Circular Letter CVM/SIN 02/23

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br Circular Letter No. 2/2023/CVM/SIN Rio de Janeiro, May 3, 2023

To administrators and managers of investment funds Subject: Interpretation of provisions of the Normative Annex I of CVM Resolution No. 175

Dear Sirs,

This Circular Letter aims to disseminate the interpretations of the Superintendence of Institutional Investor Supervision (“SIN”) regarding the provisions of the Normative Annex I of CVM Resolution No. 175.

We recommend, for a better understanding of the topics presented herein, that the interpretations now exposed be read together with those previously disseminated through Joint Circular Letter No. 1/2023/CVM/SIN/SSE, which dealt with joint interpretations by SIN and SSE regarding the general part of CVM Resolution No. 175.

For better organization of the subjects, the clarifications will be made through questions and answers that were consolidated from doubts received from the market.

Sincerely,

Digitally signed by
DANIEL WALTER MAEDA BERNARDO
Superintendent of Institutional Investor Supervision

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

Table of Contents
A) Capital risk exposure ........................................................................................................ 3
B) Portion of the performance fee to be paid to the distributor ........................................................ 6
C) Exception for restricted classes ..................................................................................................... 7
D) Investment abroad ............................................................................................................ 8
E) Fund portfolios .................................................................................................................. 11
F) Communication between essential providers and CVM ..................................................................... 11
G) Declassification and deadlines for communication ....................................................................... 12
H) Verifications necessary by the Administrator ........................................................................... 12
I) Limits per issuer ................................................................................................................... 13
J) Investment class in shares ...................................................................................................... 14
K) Responsibilities of custodians ......................................................................................... 16
L) ISIN and other codes ................................................................................................................ 16
M) Maximum deadlines for achieving limits applicable to classes ......................................... 17
N) Single class distribution ...................................................................................................... 17
O) Exposure of the administration fee ........................................................................................ 18
P) Cryptoassets .............................................................................................................................. 18
Q) Carbon credit .................................................................................................................. 19

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

A) Capital risk exposure

Long and Short Funds: We feel the lack of specific treatment for Long and Short funds. We understand that such funds should not have margin limits due to the particularities of the product and because they have specific criteria, since, in practical situations, they consume more margin not only due to operations in derivatives, but also by maintaining positions in BTC. What is the rationale followed by CVM for not treating these funds specifically?

Answer: It is worth reporting, initially, the issuance of CVM Resolution No. 181, which, by amending CVM Resolution No. 175, included § 5th in article 73 of Annex I, expressly dispensing funds denominated in the market as long and short from complying with capital risk exposure limits.

In any case, we remind you of the need to provide for the classification of the fund as long and short in the fund's investment policy, as well as the establishment in the bylaws of the maximum margin limits to which the fund may be exposed, as a minimum transparency measure regarding up to what level the fund intends to make use of exposures of this nature as part of its strategy.

Domestic market operations vs. foreign operations: We proposed in our manifestation that the controls for capital risk exposure consider only the operations carried out by the funds in the domestic markets, not considering operations carried out abroad, but we did not identify such segregation in Res. CVM 175. We understand that such segregation is necessary, as operations abroad have their own characteristics (controls, requirements, limits, metrics, among others) not fully compatible with the parameters of the local market.

If the rule in fact encompasses the operations carried out abroad, we will certainly find great distortions and complexities in the observance and implementation of the rules. What is the rationale followed by CVM for not segregating investments, and what is the expectation for practical implementation considering the differences between domestic and international markets and controls?

Answer: We understand the complexity that the theme can assume in the case of positions abroad, but the non-application of capital risk exposure requirements to these positions would generate asymmetry of treatment in their favor that would not be justified. Thus, the manager must, in light of this rule, define a calculation methodology that takes into account the value of the margins required in operations carried out with collateral added to the potential margin of derivative operations abroad without collateral added to the margins required for derivative positions carried out in the local market.

The responsibility for consolidation on funds invested abroad regarding margin falls on the manager or on the administrator?

Answer: It falls on the manager, maintaining the verification by the administrator (article 25, II, of the Normative Annex I).

Art. 16, Sole Paragraph, of Annex I provides that “the class is exposed to capital risk when it carries out operations in value greater than its equity”. Doubts remain about how to reconcile the concept presented in this article with the margin consolidation metric presented in Art. 73 also of Annex I.

This is because Art. 16 appears to approach the concept of notional, while Art. 73 deals expressly with margin. Furthermore, the concept presented by Art. 16 also generates confusion when reading the definition of exposure to capital risk presented in Art. 3; XXIV of the General Rule: exposure of the share class to the risk of its net equity becoming negative due to applications of its asset portfolio.

What is the regulator's understanding on this theme?

Answer: We understand that the concepts of article 16 and 3rd, XXIV have the ambition to define the concept of “exposure to capital risk”. The requirements of article 73, on the other hand, define the metric and limits to assess this exposure (although, it is to be recognized, sometimes margins do not represent these concepts with total fidelity, and hence the existence of distinct limits and some exceptions to their compliance). Thus, by having different roles in the normative logic, we understand that the provisions do not conflict.

We would also like to clarify some concepts used in these articles: (i) Would the required margin be that currently already complied with by the manager with B3? (ii) Would the potential margin be calculated based on stress models disclosed by B3 (envelope scenario) taking into account everything the fund operated without required margin at B3? (iii) What did the norm mean by the concept “hedging”? Would swap operations be equivalent to deposit/margin call (swap with premium)?

Answer: The concept of Gross Margin encompasses the concepts of Required Margin and Potential Margin.

Gross Margin = Required Margin + Potential Margin

Required Margin = collateral margin required and derived from operations carried out at B3 + Hedging (collateral margin required in the local or international market excluding the collateral margin required by B3)

SECURITIES COMMISSION OF BRAZIL (CVM)
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Potential Margin = margin equivalent for derivative operations without collateral. It must be based on the administrator's margin calculation model and cannot be offset with the margins of operations with collateral.

It is also important to clarify that margin calculation must foresee scenarios of price variations in periods of normality and also in stress scenarios. It is the manager's responsibility to monitor and manage positions to avoid breaching the gross margin limits provided for in the bylaws.

Still regarding Art. 73 of Annex I, in its § 2nd it is provided that the calculation of potential margin must be based on the administrator's margin calculation model, consistent and verifiable, and cannot be offset with the margins of operations that have hedging or collateral margin. Will the potential margin in fact be calculated based on the administrator's model? Shouldn't it be the manager's?

Answer: Due to the sensitivity of the theme and the potential for conflicts of interest that may emerge in the responsibility for calculation with the manager, the regulation opted for the administrator in this function. Nothing prevents the manager from carrying out the calculation in practice, but the administrator must endorse it at some point, given its responsibility. The administrator's attribution, in the hypothesis in question, goes beyond the duty of broader verification, consisting of a matter of specific competence and responsibility of the administrator.

Will the gross margin calculation be made taking into account the margin required by leveraged positions, or taking into account the market value of assets blocked as collateral?

Answer: The required margin must be taken into account, and not the effectively deposited.

Should the margin limits described in the norm be applicable only to funds that may be exposed above equity? If the fund does not admit being exposed above equity, will there be no margin limit?

Answer: The margin limits defined in the norm are applicable to all funds intended for qualified and non-qualified investors that carry out operations with derivatives and/or lending of financial assets, regardless of whether the exposure in derivatives is greater or not than the Fund's Net Equity.

Article 3rd, XXIV, of the Normative Annex I provides:

Art. 3rd For the purposes of this Resolution, it is understood as:
(...)
XXIV – exposure to capital risk: exposure of the share class to the risk of its net equity becoming negative due to applications of its asset portfolio;

Art. 73. Preserved the possibility of the Bylaws establishing lower limits, the manager must observe the following maximum limits of gross margin utilization:

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

(...)
§ 4th Share classes exclusively intended for professional investors do not have capital risk exposure limits, except for what may be provided in the Bylaws, in accordance with art. 17, item V, of this Normative Annex I.

Does the regulator understand that if the class does not allow exposure to capital risk, there will be, thus, no maximum margin limit? Moreover, the limits provided for in Art. 73 do not need to be observed only by professional investor classes, being still observed for qualified investors?

Answer: The exceptions for a fund not to have a margin limit are (1) that the fund cannot carry out operations with derivatives and/or lending of securities, or (2) in the hypothesis that the fund is intended for professional investors. In this sense, only for funds intended for professional investors can an unlimited margin limit be provided. It is worth remembering, furthermore, that margin control and compliance with limits established in bylaws have a prudential character, particularly in stress scenarios in which more leveraged strategies can cause runs for redemptions in more diversified funds and with investors of a more incipient level of sophistication.

B) Portion of the performance fee to be paid to the distributor

Article 28 of the Normative Annex I, as well as articles 3rd, XXXVII and 113, III, of the Resolution, provide as follows:

Normative Annex I
Art. 28. The bylaws may establish the charging of a performance fee by the manager.

Resolution
Art. 3rd For the purposes of this Resolution, it is understood as:
(...)
XXXVII – maximum distribution fee for shares: fee charged to the fund, representing the total amount for remuneration of distributors, expressed as an annual percentage of net equity (base 252 days);

(...)
Art. 113. The bylaws of the restricted share class may:
(...)
III – calculate and charge the fees provided for in the regulation according to any criterion established in its bylaws;

(i) Is it possible to rebate performance to the distributor in funds intended for the general public?

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

Answer: No, any remuneration for the distributor based on the performance fee due to the manager will only be possible for funds intended for qualified and professional investors, in accordance with article 113, III, of the Resolution. This is because article 28 of the Normative Annex I determines that remuneration by performance fee must be established in favor of the manager.

(ii) Considering the above provisions, we would like to verify if it is possible for the distributor to receive a portion of the performance fee provided for in the annex of the restricted class, since art. 113, III, allows the charging of fees according to what is provided in the bylaws. In this case, would it be permitted to provide in the annex the maximum distribution fee based on the net equity of the class, as well as a percentage of the fund's performance fee?

Answer: For qualified and professional investors, it is possible to establish a remuneration agreement on the performance fee, given the exception provided in article 113, III, of the Resolution; as well as, the calculation of a percentage of the performance fee due to the manager as an alternative way of disclosing the “maximum distribution fee” in this specific case.

(iii) In non-restricted classes, would it also be possible for the distributor to receive a portion of the performance fee provided for in the annex of the restricted class, provided that the percentage of the maximum distribution fee is not exceeded? In this case, how should the daily provision of the portion of the performance fee attributable to the distributor be made?

Answer: No. As provided in article 28 of the Normative Annex I, the performance fee for funds in general must be paid only to the manager, observed the transition of the fund stock 555, as explained in Joint Circular Letter No. 1/2023/CVM/SIN/SSE. And respected, in any case and as already exposed, the greater freedom conferred to the stipulation of more flexible remuneration agreements in restricted classes (article 113, III, of the Resolution).

(iv) In cases where the publication of the disclosure material is necessary, should the material be of the invested fund or the investing fund?

Answer: Always of the fund that is being distributed. Remembering, however, that the future possibility of use of share subclasses may render distribution feeder funds useless.

C) Exception for restricted classes

Art 76, item I, of the Normative Annex I provides:

Art. 76. In addition to the matters provided for in art. 113 of the general part of the Resolution, the bylaws of the share class intended exclusively for professional investors may provide:
I – non-observance of concentration limits per issuer and per financial asset modality, as established in arts. 44, 45 and 70, all of this Normative Annex I;

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

Is there provision for eventual non-observance of some requirements for restricted classes (provided it is provided for in their bylaws), including the private credit limit described in Art. 70 of the same Annex?

Such inclusion would bring the possibility of increasing the private credit limit, without the need to observe the requirements provided for in art. 70 (such as, for example, providing the suffix “private credit” in the name of the restricted class)?

Answer: No. Note that the requirement to include the term “private credit” in the denomination is of an informational nature, and therefore should not be understood as referring to the “concentration limits” provided for in the norm.

D) Investment abroad

The rule brought an important advance allowing greater openness to international investments, mainly for retail investors. Who will be the provider responsible for the necessary controls for the extrapolation of the 20% and 40% limits for retail and qualified respectively? The rule is not clear on this point, except for item III of paragraph 1st of article Art. 43 of Annex I, which expressly mentions the manager.

Answer: This is a classification rule, that is, of primary responsibility of the manager, with verification by the administrator (article 25, II, of the Normative Annex I).

Regarding the condition established in Art. 43, § 2nd, I of Annex I, who will be the provider responsible for verifying the referred condition? The rule is not clear on this point, unlike item II of the same device which expressly mentions the custodian.

Answer: The responsibility is with the manager, with verification by the administrator (Art. 25, II, of the Normative Annex I).

Regarding the non-provision of the “Investment Abroad” suffix for funds that exceed the limits provided for in Art. 43 of Annex I, as well as item I of Art. 70 of Annex I obliges the adoption of the Private Credit suffix in the name, the maintenance of the “Investment Abroad” suffix, for the funds and their classes that may exceed the limits provided for in Art. 43 of Annex I, would bring greater transparency to the shareholder regarding the higher limits of assets abroad that the class can observe.

Furthermore, the inclusion of the “Investment Abroad” suffix also induces a better understanding on the part of the investor regarding the representative market abroad to which it may be exposed, without prejudice to the detailing of other clauses of the bylaws.

Ideally, we understand that the maintenance of the referred suffix for the case of funds that exceed the limits of Art. 43 of Annex I should be maintained. What was the rationale used by CVM for its exclusion?

Answer: We understand that “investment abroad” is ceasing to be indicative of a specific risk factor, as in the case of Private Credit cited as an example, and hence its exclusion as a suffix in the name.

SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

Such a measure was adopted with a view to the gradual migration of the regulatory architecture to the treatment of investment abroad as just another admitted modality of investment, and not something that comes to suggest a own and individualized typology of fund dedicated to it.

In any case, it is worth remembering that in the adaptation of the systems by CVM a fund may be identified, through public consultations, as a fund with majority investment abroad, since this information will be a cadastral attribute of funds in the future.

We know that the determination of an efficient way to control exposure with derivatives in investment funds was one of the great challenges of the public hearing of CVM Resolution 175. We understand that exposure abroad should be controlled using the same metric for operations with derivatives in Brazil, namely, the collateral margin according to Section IX of Chapter VIII of Annex I regarding exposure to capital risk. However, such provision was not reflected in art. 43 of the Normative Annex I and § 3rd of the referred device ended up generating doubts about the way to control exposure abroad. In this way, we would like to clarify if the way to control exposure in derivatives abroad as stated in § 3rd of art. 43 of the Normative Annex I can be done through collateral margin?

Answer: Yes. Despite its imperfections, we understand that the collateral margin is the best metric capable of being used for the purposes of controlling fund exposure. In this context, the regulation requires symmetry of treatment between domestic and offshore exposures, in order to also avoid eventual regulatory arbitrage.

It is worth adding, furthermore, that offshore funds used as investment vehicles usually have limited liability. Thus, in the event of extreme losses that result in negative net equity in the invested offshore fund, the local fund is not obliged to contribute capital to cover these losses.

We emphasize, however, that compliance with Art. 42, paragraph 1st, item iii and paragraph 2nd would already be sufficient in terms of control, since, once carried out through control of the collateral margins, paragraph 3rd of Art. 43 would already be included in this control. In any case, it is worth clarifying that they are two different controls, and thus, the limits of exposure abroad do not confuse with the control through the collateral margin, and both need to be fulfilled and observed on a permanent basis.

COMISSÃO DE VALORES MOBILIÁRIOS
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When the manager holds influence over the investment decisions of the local and offshore funds, portfolio consolidation is viable. In this case, would it be possible to exceed the 20% limit for retail investors?
Answer: No. The limit applies to all funds, regardless of whether the manager has influence over the offshore fund. The advantage for the manager in cases where they hold influence is the ability to calculate exposure limits based on the respective actual exposure maintained by the offshore fund, considering the viability of consolidation. When such possibility does not exist, we suggest reading the answer to the following question 17.
Article 42, §2º states that in cases where the investor class manager does not hold influence over investment decisions abroad, the calculation of portfolio exposure must consider the maximum possible exposure according to the characteristics of the invested fund. What diligence is expected from the manager in these cases?
Answer: When there is no influence over investment decisions abroad, we understand that the local fund manager does not have prior access to the portfolio. Therefore, it is necessary that, at the time of investment, the manager maintains diligence to obtain sufficient information with the objective of verifying whether the investment to be made is consistent with the investor class strategy in light of its risk management policies; or alternatively, consider the maximum possible allocation for the calculation of portfolio exposure.
Is it possible for the retail class, which allows investment of up to 100% of its net asset value abroad, to invest up to 20% of its resources in assets or shares abroad that observe the provisions of Articles 41 and 42 of Normative Annex I, with the requirement provided in Article 43, §2º of Normative Annex I applying only to what exceeds the 20% limit abroad? Would the same rationale apply to funds intended for qualified investors, within their respective limits?
If not possible, would the class that can invest up to 100% of its resources abroad be prohibited from investing its resources in classes of the same manager that can allocate only 20% (retail classes), since such classes must observe only the requirements provided in Articles 41 and 42 of Normative Annex I?
Answer: No. It is important to highlight that the provision of Article 43, §2º of Normative Annex I expressly states that “all investments occur through funds or investment vehicles abroad”. That is, it is a rule that deals with feeder funds for distribution of foreign investment funds or, at most, local multi-manager funds of foreign investment funds. For this reason, the application of the general rules provided in Articles 41 and 42 does not apply, but only those provided in the device itself and in the preceding §1º of the same article of Normative Annex I.

COMISSÃO DE VALORES MOBILIÁRIOS
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E) Fund Portfolios

Article 56 of Annex I provides the minimum rules to be fulfilled for funds to be considered as equity funds, such as at least 67% of the fund's NAV needing to be allocated to a specific set of financial assets.
Currently, ICVM 555 provides in its Article 115, §1º, II that excess portfolio resources (that is, what exceeds the 67% limit) can be applied in any other modalities of financial assets, observing the concentration limits of the rule, and we notice that in CVM Resolution 175 this rule was altered.
Article 56, §1º, II of Annex I states that excess portfolio resources can be applied in any other modalities of financial assets intended for liquidity management. Clarify if the regulator's intention was indeed to restrict excess resources only to liquid assets?
Answer: The CVM's interpretation of this device is that any financial assets may compose this list, even by equivalence, admitted by the regulation of financial investment funds, even if they are not individually liquid (such as FIP shares, for example), provided that they respect the metrics adopted by the manager in their portfolio liquidity risk management, that is, that they do not compromise the payment of fund redemptions, even in stress scenarios, in accordance with Article 92 of the general part of the Resolution.

F) Interlocution between essential providers and CVM

Article 46 of Annex I deals with the responsibilities correctly attributed to the manager regarding compliance with portfolio composition and concentration limits, capital risk exposure, and concentration in risk factors. In the case of non-compliance, §2º of this same article provides that the manager will be responsible for sending a plan of action to the CVM for portfolio re-compliance.
The same occurs in Article 90 of the General Rule. It deals with the occurrence of passive non-compliance in the case of non-compliance with defined portfolio concentration and diversification limits and risk concentration, and its §2º states that the manager must inform the CVM as soon as portfolio re-compliance occurs.
Although the manager becomes expressly responsible for certain issues, the understanding was that it would continue to be the administrator's responsibility to carry out the necessary interactions with the CVM since it is the one who currently has the channel established for such communication.

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Will the manager really be responsible for carrying out communications such as those mentioned above with the CVM? If positive, how will such interaction take place? Will any new interface be created to allow communication between the manager and the CVM?
Answer: It is the administrator who will send such communications, as the agent responsible operationally for sending to the CVM, even if they were elaborated or provided by the manager, as the participant responsible for the production and elaboration of the document in question.

Still regarding compliance with portfolio composition and concentration limits, capital risk exposure, and concentration in risk factors, we request clarification on whether it is correct to understand that only situations of non-compliance that exceed 10 business days should be the subject of a plan of action by the manager, and that situations that are resolved within the period established in §1º of Article 46 do not involve any type of communication with the CVM.
Answer: Correct.

G) Non-compliance and deadlines for communication

Considering that the current rule of ICVM 555 deals with consecutive days for these provisions, we understand that from the entry into force of CVM Resolution 175 the deadlines must be followed in business days. Is this understanding correct?
Answer: Correct. We take this opportunity to clarify that the new sending deadlines now apply to all financial investment funds with the entry into force of CVM Resolution No. 175, on 10/01/2023, and both to new funds and to pre-existing ones, and independently, even, of the existing fund having adapted or not to the Resolution.

H) Verifications necessary by the Administrator

Article 25 of Annex I defined as the Administrator's obligation to verify after the operations carried out by the manager (i) the compatibility of the prices practiced with market prices; and (ii) the observance of the asset portfolio to composition, concentration, and, if applicable, capital risk exposure limits, in a periodicity compatible with the investment policy of the class.
However, it was not expressly defined what would be the moment and periodicity of these verifications. What would be the moment of each verification, and for compliance, what would be the criteria to be used to determine the compatibility of the periodicity with the investment policy of the class?
Answer: The definition of the moment and periodicity of the verifications will be at the discretion of the routines and policies adopted by each administrator, in observance of the duties, obligations

COMISSÃO DE VALORES MOBILIÁRIOS
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and standards of conduct provided by regulation. Naturally, it is expected that the defined periodicity will vary depending on issues such as the type and nature of the asset involved in the verification, respecting the particularities of each specific situation.

Still regarding the Administrator's duty provided for in Article 25 of Annex I regarding the compliance of the class portfolio operations, it determines that the Administrator must inform the CVM of any active non-compliance by the end of the day following the date of verification; Article 46 determines that the Administrator inform the CVM, if active non-compliance persists for 10 consecutive business days, by the end of the business day following the closure of the period. Is the intention that notice be given to the CVM both on the first business day after the detection of non-compliance and on the 11th business day after a non-compliance of 10 consecutive business days?
Answer: Correct, there are two communications related to active non-compliance scenarios, one to inform of its occurrence; and another to notify about the persistence of non-compliance in the portfolio. And considering, as per previous answers, that communication to the CVM will always be carried out by the administrator. In this line, in the case of Article 46 of Normative Annex I, the manager must send the plan of action referred to therein to the administrator, so that this can attach the document in the communication it will make to the CVM.

I) Limits per issuer

Regarding the limits per modality of Financial Assets eligible for FIFs, what do the assets described in Article 45, item IV, letter j, described in Normative Annex I represent?
Answer: The CVM did not have the objective of limiting the scope of the device to any specific type of security, as long as issued by a public company and subject to public offering. It only enabled, there, the structuring of investment funds that have the specific purpose of participating in a single issuance of securities. As seen in the device, the fund's regulation will have, in this case, an investment policy focused on the acquisition of assets from this issuance.
In Article 16, III of Normative Annex I, a reservation was provided regarding fungible assets: III – the maximum percentage of application in financial assets of the same issuer, observed the provisions of Article 44 Normative Annex I and without prejudice to the provisions of Article 45, item IV, letter “j”, both of this Normative Annex I.
One of the interpretations for the rule mentioned above is that the fund's regulation must provide for the maximum limit per issuer, observing the concentration limits per issuer of Article 44 and the absence of concentration limits for fungible assets. In practical terms, as long as the issuer is indicated in the regulation, the fund regardless of its target audience could allow up to 100% in issuers of such assets (fungible)?

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Answer: See answer above. The device enables the structuring of a fund that participates in a single issuance of a given public company. In this situation, it will not be subject to concentration limits either per issuer (Article 44, V, c), nor for the asset modality (Article 45, IV, j).

Can the CVM define and give examples of fungible assets?
Answer: Any that is issued by the public company in a public offering. Shares or debentures are the most common examples.

J) Investment class in shares

Article 71 of Normative Annex I provides:
Article 71. The investment classes in shares must acquire classes of the same type as their own, except in the case of classes typified as “Multimarket”, which can invest in shares of FIF of any type, without prejudice to the provisions of §5º of Article 45 of this Normative Annex I.
Sole Paragraph. The restriction provided in the caput does not reach the acquisition of shares within the liquidity management of the class.
Article 72. The regulation of the share class and, if applicable, its prospectus must specify the maximum percentage of net asset value that can be applied in a single class, observing the concentration limits per issuer and modality of financial asset provided for in this Normative Annex I.
Sole Paragraph. In the case of application in a class that may exceed the concentration limit in private credits referred to in Article 70 of this Normative Annex I, the investment policy of the investor class must detail the mechanisms that will be adopted to mitigate the risk of exceeding the said limit or, alternatively, adopt the measures provided for in items I to II of the said article.

In Article 71 of Annex I, the conditions of the classes that invest in shares are provided.
Regarding this modality, we would like to verify the following:
(i) According to Article 71 and its sole paragraph, investment classes in shares can only allocate their resources in classes of the same typification, with the exception of multimarkets or shares intended for liquidity. Thus, classes that are not typified as “multimarket” will not be able to invest in shares provided for in Article 45, such as FIDC, FIP, FII, ETF? Considering that the objective of CVM Resolution 175 was to bring more flexibility to investment funds, our suggestion is that §§6º to 10 of Article 119 of ICVM 555 be brought to the new rule, because otherwise, the portfolios of existing FICs will have to be substantially modified. Answer: No. As exposed in the title of Section VIII, the device refers to the investment possibilities of FIF in shares of other FIF. But investment in other

COMISSÃO DE VALORES MOBILIÁRIOS
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categories (and not types) of funds continues to be possible, but now under the terms and limits provided for in Article 45. See, moreover, that funds dedicated to qualified investors count with double those limits, and those for professionals remain not subject to any limits.

(ii) In addition, the sole paragraph of Article 71 provides that only shares for liquidity may be acquired, which is also a more restrictive rule compared to the wording of Article 119, §1º, of ICVM 555. Thus, will repurchase agreements, public bonds, and cash be prohibited in investment classes in shares? We recommend that the wording of Article 119, §1º, of ICVM 555 also be transported to CVM Resolution 175. Answer: What the Sole Paragraph provides is only that the class congruence rule does not apply to shares for liquidity management. Thus, for example, an equity class can invest in shares of a fixed income class if that invested class has the objective of safeguarding liquidity. But there is no impediment for the investor class to continue applying in other liquidity assets, even aware that, by fiscal issues, the limit is narrow in practice.

(iii) We would like to verify if the prohibition on acquiring offshore shares through investment classes in shares is still preserved.
Answer: The acquisition of offshore fund shares is indeed permitted, but based on and under the conditions provided in Article 43 of Normative Annex I.

(iv) Should the minimum limit of 95% in shares of the same typification not be observed, could a class of equity shares, for example, hold 67% in equity shares and 33% in fixed income shares?
Answer: Yes, provided that these fixed income class shares in the example are intended for the liquidity management of the class. It is worth also remembering the fiscal specifics associated with this type of structure.

(v) Given that the investment class in shares must obey the modality limits of Annex I, will the current multimarket investment funds intended for qualified investors (“FICM”) become more restricted, possibly resulting in non-compliance, and it will not be possible, in many cases, to re-comply due to the liquidity of their assets (FIP, FIDC, and possibly FII). Thus, would it be possible to maintain the current limits? If not possible, given the situation above, we understand it is necessary to make clear in the circular the possibility of maintaining the characteristics of such FICM until their closure.

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Answer: In the situation exposed, the funds fall into a situation of passive non-compliance. Due to this context, the fund manager must diligence to ensure that any re-compliance needs are carried out under the possible and available conditions. The impossibility of re-compliance due to the illiquidity of assets is a reasonable justification for the fund not to re-comply immediately or even until its adaptation to the Resolution. In any case, it is prohibited, in any case, to carry out applications that aggravate this situation of non-compliance.

K) Responsibilities of Custodians

In Article 27 of Annex I it was provided regarding the responsibilities of the custodian that “the custodian must, in addition to observing what the general part of the Resolution and the specific regulation that deals with custody of securities...” provides.
Considering that no mention or item of specific responsibilities for the custodian was identified in the general part of the Resolution, as well as that the custodian already observes specific regulation, we understand that the part highlighted above would not actually be applicable. What is the regulator's understanding regarding the theme? Answer: Yes, agreed.
We understand that it would be the case for the custodian also to remain in the exercise of its activities, in the case of resignation and that there is no substitution. What is the regulator's understanding regarding the theme?
Answer: For now, this condition applies only to essential service providers (Article 107 of the Resolution).

L) ISIN and other codes

According to the provision of Article 37, sole paragraph of Annex I, any other code that is capable of identifying assets individually may be accepted alternatively to the ISIN code. Will there be specific regulation by SIN itself to approve which types of codes may be adopted?
Answer: Yes, correct, when provoked by the market in this sense. For now, only the ISIN is admitted.
Still regarding the article mentioned above, the provision regarding the obligation of the code is only for the identification of portfolio assets. However, there are also funds that request the generation of the ISIN for their identification. Considering the division that will now occur between classes and subclasses, we understand that in these cases the code should remain in the subclass. Is this the same understanding of the CVM?

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Answer: Correct, it is desirable that the ISIN be generated in the subclasses, when they exist.

Given the obligation of funds constituted from the entry into force of the rules to have assets identified with ISIN, would there be the possibility of having different deadlines for the creation of codes?
Answer: Before answering, it is important to remember that the vast majority of assets invested today by FIFs already hold ISIN. Said this, it is sufficient that a new fund, when intending to acquire an asset without ISIN, provides for its obtaining from the issuer as a prior condition for the acquisition of the asset.

M) Maximum deadlines for reaching the limits applicable to classes

Article 47 of Annex I states: “Share classes have the following maximum deadlines to reach the concentration limits per issuer and per modality of financial asset, as established by this Normative Annex I and by its regulation: (...)”.
Given the previous language of Article 107 of ICVM 555, the rule now specifies only the concentration limits per issuer and per modality of financial asset, with a more restrictive scope and not referring only to “limits”. Should we then conclude that other limits applicable to classes, coming from both Annex I and the Regulation (such as the limit for exposure to capital risk and those resulting from the respective CVM class), do not have an adaptation deadline and must “be born” compliant? Answer: Yes. See, for example, that it does not make sense to speak of an “evolutionary process of compliance” regarding capital risk exposure limits for new funds, since funds in the beginning of activities cannot be born non-compliant in this aspect, something, of course, that necessarily occurs in the case of concentration limits per issuer and per modality of financial asset. The limits associated with the type of FIF (equity, fixed income, multimarket, etc.), on the other hand, are also limits that can be respected from the launch of the fund, and therefore are not included in the scope treated by the device.

N) Distribution of single class

Can a single-class FIF have more than 1 distributor with different remuneration?
Answer: Yes, it is possible, as long as the sum of the remunerations due to each one does not exceed the maximum distribution rate agreed in the class annex (or sub-class appendix, as the case may be). The miscellany of different distribution agreements in the same class or sub-class, however, makes it impossible for the class or sub-class to have an effective (and therefore always lower) distribution rate to its investors, instead of a maximum rate.

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O) Disclosure of the management fee
36. In the FIF fund sheet, it is possible to state that "the management fee may vary from XX% up to XX% of Net Asset Value". Can this concept be applied to the class and sub-class?
Answer: Yes, provided that the criteria established in article 48, § 1º, VII, of the Resolution are respected. Regarding these criteria, we reiterate that the provision in item "b" also admits its stipulation as a percentage of net asset value.

P) Cryptoassets
37. The Resolution brought the possibility of investments in cryptoassets. As indicated in Art. 45 of Annex I, which deals with limits by financial asset modality, we understand that the share class may invest in this asset modality up to a limit of 10% of its NAV, with the limit being 20% for share classes intended for qualified investors and unlimited for share classes intended for professional investors. In this sense, a doubt arises regarding the existence or not of limits when applying to: (i) funds shares in foreign countries that allocate their resources in cryptoassets and (ii) cryptoasset ETFs.
Answer: The 10% investment limit (in the case of funds for the general public) on cryptoassets encompasses investment in offshore fund shares whose main risk factor described in their documents is exposure to cryptoassets.
As for the limit on cryptoasset ETFs, it respects the limit itself provided for in regulations for ETFs (article 45, IV, "g", of Normative Annex I), as ETFs are considered as a final asset for regulatory purposes.
In any case, the associated risk factor must be respected, so that a cryptoasset ETF can only be invested, for example, by funds typified as multimarket (given that this asset does not have the typical risk of equities, nor of fixed income).
38. Are there rules or requirements related to the custody of cryptoassets or tokenized assets?
Answer: See Circular Letter CVM/SIN nº 11/2018, which remains applicable to the subject, except with regard to the concentration limits by issuer and by asset modality admitted. We highlight, at this opportunity, that the concept of "custody" cited in the Circular Letter should not be interpreted nor does it refer, even indirectly, to the CVM securities custody regulation (CVM Resolution nº 32) and the requirements provided therein.

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Q) Carbon credit
39. What is the concept and scope of carbon credit that the CVM considered when drafting the rule?
Answer: The requirement that the issuance of carbon credit depends on "authorization of a government authority" reflects the concern that this financial asset by equivalence observes parameters established by a national, international, or multilateral authority recognized in this theme for (i) its issuance and/or (ii) corresponding registration in the respective authority; and thus, it is not a restrictive provision to the point of making investment possible only in carbon credits that are regulated by government entities in the strictest sense. Thus, the reference to "authorization of a government authority" in local jurisdiction covers carbon credits that may be approved by and/or registered in conformity with Sinare or other mechanisms of similar functioning and regulatory provision, in Brazil or abroad, respecting in the latter case, clear limits of exposure to foreign assets provided for in the regulations.

Circular Letter CVM/SIN 02/23

Lineage: In force