Circular Letter CVM/SIN 03/2012

CIRCULAR LETTER/CVM/SIN/No. 3/2012
Rio de Janeiro, August 13, 2012
Subject: CVM Instruction No. 522, of May 8, 2012

Dear Administrators and Managers of Investment Funds regulated by CVM Instruction No. 409/04,

As is known, as a result of CVM/SDM Public Hearing No. 6/2011, CVM Instruction No. 522/2012 was issued, which amended CVM Instruction No. 409/04 in several aspects, including the creation of two new documents for mandatory preparation and dissemination: the Performance Statement and the Essential Information Sheet.

This Circular Letter aims to guide administrators and managers of investment funds regarding doubts raised by the market since the issuance of the regulation, related to the completion, preparation, and sending of these documents to unitholders.

1. PERFORMANCE STATEMENT

1.1 NECESSITY AND METHOD OF SENDING

We remind you that, in accordance with Article 68, § 4th, the Performance Statement must "be prepared for all open funds that have been in operation for at least 1 (one) year as of the base date to which the performance statement refers." However, in accordance with Article 68, item IV, the Performance Statement must only be sent to unitholders of funds not exclusively intended for qualified investors.

Thus, the joint interpretation of the two provisions allows us to infer that, for open funds in operation for at least 1 year and intended for qualified investors, the Performance Statement must be prepared but does not need to be sent to unitholders.

Similarly, we reiterate that the Performance Statement is not a document subject to sending to the CVM.

Regarding the method of sending, we remind you of the possibility of using, for example, electronic mail as a valid form of communication with the unitholder, provided it is expressly authorized by them (Article 123, § 1st, of CVM Instruction No. 409/04).

Similarly, we consider valid the physical delivery of a letter indicating the address on the Internet where the document can be viewed, instead of sending an integral physical document.

1.2 COMPLETION OF ITEM 2 OF THE PERFORMANCE STATEMENT

We refer to the third column of the table in Item 2 of the Performance Statement, which contains information on "Fund Performance as a % of [reference index]," represented by the ratio between the results exposed in its first and second columns.

Naturally, it is possible that the ratio required in that document results in numbers of more limited significance, such as in cases where the reference index presents numbers smaller than zero, close to zero, or equal to zero.

In the case of the reference index behavior being equal to zero, the message of not applicable or similar must appear in the respective items of the table, considering that the result of this ratio cannot generate any possible number.

In the hypotheses of behavior for the reference index being negative or close to zero, we do not consider it appropriate that the result be replaced by any message, as it would not be up to the fund administrator to substitute the investor in the evaluation of the relevance or importance of the information.

Thus, in these cases, we understand that, without prejudice to maintaining the ratio obtained in the corresponding fields of the table in cases where the reference index is smaller or close to zero, a disclaimer may be included at the end of the document with the objective of clarifying the limitations in the interpretation of this result.

1.3 COMPLETION OF ITEM 3 OF THE PERFORMANCE STATEMENT

For the completion of that item of the document, and in line with the provisions of Article 68, § 7th, of CVM Instruction No. 409/04, we state that the information regarding the expenses incurred by the investment funds must also take into consideration the expenses of the investment funds invested in by them.

In this regard, it is important to emphasize that, in the pro-rata calculation of the impact of the expenses of the invested funds on the investing fund, "proportionally to the amounts invested and terms of application" (Article 68, § 7th, of CVM Instruction No. 409/04), the total expense rate disclosed by the invested funds in the previous semester must always be used, even in cases where more updated information is available (for example, invested funds administered or managed by the same economic group of the investing fund).

Regarding the second table of Item 3 of the Performance Statement, it is necessary to evaluate how to treat the consolidation of expenses paid by the investment fund to the economic group of the administrator and manager with those paid by other investment funds that are invested by this fund to their respective economic groups of their administrators and managers.

In these circumstances, we understand that a fund of funds investor must consolidate its information with those of the funds invested by it only when the administrator of the investing fund and the administrator of the invested fund belong to the same economic group; or, similarly, when the manager of the investing fund and the manager of the invested fund also belong to the same economic group.

2. ESSENTIAL INFORMATION SHEET

2.1 ITEM 3 – INVESTMENT POLICY

As is known, in this item, CVM Instruction No. 522/2012 requires, among other information, the maximum concentration limit "in a single issuer that is not the Federal Union."

As most investment funds provide for different maximum concentration limits by type of issuer (for example, financial institutions, publicly held companies, shares of other investment funds, other natural and legal persons), we inform you that this item of the Essential Information Sheet must always be filled in with the highest of the limits provided for in the fund's regulations.

2.2 ITEM 4 – INVESTMENT CONDITIONS

In some items of the table regarding Investment Conditions in the Essential Information Sheet, there are mentions of the number of days as references, for example, for waiting periods (6th line) or the payment of redemptions (8th line).

In this sense, we inform you that the discrimination of the nature (in this case, whether useful or calendar) of the days mentioned in that item of the document, as its objective is only to adequately qualify information that appears in the model proposed by the regulation, does not go against the standardization requirements provided for in Article 40-A, II, of CVM Instruction No. 409/04.

2.3 ITEM 5 – PORTFOLIO COMPOSITION

In this item, the summarized composition of the fund's portfolio must be discriminated, with the indication of the 5 most relevant types of assets.

It is worth saying that, in line with the filling instruction (vii) of that document, "When it is an investment fund in shares – FIC, the information must be given in relation to the portfolio of the invested funds," which will require efforts on the part of the administrator of the fund of funds investing fund to consolidate (look through) the portfolios of the invested funds.

Thus, in cases where the funds invested by the fund of funds investment funds are administered and managed by third parties, the application of Article 115-A of CVM Instruction No. 409/04 will apply, which exempts investing funds from such consolidation, given the practical impossibility of doing so.

Thus, in this case, such investments must be discriminated as applications in shares of other investment funds, as the case may be.

We also inform you that the obligation to fill in extends even to those who make use of the faculty, provided for in Article 68, § 1st, of CVM Instruction No. 409/04, to hide the composition of their portfolio for a period of 90 days, since even in these cases the investment fund is obliged to disclose aggregated information of the portfolio at levels compatible with what is required by Item 5 of the Sheet.

2.4 ITEM 9 – EXPENSE SIMULATION

In this item of the Essential Information Sheet, for a simulated exercise of hypothetical annual gross yield of 5%, there is a need to discriminate the expenses that would be incurred by the investment fund involved in time horizons of 3 and 5 years, and as a result of the subtraction of the first by the second, the obtaining of the hypothetical gross return in these cases.

Although deducted from the expenses incurred by the fund, this return is still called gross because it does not yet contain all the expenses that may be borne by the unitholder, such as taxes, those resulting from the collection of possible entry or exit fees, or even, as cited in the statement, the "performance fee."

It is worth highlighting, in this regard, that the "performance fee" cited in the third line of the table regarding this item of the Sheet does not refer to the general performance fee charged to the fund, as established by Article 62, all the more so because this expense already comprises those cited in the field itself "Expected Expenses," so not considering this amount in the field "hypothetical gross return" would go against the very logic of the information contained in the table described above.

Thus, such mention refers, only, to the adjustment on the individual performance of the unitholder who applies resources in the fund subsequently to the date of the last charge, under the conditions provided for in § 3rd of Article 62 of CVM Instruction No. 409/04.

3. OTHER ISSUES

3.1 EXPECTED IMPACTS IN SUBSTITUTIONS OF ADMINISTRATORS OR MANAGERS OF INVESTMENT FUNDS

Regarding the hypothesis, we remind you that in future substitutions of administrators or managers of investment funds, the new administrator or manager must always ensure, in the process, that it received all the necessary information for the permanent compliance with the requirements provided for in the regulation.

In this case, we refer specifically to all the necessary information for the preparation of the first Performance Statement and Essential Information Sheet under its responsibility, which can be guaranteed, in the case of Item 3 of the Performance Statement, for example, by the requirement of transfer, from the old administrator of the fund to the new one, of the "Fund Expenses" table filled in.

In the case of the second table of Item 3 of the Performance Statement, which discriminates the expenses paid to the economic group of the administrator and manager, we emphasize that in cases where the administration or management of the fund is transferred to a third party not part of their respective economic groups, the consolidation of expenses paid to these titles between the periods prior and posterior to the transfer should not be carried out, under risk of inducing investors to errors in evaluation.

Thus, in this hypothesis, it is necessary that in the next Performance Statement prepared, the information relating to the period posterior to the transfer of administration or management be used, as the case may be, accompanied by a disclaimer at the end of the document clarifying the limitation of the information.

Sincerely,

FRANCISCO JOSÉ BASTOS SANTOS
Superintendent of Institutional Investor Relations