Circular Letter CVM/SIN 08/15

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Seven of September Street, 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. 008/2015/CVM/SIN Rio de Janeiro, November 26, 2015.
To
Responsible Directors
Institutions administering and managing investment funds Subject: Clarifications on provisions of CVM Instruction No. 555/14.

Dear Sirs/Madams,

This Circular Letter complements Circular Letter CVM/SIN 01/15 and presents clarifications on provisions of CVM Instruction No. 555/14 (“ICVM 555” or “Instruction”), with the objective of guiding on the best way to comply with the aforementioned regulation.
Observance of the recommendations listed below will contribute to minimizing possible deviations and, consequently, to reducing the need for the SIN to formulate requirements, as well as to allowing the activities of market participants to take place in an agile manner, in favor of investor protection and market integrity.
We note, at this juncture, that much of the content addressed in this Circular Letter is the result of questions raised by ANBIMA. Furthermore, it is important to mention that the understandings and interpretations of this Superintendence may not necessarily represent the final interpretation of the CVM Board in concrete cases.

Art. 22, §4º

The mention of the “regulation” made in article 22, §4º, which deals with the conditions for the return of values to unitholders who dissent from changes in distribution conditions, must be read broadly. The relevant aspect in the view of the SIN is that the mentioned conditions are clearly formalized in some investor-accessible document, such as the regulation, the prospectus, or a supplementary information form, for example. It is also important to warn that if the information is included in more than one document, the administrator must ensure complete harmony between them.

Art. 25, §1º, I – Risk factors in the adherence term

Article 25, §1º, I, determines the identification of the five main risk factors inherent to the fund's portfolio composition. The limitation aims to prevent too many risk factors from being reported, thereby diminishing the value of the information for the investor's decision-making. Naturally, if there are fewer than five factors, it is sufficient to report only those that exist.

Art. 33, I - Distribution on behalf and order – Investment note

Item I of article 33 includes among the obligations of the distributor acting on behalf and order the provision to its clients, among other documents, of “investment notes and statements to be mandatorily forwarded by the administrators to the distributors for this purpose”. Article 34, in turn, reinforces the administrator's obligation to send, within 5 (five) days of the application, an “investment note that attests to the effective realization of the investment”.
Although the Instruction does not distinguish between the two documents mentioned above, referring to them by the same name, “investment note”, there is a small, yet relevant, difference between them. The note from article 34 is a document provided by the administrator to the distributor and, since it concerns distribution on behalf and order, will not contain the identification of the final investor, but rather the client code assigned to the unitholder by the distributor, as described in article 31, item I, and as mentioned in article 34, §1º itself. The note from article 33, provided by the distributor to the investor, must, naturally, be accompanied by this identification. Thus, the note from article 33 should be understood as the note from article 34, with all the elements described in article 34, §1º, plus the nominal identification of the investor and all other elements that the distributor considers necessary, in accordance with §4º of article 34.
The Instruction established a five-day deadline for the administrator to make the investment note available to the distributor, but did not define a deadline for the distributor to provide the investment note to its clients. From the time it is made available by the administrator, the distributor must, in the shortest operationally viable timeframe, add the investor's identification to the note and arrange for its provision to the unitholder as determined in article 33, I. The understanding of this Superintendence is that this forwarding should be done at the latest by the end of the next business day after the moment of receipt of the information provided by the administrator.
It is worth remembering that the exhaustive list of charges that can be debited directly from the fund is presented in article 132. Furthermore, equal treatment among unitholders is a fundamental principle of regulation, derived from the condominium structure and the fiduciary duty of the administrator. Thus, any additional expenses incurred due to the use of the distribution on behalf and order model must be treated contractually between the administrator and the distributor, and cannot be passed on to either the on-behalf-and-order unitholders or the other unitholders of the fund. Thus, in the case of information provided by the distributor on behalf and order to its clients, the administrator can only debit the fund to reimburse the distributor for document sending and information provision expenses up to a level equivalent to the cost of sending documents and information to the other unitholders of the fund.

Art. 33, VII - Convocation for assemblies - Distribution on behalf and order vs. direct distribution

Article 33, sole paragraph, determines that the administrator must notify the distributor acting on behalf and order of the convocations for unitholder assemblies with a minimum advance notice of 17 days in the case of physical communication and 15 days in the case of electronic communication. On the other hand, article 67, §3º, determines the general deadline of ten days of advance notice for the convocation of the assembly.
Thus, in a situation where direct distribution and distribution on behalf and order coexist, in principle, the rule would allow the distributor acting on behalf and order to receive information regarding assembly convocations before the unitholders of the direct distribution. Furthermore, in this situation, if the distributor acting on behalf and order acted swiftly in passing on the information, the unitholders on behalf and order could have access to the information before the unitholders of the direct distribution.
The subject had already been brought up during the public hearing SDM 04/14. At that time, a participant suggested that the rule determine that, in cases of convocation by electronic means, the distributor acting on behalf and order would receive the convocation for assemblies with only one day of advance notice relative to the other unitholders of the fund. In his view, this reduced advance notice would be sufficient for the distributor to forward the documentation to its clients and would avoid possible differentiated treatment among unitholders. The proposed change was not accepted by the CVM, under the justification that the differentiated deadlines aim to allow the intermediary acting on behalf and order sufficient time to send the convocation to its clients.
Despite the rejection of the proposal, it is worth remembering that art. 33, IX, is clear in determining that the distributor acting on behalf and order must ensure that the final investor has access to all documents and information on equal terms with the other unitholders of the fund.
In light of the above, and given the need for unitholders to receive equal treatment, the administrator and the distributor acting on behalf and order must diligently evaluate whether the content of the information provided is relevant for investment decisions and, if so, coordinate efforts so that the documentation is sent simultaneously to both groups of unitholders.

Art. 41 - Supplementary information form – risk factors

Item IV of article 41 determines that the supplementary information form must report the risk factors in order of relevance. The classification of risk factors must be made based on the investment policy defined in the regulation and does not necessarily need to be changed with each change of strategy or portfolio allocations within the same investment policy.

Art. 59, V - Standardized form with fund information

The form mentioned in article 59, V, of Instruction 555 serves to structure the information that is sent to the CVM and does not need to be made available to the public on the fund administrator's website.

Art. 92, §3º, I - Rebating contracts – investment funds in shares of investment funds

The definition of Instruction 391 for investment funds in shares of investment funds in participations, presented in its article 37, is of funds that invest at least 90% of their assets in shares of investment funds in participations, investment funds in emerging companies, or equity funds – access market. In Instruction 555, article 92, §3º, I, opens an exception to the prohibition of article 92, §2º, in the case of funds that invest at least 95% of their assets in shares of a single fund. Thus, to avail themselves of the permission given in article 92, §3º, it is not enough for investment funds in shares of investment funds in participations to comply with the determination of article 37 of Instruction 391; the requirement to apply 95% of the assets in shares of a single fund must also be satisfied.

Art. 101, §1º - Investments abroad

Article 101, §1º, provides for the possibility that investment funds intended for qualified investors invest the entirety of their resources abroad. The SIN was questioned about the hypothetical situation of a local master-feeder fund structure that ultimately invests in assets abroad, that is, a certain fund “A” invests in a share fund “B” that invests in a fund “C” that, in turn, invests only in assets abroad. A, B, C in this example are funds constituted in Brazil and registered with the CVM. The question was whether share fund B could be considered as part of the 67% that fund A should keep invested abroad to comply with the requirement of article 101, §1º, I (minimum portion of resources that must be invested abroad for a fund to enjoy the prerogative to invest the entirety of its resources outside the country).
Regarding this, the understanding of this Superintendence is that only in cases where the portfolios of funds B and C are consolidated into fund A's portfolio will it be possible to consider the portion invested in fund B as part of the 67% that fund A must keep invested abroad.
It is important to emphasize that portfolio consolidation is mandatory in certain cases, but can also be done in situations where it is not. Thus, to use a structure as mentioned in a situation where consolidation is not mandatory, fund administrators must seek means to ensure that consolidation is carried out, thereby allowing the invested resources to be counted as part of the minimum required, in line with the reasoning described above.

Art. 102, III - Concentration limit by issuer when the issuer is an investment fund

Instruction 555 reproduces, in its article 102, item III, a portfolio diversification rule that already existed in Instruction 409 and that imposes a general limit of 10% on investments in shares of a particular investment fund.
The SIN received a request from ANBIMA that this limit be eliminated, as it would lead to the creation of funds for the mere purpose of regulatory compliance, generating unnecessary costs.
In response to the SIN's request, the Board, in a meeting on 10/27/2015, decided to forward the issue to the SDM for evaluation in a future revision of the Instruction.

Art. 103 - Limits by financial asset modality

Despite the limitation of concentration limits applicable to funds intended for qualified investors given by the combination of articles 126 and 103, article 103, §1º, allows any funds to exceed the limits dealt with in items “a”, “b”, and “h” of item I, provided they comply with the provisions of articles 120 and 121. Thus, both funds aimed at the general public and funds aimed at qualified investors can invest without concentration limits in shares of investment funds, in shares of share funds, and in shares of index funds, provided that the performance fee is charged as provided in article 86 and the regulation and prospectus stipulate the limit allowed for application in a single fund and the regulation provides for the investment policy and the administration fee of the funds in which it is intended to invest and discloses the sum of the administration fee of the investing fund with that of the invested funds.
It is also important to mention that although article 121 mentions investment funds in shares, the provisions found there are inserted in the context of article 103, §1º, thus being applicable also to investment funds that are not investment funds in shares, but that intend to invest more than 20% of the assets (40% in the case of funds intended for qualified investors) in the shares of a single fund.

Art. 115, §4º - Concentration limits by issuer for Level I BDRs

With the introduction of art. 101, §2º, for which there was no equivalent in Instruction 409, a potential imbalance arose between the treatment applicable to investments in assets abroad and that provided for in the case of investment in Level I BDRs of those same assets. The asymmetry would result from the restriction imposed on investments in Level I BDRs by the application of art. 115, §4º combined with art. 115, §§2º and 3º compared to the general rule applicable to assets abroad provided for in art. 101, §2º. While art. 101, §2º, determines that concentration limits by issuer do not apply to assets abroad, art. 115, §§2º, 3º and 4º, limits the non-incidence of these limits to Level I BDRs to the situation where the funds have the designation “Level I BDR” in their name.
Asked by the SIN, the Board issued, in a meeting on 10/27/2015, an authentic interpretation of the Instruction to clarify that the general rule applicable to investments in Level I BDRs is that they must be considered equivalent to assets abroad, as provided for in art. 100, II.

Art. 117, §1º - Concentration limits – multi-market funds

Article 117, §1º, of Instruction 555 establishes that the investment fund of the multi-market class does not need to observe the concentration limits by issuer for shares of investment funds headquartered abroad. However, this is already the general rule for all classes of investment funds and for all assets abroad, in accordance with article 101, §2º.
Thus, the SIN alerts market participants that art. 117, §1º, should not be interpreted restrictively, since the rule imposed by art. 101, §2º, is valid for all classes of funds. The SIN brought the issue to the Board, which referred the topic to the SDM for consideration in the next revision of the Instruction.

Art. 119 - Investment funds in shares of investment funds abroad

Instruction 555 maintained, in its article 119, the definition of investment fund in shares of investment funds as that which invests at least 95% in shares of other funds.
ANBIMA requested that shares of investment funds abroad be considered in the calculation of the 95% described above.
Regarding this request, in line with the SIN's proposal, the Board decided to report to the SDM to consider the request during a future revision of the Instruction.

Art. 122 - Portfolio consolidation – funds for professional investors

The general rule provided in ICVM 555 is that funds consolidate the applications of invested funds into the portfolio of investing funds (Art. 122). The exceptions to the rule, presented in §1º of art. 122, are: (i) investments in funds whose manager is not linked to the administrator or to the manager of the investing fund, and (ii) investments in index funds traded on organized markets. However, the use of this exception to the rule is conditioned on the fund not allowing investment in funds intended exclusively for professional investors, as provided in §2º of art. 122.
The SIN, in response to a consultation from ANBIMA on the subject, urged the Board to evaluate the issue of consolidation in the case of funds intended exclusively for professional investors. The technical area's understanding is that in this situation there is no additional risk to be mitigated, as the Instruction gives professional investors broad freedom to make the investments they wish directly. In response to the consultation, the Board issued, in the meeting of 10/27/2015, an authentic interpretation of the Instruction, clarifying that investment funds intended exclusively for professional investors do not need to meet the condition expressed in art. 122, §2º to avail themselves of the exemption provided in art. 122, §1º.

Art. 122 - Portfolio consolidation – retail funds

Still in the context of rules regarding portfolio consolidation, the Instruction determines that consolidation must occur whenever a fund chooses to apply to funds intended for professional investors, as in this situation, by force of art. 122, §2º, the exemption of art. 122, §1º becomes inapplicable.
The SIN was questioned about the scope of the consolidation requirement in the case of funds not intended for professional investors, since ANBIMA defended that consolidation should occur only for the portion of the portfolio applied in the invested funds intended for professional investors.
In this sense, the SIN issued an opinion favorable to the request, understanding that partial consolidation would be sufficient to ensure that the investments of invested funds intended for professional investors do not result in exceeding the limits applicable to investing funds intended for non-professional investors. Furthermore, the technical area recalled that the portion of assets that can be invested in these assets is low (10% in the case of funds intended for qualified investors and 5% in the case of funds intended for the general public).
In response to the SIN's request, the Board issued, in the meeting of 10/27/2015, an authentic interpretation of the Instruction clarifying that investment funds not intended for professional investors can avail themselves of the exemption provided in art. 122, §1º, even if their regulation allows investment in funds intended for professional investors, provided that the portion invested in these funds is duly consolidated.

Art. 138 - Liquidation/closure of the fund

Instruction 555 increased the minimum average net assets that funds must maintain. While article 105 of Instruction 409 determined liquidation or incorporation of funds with less than R$300,000.00 of average daily net assets, article 138 of Instruction 555 determines that the fund must maintain an average daily net asset of at least R$1,000,000.00.
Regarding this, it is worth informing that the understanding of the SIN is that until adaptation to the new rule, funds may maintain the net asset at the previously required level, namely, above R$300,000.00. From the moment the fund adapts to 555, however, the net asset must be at the new required level. Otherwise, a new count of days begins for the purposes of article 138, and the fund must be liquidated or incorporated if the average daily net asset remains below one million reais for ninety consecutive days. It is worth noting that the new count only applies to funds that have not completed the ninety days with net assets below R$ 300 thousand at the time of adaptation, as in this case the funds should already have been liquidated or incorporated in compliance with article 105 of ICVM 409.
At this juncture, it is worth mentioning that CVM Instruction No. 572 was issued on this date, which corrected an ambiguity existing in article 138. The original text of the regulation, imported from Instruction 409, referred to “open” funds. The legislative intent was never, however, to refer to the condominium form of the funds, but rather to restrict the applicability of the device to funds in normal operation, that is, that were not in the process of liquidation. This understanding was already considered in supervision routines and is now codified in the new wording of the caput and the new sole paragraph.

Art. 150 - Transition rules – investor qualification

In response to a question from ANBIMA, the SIN brought to the Board a consultation regarding the investor qualification rules that funds must follow during their adaptation period.
In the meeting of 10/27/2015, the Board deliberated to interpret the norm in the sense that, until its adaptation, funds must fully comply with Instruction 409. This

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION 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

the determination is valid in the case of qualification criteria, and therefore, the provisions of Article 109 of Instruction 409 may be used.

It is necessary to alert, however, that the minimum investment requirements existing in the regulations of funds created based on Article 110-B of Instruction 409 can only be abandoned from the adaptation to Instruction 555.

Art. 150 - Adaptations of regulations to Instruction 555

Paragraph 1 of Article 150 of Instruction 555 allows the administrator to spontaneously promote the necessary adaptations in the regulations of the funds it administers, merely communicating such changes to the unitholders. The approval of unitholders gathered in an assembly is only necessary, in accordance with §2 of said article, when the changes serve to include prerogatives or expand limits.
The Interpretation of the SIN is that the assembly is necessary whenever there is an option to be made by the unitholders. However, it is worth remembering that Article 92, item I, of Instruction 555 reproduces a command already existing in Instruction 409 that obliges the administrator to always act seeking the best conditions for the fund.
Thus, considering the costs for convening and holding a unitholder assembly, administrators must be diligent in identifying situations in which the assembly is truly necessary, avoiding holding them in cases where the change could have been made in the mold of Art. 150, §1.
On the other hand, it is worth mentioning that although Article 152 refers to "adaptation," which could induce one to think of the applicability of Article 150, §1, the conversion of a fund into a fund intended for professional investors implies changes that must be the subject of deliberation by the investors. This occurs because the situation involves changes in prerogatives and limits attracting the applicability of Art. 150, §2.

Art. 155 – Deadline for adaptation of rebate contracts

The SIN alerts that CVM Instruction No. 572, issued on this date, changed the deadline for the adaptation of rebate contracts to June 30, 2016, to coincide with the deadline given for the adaptation of funds.

Monthly Profile

During the public hearing SDM 04/14, the CVM received a suggestion that the values of shares disclosed in the investment brochure should include dividends incorporated into the fund's assets and amortizations to the fund's assets. Although the information was recognized as relevant, the suggestion to include it in the brochure was not accepted. Item 4.16 of the public hearing report, however, clarified that the information could be given in the Performance Statement and the Monthly Profile. The report further informs that the applicable provisions did not mention amortization and, therefore, would be amended.

It turns out that, in the original version of Instruction 555, only the text related to the Performance Statement was altered, and the alteration in the layout of the Monthly Profile was missing.
Thus, the SIN brought the issue to the Collegiate Board, which decided to determine that SDM include the correction in CVM Instruction No. 572, published on this date. In this way, the SIN guides administrators to take into consideration the values distributed based on share amortization when filling out item 24 of the Monthly Profile.

Sincerely,

Original signed by
FRANCISCO JOSÉ BASTOS SANTOS
Superintendent of Institutional Investor Relations

Circular Letter CVM/SIN 08/15

Lineage: In force