Given the unprecedented high volatility of the Brazilian capital markets and the restrictions imposed by governments on the movement of people due to the coronavirus pandemic, the Brazilian Securities Commission (CVM) has adopted several measures to foster the economy and provide more flexibility for market participants to comply with the rules governing the Brazilian capital markets.
To help companies navigate the various measures introduced by CVM in this context, we present below a brief analysis of the main rules concerning the Brazilian investment funds industry issued since the beginning of the covid-19 pandemic crisis:
Public offering of quotas issued by investment funds
- Quotas of investment funds can be publicly offered to investors pursuant to either (i) the regular procedure set forth in CVM Instruction No. 400/03, as amended, which requires prior registration with CVM, or (ii) the restricted efforts procedure set forth in CVM Instruction No. 476/09, as amended. Under the latter, a public offering exempt from registration with CVM could be directed to up to 75 professional investors, provided that only 50 of them would be able to subscribe or acquire the quotas issued by the relevant investment fund.
- CVM Instruction No. 400/03: CVM introduced the following flexibilization rules concerning public offerings of investment funds implemented pursuant to CVM Instruction No. 400/03:
- Changes to public offerings already registered with CVM: as a rule, changes to public offerings that have already been registered but not yet liquidated require prior approval from CVM according to article 25 of CVM Instruction No. 400/03. As an exception, CVM issued Circular Letter Nº 2/2020-CVM/SRE, on February 28, 2020, pursuant to which the autarchy will automatically approve requests that fulfill the following requirements, extending the distribution of the offering for an additional 90-days period: (i) the requests are filed with CVM during 30 days as of March 13, 2020, and (ii) the requests are justified by the proven deterioration and volatility of the investment scenario. In the latter case, the modifications of public offerings could be immediately implemented by submitting the amended documentation to CVM and issuing a communication to investors in this regard. If the change is implemented under the exception described, investors shall be given an opportunity to withdraw from the investment commitment within 5 days as from the receipt of the communication on this regard.
- Interruption of the analysis period by CVM: according to article 10 of CVM Instruction No. 400/03, the issuer and the leading bookrunner of a public offering could request the interruption of the analysis of a public offering for a period of up to 60 business days. Upon the issuance of CVM Deliberation No. 846, on March 16, 2020, however, the interruption period of a particular public offering could be extended to up to 180 business days. CVM will monthly review the effectiveness of the provisions of Deliberation No. 846, including such possible extended interruption period.
- Quiet period and limitation on the trade of quotas: article 48 of CVM Instruction No. 400/03 sets forth limitations for issuers, bookrunners and individuals involved in the relevant offering on (i) the disclosure and use of certain information until the offering is formally disclosed to the market, and (ii) the trade of the securities that will be publicly offered until a notice informing the end of the public offering is issued to the market. As an exception to such general rule, Circular Letter No. 3/2020-CVM/SRE, issued on March 18, 2020, sets forth that, during the interruption of a public offering based on CVM Deliberation No. 846, those agents will not be required to comply with such general limitations until the issuer and the bookrunners decide to resume the analysis of the public offering request by CVM.
- CVM Instruction No. 476/09: CVM introduced the following flexibilization rules regarding public offerings with restricted efforts implemented under CVM Instruction No. 476/09:
- Restriction on public offerings with restricted efforts of the same type of securities: article 9 of CVM Instruction 476/09 prevents the issuer or the person offering securities from carrying out public offerings with restricted efforts of the same type of securities under CVM Instruction 476/09 for four months as of the end or cancellation of the preceding offering. Pursuant to item IV of CVM Deliberation No 848, issued on March 25, 2020, the effectiveness of the provisions setting forth the restriction on the implementation of public offerings with restricted efforts of the same type of securities under CVM Instruction 476/09 was interrupted for four months, as from March 27, 2020 to July 27, 2020. CVM clarifies, under item 3 of Circular Letter No. 4/2020-CVM/SRE, issued on April 9, 2020, that such interruption applies to all public offerings of securities distributed with restricted efforts initiated during the period mentioned above, provided that there is no other offering with restricted efforts of the same type of securities outstanding.
- Restriction on the trade of securities: article 13 of CVM Instruction 476/09 sets forth that investors acquiring investment fund quotas in the context of a public offering with restricted efforts are prevented from trading those securities on regulated markets for 90 days as from the date of the relevant acquisition or subscription. As an exception to such general rule, CVM Deliberation No. 849, issued on March 31, 2020, interrupts the effectiveness of the provisions setting forth such lock-up for 4 months period as from April 1, 2020. CVM also clarifies, under item 4 of Circular Letter No. 4/2020-CVM/SRE, that such interruption shall apply to securities subject to public offerings distributed with restricted efforts subscribed or acquired (i) before the validity of CVM Deliberation No. 849, or (ii) during the validity of CVM Deliberation No. 849, which is April 4, 2020 to August 1, 2020, even if the relevant 90-days lockup goes beyond August 1, 2020. In this context, it is worth mentioning that the subscription or acquisition of securities under a particular public offer with restricted efforts can take place during a certain period, in the sense that subscriptions or acquisitions could occur after the August 1, 2020 deadline. In this case, provided that the investment fund quotas are subscribed or acquired during the validity of CVM Deliberation No. 849, the interruption will apply even if the lock-up restriction theoretically goes beyond August 1, 2020.
- Virtual general meetings: item VI of CVM Deliberation No. 849 authorizes all types of investment funds to hold virtual ordinary or extraordinary general meetings to approve any matters during 2020, regardless of the existence of a provision in their bylaws on this subject, provided that all investment fund's quotaholders are duly informed and given the opportunity to participate in such meetings within the deadlines required under the applicable regulations.
- Cancellation or adjournment of general meetings: considering that physical general meetings conflict with the determinations of the Brazilian Ministry of Health and the recommendations of the World Health Organization regarding social distancing, CVM clarifies, under item 4 of Circular Letter No. 6/2020/CVM/SIN, issued on March 26, 2020, that, in the light of the public interest and given the current circumstances, it is justified to cancel or adjourn general meetings, even if they have already been called, in cases in which it is not possible to hold them remotely, either through virtual meetings or formal consultations, provided that the deadlines set forth in the applicable regulations, as extended by CVM Deliberation No. 848 (as we will explain below), are complied with.
Fulfillment of regulatory obligations
- Submission of financial statements to CVM: item IV of CVM Deliberation No. 848 extended for an additional 30-days period, as of March 25, 2020, the deadline for submission to CVM of audited financial statements of all types of investment funds.
- Approval of financial statements by general meetings
- Deadline for approval of financial statements: CVM extended for an additional 3-months period the deadline for general meetings of credit rights investment funds (FIDCs), hedge funds (ICVM 555 funds), and private equity funds (FIPs) to approve their financial statements, according to subitems (c), (k), and (m), respectively, of item VII of CVM Deliberation No. 848.
- Automatic approval of financial statements: as an exception to the general rule, item VII of CVM Resolution No. 849 authorizes the automatic approval of financial statements of all types of investment funds, for the fiscal years ended between December 31, 2019 and March 31, 2020, provided that (i) a virtual meeting is called pursuant to item VI of CVM Deliberation No. 849 (as explained above) and is not installed due to the absence of investors, and (ii) the corresponding audit report does not contain a modified opinion.
- Confirmation and update of the enrollment of market participants with CVM: items VII, (g), and VIII, (m), of CVM Deliberation No. 849 extended the deadline for market participants (including administrators of investment funds) to (i) confirm that the information contained in their enrollment with CVM continues to be valid, which usually needs to be done by March 31 of each year, for an additional 3-months period, and (ii) update their enrollment with CVM in case there is any change in the information previously provided (which usually needs to be done in 7 business day) for an additional 7-business days period.
- Submission of internal controls and procedures report: subitems (f), (h), (i), (j) and (l) of item VII of CVM Deliberation No. 848 extended for an additional 3-months period the deadline for the submission of assessment and recommendation reports by the executive officers responsible for internal controls and procedures of intermediary institutions (companies authorized to participate in the Brazilian securities distribution system), centralized depositary agents (companies rendering services of centralized deposit of securities), custodians, bookkeepers, as well as administrators and portfolio managers of investment funds to their management bodies.
- Submission of reference form: subitem (l) of item VII of CVM Deliberation No. 848 extended for an additional 3-months period the deadline for investment funds’ administrators and portfolio managers submitting their reference forms to CVM.
- Concentration and diversification requirements: as a general rule and subject to the penalties that may be imposed by CVM in case of non-compliance, investment funds’ administrator and portfolio managers are required to follow the concentration and diversification rules outlined in the applicable legislation and in the investment funds’ bylaws. In response to market participants’ concerns to the compliance of such rule in view of the current high volatility of the market and the lack of liquidity of certain assets, CVM clarified that the timeframe for adjusting investment funds’ portfolios could be relaxed depending on the circumstances. In this regard, CVM expressed the understanding, under item 2 of Circular Letter No. 6/2020/CVM/SIN, that, in situations in which the unpredictability and materiality of the market conditions make it impossible to adopt measures to adjust the investment funds’ portfolio during the timeframe normally required under the applicable regulations, CVM could decide, based on the assessment of circumstances on a case-by-case basis, not to apply penalties to investment funds’ administrators and portfolio managers if: (i) the non-compliance results from abrupt exogenous facts causing unpredictable and material changes to the capital markets conditions (e.g., passive market conditions), and (ii) timeframe required for the adjustment of the investment fund’s portfolio is considered reasonable, taking in consideration for that purpose (a) the nature and liquidity of the investment fund’s assets, and (b) the best efforts adopted by the portfolio managers, in line with their fiduciary duties, to solve the problem.
- Temporary substitution of time reference for calculating the value of quotas issued by hedge funds: some of the hedge funds offering intraday liquidity governed by CVM Instruction No. 555/14, as amended, may opt in their bylaws to calculate the value of their quotas based on their reference in the opening of the market. Due to unprecedented high volatility of the capital markets caused by the covid-19 pandemic crisis, several hedge funds that made such option have been experiencing operational hurdles to maintain such time reference. In response to investment funds` administrators concerns in this regard, CVM clarified, in item 3 of Circular Letter No. 6/2020/CVM/SIN, that it is admissible for hedge funds offering intraday liquidity to, exceptionally and during the peak of adverse, extreme and unpredictable market conditions, to replace the opening of the market for its closing as a reference for calculating the value of quotas, for purposes of making payments and redemptions to investors. This rule only applies, however, if the hedge fund in this situation informs the market, through a material fact notice, about its operational hurdles and the decision to temporarily make use of such alternate time reference for calculation of quotas.
- Provision for doubtful debts by credit rights investment funds (FIDCs): in response to investment funds’ administrators questions in this regard, CVM clarified, under item 6 of Circular Letter No. 6/2020/CVM/SIN, that the delay in payment or the need of negotiation in connection with a certain credit does not necessarily require the investment fund to make a provision for doubtful debt if its administrator concludes that those events do not represent evidence, per se, of a reduction in the recoverable value of the asset, but are rather a result of an exceptional and temporary market situation. However, CVM alerts investment funds’ administrators that such interpretation shall not be used as an excuse to avoid creating a provision when the other facts and circumstances indicate a material deterioration in the recovery capacity of the relevant credit.
- Exchange of documentation among investment funds’ service providers: in response to market participants’ questions in this regard, CVM clarifies, under item 5 of Circular Letter No. 6/2020/CVM/SIN, that the exchange of information and/or documents among administrators, portfolio managers, custodians and distributors of investment fund’s quotas do not necessarily have to be done physically or in person in accordance with the applicable regulations. Therefore, from a regulatory standpoint, there is no limitation on the exchange of documents and information among those market participants remotely and in a virtual manner.