incorporation must contain express provisions regarding its powers of representation, including reporting to the BACEN and the CVM, receipt of summons or notices on behalf of foreign investors, etc.;
b the possibility of performing simultaneous currency exchange transactions, when (1) funds held by foreigners in Brazil, in reais, are converted into foreign investments in the local market; (2) investments held in Brazil in the form of foreign direct investment are transformed into investments in the financial and capital markets; (3) funds invested in depositary receipts are transferred to other types of investment in the local market, among other cases;
c the CVM’s powers to make specific exceptions to the rules governing foreign investment under CMN Resolution 2689/2000, to allow foreign investors to transfer or acquire of securities off the stock exchange and organised markets; and
d foreign investment in Brazilian investment funds must also be registered under the changes proposed in CMN Resolution 2689/2000.
ii New CVM Instruction 306/1999
CVM Instruction 306/1999, the main regulation governing asset management, is currently under revision by the CVM, and a number of improvements in the Brazilian market are expected as a result.
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The CVM held public consultations on the draft of the new Instruction in January 2012, but because of the complexity of the issues involved, market agents’ comments on the draft are still being reviewed. While the market expects the new regulations will be adopted soon, it is not possible to say precisely when the CVM will issue the new Instruction.
Some of the more important aspects under discussion in the new Instruction are:a to demonstrate the experience necessary to manage assets, the CVM intends to
require that all individual candidates be approved in a certification exam instead of simply providing evidence of professional experience in portfolio management (this certification is already required by ANBIMA – see Section II.iv, supra);
b applicants will be able to limit their accreditation with the CVM to a specific segment of the market, so that applicants will only be accredited to manage specific groups of financial assets;
c improved disclosure of periodic information by managers; andd improved rules of conduct and internal controls, compliance and physical
segregation of facilities between areas responsible for different activities.
iii Changes to CVM Instruction 476/2009
On 21 January 2014, the CVM submitted to public consultation an amendment to CVM Instruction 476/2009, which governs public offerings of securities with restricted sales efforts and the trading of such securities on regulated markets (which include closed-end investment funds).
The main change proposed by the draft is to include stock and convertible debentures issued by Category A companies among the securities that can be sold through a restricted-efforts public offering.
The amendments are intended to improve the regulatory environment so that smaller companies are able to access capital markets and obtain funds through public offerings of stocks. At present, restricted-efforts offerings are limited to companies registered with the CVM in category A, regardless of their size, that are in compliance with certain requirements and conditions established in CVM Instruction 476/2009.
Currently, qualified investors who are not institutional investors can only purchase a minimum of 1 million reais in securities under an Instruction 476 offering. However, in the secondary market, these investors can trade in any amount after the lock-up period.
The proposed amendment makes significant changes to the definition of qualified investors and to the number of investors that can be accessed in this type of offering. For example, legal entities and individuals will be classified by the value of their financial investments, or by their expertise, and will be considered ‘qualified investors’ when the value of their investments is over 1 million reais, and ‘professional investors’ when the value is over 20 million reais or when the investor is: (1) an asset management firm; (2) an investment fund; (3) a foreign investor; (4) an open or closed private pension plan fund; (5) an independent investment agent, portfolio manager, securities analyst, or advisor authorised by the CVM, regarding their own funds; (6) a financial institution or other institution authorised to operate by BACEN; or (7) an insurance company or an investment capital company.
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To eliminate the need for the minimum investment amount established by CVM Instruction 476/2009, there would be, in principle, three new regulatory options: (1) restrict trading in all cases to professional investors; (2) restrict trading in all cases to qualified investors; and (3) restrict trading in the primary market to professional investors and in the secondary market to qualified investors.
The draft, however, proposes that trading in primary and secondary markets occur only between professional investors, except when the offering is made by public companies or when the investment fund that is making the offering has an offering memorandum.
iv New CVM Instruction 409/2004
On 28 April 2014, the CVM also submitted to public consultation the draft of a new CVM Instruction, which will govern the constitution, administration, operation and reporting requirements of investment funds in general, replacing the current CVM Instruction 409/2004.
The draft is intended to modernise the rules governing investment funds in various respects, particularly by:a enhancing the use of electronic media; b streamlining the quantity and form of information disclosure; c promoting greater transparency regarding the distribution policy; d prohibiting receipt of any kind of remuneration that could affect the independence
of the fund’s management;e improving the rules on fund performance; and f eliminating the limits on investment in certain financial assets, especially assets
issued abroad.
The draft also incorporates issues clarified by Circulars, positions taken by the Commissioners of CVM in their decisions, and matters dealt with in punitive administrative proceedings.
This update of CVM Instruction 409 is part of CVM’s ongoing effort to improve its regulations and to adopt best practices consistent with the needs and specificities of the Brazilian market.
v Conclusion
Consistent efforts by market players and Brazil’s regulators, especially the CVM, have made Brazilian investment funds among the best organised and most transparent in the world, supported by mechanisms such as daily disclosure of key data, and ANBIMA’s initiative in establishing standards of conduct for all industry participants.
On an international scale, a boost to infrastructure financing in emerging markets came from the creation of a development bank by the leaders of the BRICS nations, demonstrating that these countries intend to work together as a political group to direct more resources to developing countries in ways that are consistent with their own interests and needs.
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Appendix 1
ABOUT THE AUTHORS
ANNA CAROLINA MALTABarbosa, Müssnich & AragãoAnna Carolina Malta joined BM&A in October 2002 and has been a partner since 2010.Previously, she was a trainee and attorney at BBM Bank (1996–2000).
She obtained her law degree from the Pontifical Catholic University – Rio de Janeiro (1997).
She is a member of the Brazilian Bar Association, Rio de Janeiro section.
CARLA VILMAR DA MOTTA VEIGABarbosa, Müssnich & AragãoCarla Vilmar da Motta Veiga joined Barbosa, Müssnich & Aragão in May 2004.
She has an LLM (with a corporate law specialisation) from New York University School of Law (2010) and an LLB from the Pontifical Catholic University – Rio de Janeiro (2005).
She was a trainee at the Brazilian Securities Commission – CVM from 2003 to 2004.
She is a member of the Brazilian Bar Association, Rio de Janeiro section.
BARBOSA, MÜSSNICH & ARAGÃOAv Almirante Barroso, 52 – 31st FloorCentro20031-000 Rio de JaneiroBrazilTel: +55 21 3824 5866 / 5868Fax: +55 21 2262 [email protected]@bmalaw.com.brwww.bmalaw.com.br