The Joint Circular Letter No. 2/2024/CVM/SIN/SSE ("Letter"), published by the CVM last Friday, seeks to clarify specific points of Resolution CVM No. 175/2022, as amended, which establishes the guidelines for the operation of investment funds in Brazil.
Absence of Distribution Fee Requirement
An important innovation introduced by the Resolution to improve governance and transparency in the investment fund industry was the requirement to publish the maximum distribution fee in the fund's regulations. To recap, this fee represents an annual percentage of the fund's net assets paid to distributors of its shares. However, the CVM has made an important exception to this requirement when the fund manager also acts as the distributor of the fund's shares under its management. In such cases, the CVM considers this distribution an extension of the management activity, which is already compensated through the management fee.
This exemption aligns with Article 33 of Resolution CVM No. 21/2021, which sets conditions for portfolio managers to also distribute shares of the funds they manage. This article allows portfolio managers to distribute shares, provided they comply with specific regulations, such as client registration, suitability of products to the investor’s profile, anti-money laundering compliance, and the designation of a director responsible for distribution activities, who can also assume management responsibilities. Furthermore, the article relaxes certain rules, such as the need for physical segregation between management and distribution departments, allowing them to share facilities, provided the manager only distributes shares of funds they manage.
This measure highlights the legal protection intended by the CVM, establishing one of the key segregation rules in the capital markets: the separation between management and distribution. Historically, those buying (managers) should not also be "selling" (distributors), especially when dealing with other people's money.
However, in this specific case, since the manager is distributing only shares of funds they already manage, and given the various restrictions imposed by Resolution CVM No. 175/2022 on investments in funds managed by the same manager, the exception to segregation is justifiable. Maintaining the obligation of separation in this context would incur higher compliance costs than the benefits it would bring to the market.
Despite the exemption from the maximum distribution fee, the segregation of functions remains mandatory, as is the clear identification of management fees (remunerating the manager for managing resources) and administration fees (covering the operational work of the fund, such as controls and payments). This transparency can be detailed in the fund's regulation or in the Remuneration Summary, a standardized document by ANBIMA, which centralizes information on costs charged to the fund's investors.
Clarifications on the Organization into Classes and Subclasses
The Letter also clarified situations where single-class funds may be modified into multi-class funds by unilateral action of the fund manager, without the need for approval at a general meeting. This measure depends on the fund's start date (whether before or after the implementation of Resolution CVM No. 175/2022), the provisions in its regulation, and the purpose of the new class (whether it will receive new contributions or involve the transfer of investors).
Subclasses allow for further detailing, segmenting the characteristics of the share classes to meet specific target audiences or strategies. For example, feeder funds, which primarily invest in another fund, can be reorganized into subclasses without requiring approval at a general meeting, as long as the originally agreed conditions with investors are maintained, such as redemption terms and investment policy, and no fee increases occur.
Specific Procedures for Operations
During the adaptation period to Resolution CVM No. 175/2022, the CVM implemented specific procedures for operations such as spin-offs, mergers, and class transfers. These transformations are common in funds reorganizing their structures to comply with the new rules. Transformed classes must be closed in the SGF system, and detailed information about the transformations should be submitted in CSV format spreadsheets. When a class of a single-class fund is transferred, the fund is automatically closed in the system.
International Exchange Traded Funds (ETFs)
Another important issue addressed by the Letter concerns International ETFs, treated as a special category under Resolution CVM No. 175/2022. According to Article 42, § 4, they are not considered "foreign investment funds or vehicles" and, therefore, are subject to specific rules. To invest in these International ETFs, local funds must observe the general limits of exposure to foreign investments set out in Article 43, §§ 1 and 2, being exempt from additional restrictions under the same article. This approach aims to simplify Brazilian investors' access to International ETFs, broadening investment diversification opportunities.
In interpreting the detailed provisions of Resolution CVM No. 175/2022, the Letter emphasizes the flexibility and transparency mechanisms that funds must adopt.
For further clarification, please reach out to the Banking & Finance team at FAS Advogados.
