Circular Letter CVM/SIN 06/23 — CVM — BR

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP Code: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br Circular Letter No. 6/2023/CVM/SIN Rio de Janeiro, September 27, 2023

To administrators and managers of investment funds

Subject: Interpretation of provisions of Annexes I, IV, V, and XI of CVM Resolution No. 175

Dear Sirs,

This Circular Letter aims to disseminate the interpretations of the Superintendency of Institutional Investor Supervision (“SIN”) regarding the provisions of Annexes I, IV, V, and XI of CVM Resolution No. 175.

We recommend, for a better understanding of the topics presented here, that the interpretations now exposed be read together with those previously disseminated through Joint Circular Letters No. 1 and 2/2023/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

Table of Contents
A. Annex I - Financial Investment Funds ................................................................................. 3

Exposure to capital risk ...................................................................................................... 3
Investment limit in cryptoassets ....................................................................................... 3
B. Annex XI – Pension Funds .................................................................................................. 4
C. Annex IV – Equity Investment Funds .................................................................................. 4
D. Annex V – Index Funds ........................................................................................................ 8
E. Annex VII – Mutual Privatization Funds (“FMP-FGTS”) and Other Annexes ............................. 9

A. Annex I - Financial Investment Funds

Exposure to capital risk
Is the exemption provided for in Art. 73, § 5º, of CVM Resolution 175 also applicable to equity funds with a long and short strategy?

Answer: Yes, the portion of the portfolio whose strategy is long and short, that is, a strategy involving arbitrage of bought and sold positions of assets and derivatives of the equity market, is exempt from observing the maximum gross margin utilization limits set forth in Article 73, without prejudice to the establishment in regulations of maximum margin limits, as a necessary measure of transparency, to which the class may be exposed.

Investment limit in cryptoassets
Regarding investment limits in cryptoassets, Article 45 of Normative Annex I provides that:

Art. 45. Cumulatively to the concentration limits by issuer, the share class must observe the following concentration limits by financial asset modality, without prejudice to the norms applicable to its type:
(...)
III – up to 10% (ten percent) of net equity for the set of the following assets:
(...) c) cryptoassets;

We would like to confirm whether, to verify the investment limit in cryptoassets (10%), both the onshore position and the offshore position are considered in the fund's portfolio.

Answer: Yes. The 10% investment limit (in the case of funds for the general public) encompasses direct investment in cryptoassets and/or in shares of local funds, offshore funds, and/or offshore ETFs whose main risk factor described in their documents is exposure to cryptoassets.

It is also emphasized that positions in onshore ETFs whose main risk factor described in their documents is exposure to cryptoassets should not be computed in such limit, nor should local funds that allow investment in cryptoassets exclusively through onshore cryptoasset ETFs, given that this class of asset does not have an allocation limit by modality, in accordance with Article 45, Item IV, letter “g” of Normative Annex I of Res. 175.

B. Annex XI – Pension Funds

Is the annex on pension funds of CVM Resolution 184 (Annex XI) applicable to all EAPC (Open Complementary Pension Entity) funds?

Answer: No. The annex in question deals only with funds governed by Art. 76 and following of Law No. 11.196, since the objective was to regulate this specific type of product within the scope of the CVM (investment funds with segregated assets linked exclusively to complementary pension plans or life insurance policies with survival coverage clauses, structured in the variable contribution modality, marketed and administered by them).

Therefore, Annex XI does not apply to all pension funds, nor does it coincide with funds regulated by Article 116 of the general part of Resolution 175, which, in turn, deals with pension funds in a more comprehensive manner.

C. Annex IV – Equity Investment Funds

In the event of divestment in the invested company, and if the credit right or duty to indemnify still exists, does the CVM understand that we can keep it in the portfolio until its maturity, or is it necessary to liquidate and/or sell the credit right when the divestment is made? The following is set forth in Article 5 of CVM Resolution No. 184 regarding the subject:

Art. 5. The share classes of FIPs must be constituted in a closed regime, being destined for the acquisition of:
(...)
§ 3º The share class may acquire credit rights that are not listed in the caput, provided they are issued by invested companies or societies.

Answer: There is no obligation for the FIP to dispose of the credit right simply by divesting from the related company. Thus, it may be alienated at the time the manager deems most appropriate or even be kept in the portfolio until its maturity.

Regarding the classification of the FIP portfolio, ICVM 578 currently provides that investments, from each capitalization, cannot exceed “the last business day of the 2nd month subsequent to the date of the first capitalization of shares by any of the shareholders within each capital call”. In the market's understanding, RCVM 184 brought flexibilizations regarding this subject (Annex IV, Articles 9 and 11). The rule continues to bring the obligation that the regulation foresee the “rules and criteria for setting a timeframe for investments from each capitalization”, but ceases to bring any type of maximum timeframe for investments to occur. Is this understanding correct? The following is set forth below in Article 9 of CVM Instruction No. 578 and the new wording given to the subject by CVM Resolution No. 184:

ICVM 578:
Art. 9º The regulation of the Equity Investment Fund must provide for:
IV – rules and criteria for setting a timeframe for investments from each capitalization of capital, observing the provisions of § 3º; (...)
§ 3º The maximum timeframe referred to in item IV of the caput must not exceed the last business day of the 2nd month subsequent to the date of the first capitalization of shares by any of the shareholders within each capital call.
(...)

RCVM 184, Annex IV - Equity Investment Funds:
“Art. 9º In addition to the matters set forth in art. 48 of the general part of the Resolution, the FIP regulation must provide for:
I – rules and criteria for setting a timeframe for investments from each capitalization of shares; II – rules and criteria regarding the restitution of capital to shareholders or extension of the timeframe provided for in item I, in case the investment is not realized within the established timeframe, observing the provisions of art. 11, § 5º, of this Normative Annex IV; (...) Art. 11. The share class must maintain, at least, 90% (ninety percent) of its net equity invested in the assets provided for in art. 5 of this Normative Annex IV. § 2º The limit established in the caput is not applicable during the timeframe for investment of resources, established according to art. 9º, item I, of this Normative Annex IV, of each of the share capitalization events provided for in the investment commitment. § 3º The administrator must communicate to the CVM, by the end of the business day following the end of the timeframe referred to in § 2º, the occurrence of non-compliance, with the appropriate justifications, also informing the re-compliance of the portfolio, as soon as it occurs.”

Answer: Yes, the understanding is correct. Articles 9 and 11 of Annex IV of RCVM 184 flexibilize the timeframe initially provided in ICVM 578 regarding the classification of FIP portfolios, referring the discipline of the subject to what the fund's regulation provides.

Does Annex IV of RCVM 184 increase legal certainty for the industry by formally recognizing structures already used, such as convertible loans? Will this structure have any type of restriction regarding the circumstances in which it may be used (e.g.: using convertible loans in the case of Ltda companies being unable to perform AFAC – Advance for Future Capital Increases)? Furthermore, will any type of timeframe be provided for the conversion of loans (e.g.: AFAC timeframe is generally 12 months)?

RCVM 184 Annex IV - Equity Investment Funds:
“Art. 5º The share classes of FIPs must be constituted in a closed regime, being destined for the acquisition of:
(...)
§ 7º The share class may invest in the societies referred to in the caput through instruments that confer the right to acquire corporate participation, regardless of the moment of the effective injection of resources, such as purchase option contracts or subscription of shares or shares, convertible loans to corporate participation or other instruments or contractual arrangements that result in capital or debt injection, convertible or not.”

Answer: If there were an intention to limit the use of convertible loans by the FIP, the CVM would have done so with express provisions in the regulation of the matter. Thus, we reiterate that Annex IV of CVM Resolution No. 175 does not provide any restrictions regarding the use of convertible loans or the timeframe for their respective conversion.

ICVM 578 currently provides certain obligations for the manager that were not contemplated in Annex IV of RCVM 184. This is the case, for example, of the articles mentioned below:

Art. 40. The manager's obligations include, without prejudice to the administrator's obligations:
XII – provide the administrator with all information and documents necessary for this to fulfill its obligations, including, among others:
a) the information necessary for the administrator to determine if the fund qualifies or not as an investment entity, in accordance with specific accounting regulation; b) the audited financial statements of the invested companies provided for in art. 8º, VI, when applicable; and c) the fair value appraisal report of the invested companies, when applicable in accordance with specific accounting regulation, as well as all documents necessary for the administrator to validate it and form its conclusions regarding the premises used by the manager for the fair value calculation.

Art. 49. The preparation of financial statements must observe the specific norms issued by the CVM.
(...)
§ 4º Without prejudice to the administrator's responsibilities, the manager also assumes its responsibilities as the provider of the information provided for in art. 40, XII, which aim to assist the administrator in the preparation of the fund's financial statements.

Thus, art. 40, item XII of ICVM 578, which states that the manager must “provide the administrator with all information and documents necessary for this to fulfill its obligations”.

When the publication of Annex IV of RCVM 184 occurred, the aforementioned provisions were suppressed, remaining only the obligations of the administrators. Considering that no public hearing was held to alter the merit of ICVM 578, and that, in our view, these suppressed points do not deal merely with adaptation resulting from the issuance of RCVM 175, we believe that there was no intention to make any type of alteration in the requirements that must be fulfilled by essential service providers.

Notwithstanding the flexibility conferred by the Economic Freedom Law for the celebration of contractual arrangements between essential service providers, the information and documents provided for in the aforementioned articles are, and will continue to be, indispensable for the performance of various and relevant regulatory functions of fiduciary administrators. Furthermore, we highlight special attention to the provisions of Art. 40, “a”, given that the wording there disposes uses the term “investment entity”, a term that is accounting and that is also being used within the scope of MP 1184, which deals with the taxation of closed funds.

Therefore, we understand that it will continue to be the responsibility of managers to send the information provided for in the aforementioned articles to the administrators, including responding for the diligence in obtaining such information. Is this understanding correct?

Answer: Yes, the understanding is correct. The suppression of the provisions related to the manager provided for in the aforementioned articles occurred only having in view the CVM's understanding that such provisions would be unnecessary, as they are redundant, since they all deal with natural duties of the manager arising from its contractual relationship with the respective fiduciary administrators of the funds.

Thus, despite the highlighted suppressions, all necessary support for the preparation, by the administrators, of the fund's financial statements and its classes, as well as the appraisal reports of the investees and the qualification of the fund as an investment entity, continue to be duties of the managers. If the technical area's supervision identifies any failure in any of these aspects and observed the principle of individualization of conduct, if it is identified that the failure resulted from the manager's omission or error, it is he who will answer for this failure.

As provided for in paragraph 3 of Art. 76 of CVM Resolution 175, for the purposes of computing quorum and voting manifestations in assemblies, each shareholder is entitled to a quantity of votes representative of their participation in the fund, class, or sub-class, as the case may be.

Thus, our understanding is that we must consider, when computing votes in assemblies, the financial value and its proportionality in the fund, class, or sub-class, as the case may be. Is this understanding correct?

If the above understanding is correct, we will find difficulties in compatibilizing it with the provisions in some normative annexes, which dispose differently regarding the method of computing votes in assemblies.
This disparity between methodologies may (i) compromise the investors' understanding and hinder transparency in deliberations; and (ii) impact the processes and systems of administrators, increasing compliance costs, given the need to adapt to distinct methodologies in various fund categories.

In the case of FIPs, Chapter VII, section II, Art. 22, of Annex IV states that “Without prejudice to the regulation being able to establish other matters subject to qualified quorum, deliberations regarding the matters provided for in arts. 21, items II, III and IV, and 27 of this Normative Annex IV and of arts. 70, items II to V; 74, 76, § 1º; 96, § 1º, and 97 of the general part of the Resolution” depend on the approval of shareholders representing at least half of the subscribed shares, if a higher quorum is not fixed in the regulation.

Answer: Indeed, the quorums regarding the convening, installation, and deliberation in shareholder assemblies must take into consideration the participation of each shareholder, based on the financial value of their participation in the fund's liabilities, and not the number of shares, as per the wording that already exists in the general part of Resolution 175.

For this reason, “subscribed shares” must be understood as a criterion according to which, in the terms established by the general norm of the Resolution, the financial participation of each shareholder must be applied.

D. Annex V – Index Funds

The same question associated with paragraph 3 of Art. 76 of CVM Resolution 175, for the purposes of computing quorum and voting manifestations in assemblies, also seems to present an apparent antinomy with the provisions of Article 28 of Annex V of this Resolution, as exposed below:

Art. 28. The deliberations of the shareholder assembly, which must be installed with the presence of at least 1 (one) shareholder or legal representative, are taken by the criterion of the majority of the shares held by those present, with 1 (one) vote attributed to each share.

Answer: Also here, to the same extent as clarified for FIPs, the criterion for computing votes must be the financial participation of each shareholder within the fund, class, or sub-class.

E. Annex VII – Mutual Privatization Funds (“FMP-FGTS”) and Other Annexes

Finally, within the scope of FMP-FGTS, the provisions of Article 11 of Annex VII of the Resolution also bring doubts about the effective quorum criterion to be used, as described below:

Art. 11. In the shareholder assembly, deliberations must be taken by the majority of the shares of the shareholders present:
I – in first call, with a minimum quorum of 5% (five percent) of the issued shares; and II – in second call, with any number.

§1º The deliberation quorum for the formal consultation process provided for in § 5º of art. 76 of the general part of the Resolution must be the absolute majority of the issued shares, regardless of the matter.

In light of the above, we understand the standardization of the vote computation methodology among fund categories to be necessary as a measure to avoid interpretation errors.

Finally, regarding normative annexes No. IX – FMAI and XI – PENSION FUNDS, we did not find calculation methods for vote computation in assemblies, thus we understand that funds regulated by said annexes must follow the provisions of paragraph 3 of Art. 76 of Res. 175. Is our understanding correct?

Answer: Yes. In the same way, both here and for the FMAI and pension funds of Annex XI, to the same extent as clarified for FIP and FIIM, the criterion for computing votes must be the financial participation of each shareholder within the fund, class, or sub-class.