Joint Circular CVM/SIN/SSE No. 02/2023

COMMISSION OF SECURITIES AND EXCHANGE
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 Joint Circular No. 2/2023/CVM/SIN/SSE Rio de Janeiro, September 27, 2023

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

Dear Sirs,

This Joint Circular aims to disseminate additional interpretations by the Superintendency of Institutional Investors Supervision (“SIN”) and the Superintendency of Securitization and Agribusiness (“SSE”) regarding other provisions of the general part of the Resolution. Thus, this Joint Circular complements Joint Circular No. 1/2023/CVM/SIN/SSE, of April 11, 2023.

For better organization of the subjects, the clarifications will be made through questions and answers that were consolidated from doubts received from the market, and follow as an annex to this Circular.

We also inform you that other Joint Circulars will be disseminated opportune with clarifications on doubts related to the Normative Annexes of the Resolution, and as the case may be, by the respective superintendency that is competent for the supervision of the categories of funds treated therein.

Sincerely,

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

Digitally signed by
BRUNO DE FREITAS GOMES
Superintendent of Securitization and Agribusiness

COMMISSION OF SECURITIES AND EXCHANGE
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Table of Contents

1. Remuneration .......................................................................................................................... 3
2. Distribution by Account and Order ............................................................................................... 6
   1.3 Absence of provision for the maximum distribution fee for funds without sales effort ......... 6
   1.4 Exclusive classes .................................................................................................................... 7
   1.5 Limited Liability ...................................................................................................................... 7
   1.6 Hiring of Custodian/Registrar Abroad .............................................................. 8
   1.7 Charging of Performance Fee at the Class/Subclass Level ............................................................ 8
   1.8 Liquidity Management Tools ......................................................................................... 8
   1.9 Operational process for adapting funds to CVM Resolution No. 175 ................................ 10

COMMISSION OF SECURITIES AND EXCHANGE
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1. Remuneration
   a. It is the nature and purpose of remuneration arrangements between service providers that they be established on a long-term basis, based on a relationship between contractors and service providers that lasts for many years. Thus, it may be unfeasible, within the scope of an adaptation process that will end in about a year, to redesign so many arrangements. Would it be possible for investment funds to provide for full adaptation to the terms of CVM Resolution No. 175, including with regard to the remuneration of service providers, but exceptionally admitting that the current arrangement remains in force, as a transitional provision in the fund regulations, class annexes, and subclass appendices, until the end of 2024?

Answer: The remuneration arrangements of service providers of investment funds intended for the general public, qualified, or professional, constituted until March 31, 2024, and that provide for remuneration (rebate) to their distributor or to the fund allocator manager under the terms of the exceptions contained in art. 92 of CVM Instruction 555, as well as the possibility of the distributor being remunerated based on the performance fee in the case of funds intended for the general public, will be considered regular under the conditions already agreed upon until the period ending in December 2024 (“Adaptation Period”), even if the investment funds subject to such arrangements adapt their regulation to CVM Resolution 175 before the end of the Adaptation Period.

This prerogative can be used for investment funds invested and investors subject to commercial arrangements under art. 92 of CVM Instruction 555 and/or investment funds whose contract provides for remuneration of the distributor based on the performance fee.

The aforementioned understanding applies only to funds that, upon adaptation of their documents, already provide for wording on remunerations compatible with all the provisions of CVM Resolution No. 175, excluding its application temporarily by an explicit transitional provision also in the fund documents. These documents must also make it clear that the remuneration rules are still based on CVM Instruction No. 555 and that, in any case, they will not exceed, under any circumstances, the final adaptation deadline for funds set for 12/31/2024.

If the investment fund subject to the arrangement does not use the prerogative contained herein when adapting its regulation to CVM Resolution No. 175, namely, the maintenance of remuneration wording under CVM Instruction No. 555 due to commercial arrangements until the end of the Adaptation Period, the guidance contained in item 31 of Joint Circular No. 1/2023/CVM/SIN/SSE must be observed.

b. It is common for the fund’s essential service providers to establish remuneration arrangements that respect a fixed consolidated value, but formed by components that may vary, for example, depending on the total net asset value under the control of that relationship. Given the volatile nature of these components, is it possible to disclose these remunerations in addition to that provided for by CVM Resolution No. 175 (in the fund documents)?

Answer: Regarding the obligation of funds (whether intended for the general public, qualified investors, or professionals) to disclose segregated administration and management fees, the technical areas clarify that they consider it regular for the fund documents to disclose the sum of the value of the consolidated fee of the essential service providers (administrator and manager), provided that the document refers to the website of the fund, the administrator and/or the manager, on which must appear (i) the methodology for sharing such consolidated fee among the essential service providers of the fund; and, cumulatively, (ii) the effective rate, condition, or value to which each, administrator and manager, are or were entitled with respect to the consolidated fee of the essential service providers disclosed in the regulation at the time of consultation by any investor.

For the definition of the applicable administration and management fee value, essential service providers can use as a parameter, for example, the mentioned sum of the net asset value of all funds administered and/or managed by the same administrator/manager.

It should be noted that this possibility does not apply to distributors, whose remuneration must remain segregated in the regulation (annex or appendix, as the case may be) under the heading of the maximum distribution fee of the respective fund.

c. Considering the new validity schedule of Resolution 175 given by Resolution 181, what will be the validity date of the new obligation for investment fund fees to be disclosed in a segregated manner between fees for (i) administration; (ii) management; and (iii) maximum distribution?

Answer: The commands of Resolution 175 regarding fund fees (remuneration of service providers) and the new conduct rules regarding the remuneration of service providers of funds (including rebates) will be in effect on April 1, 2024. Therefore, the documents of funds constituted:

(i) before April 1, 2024 and not yet adapted, may bring only the information of the consolidated administration fee of the service providers of the respective fund, under the terms of CVM Instruction 555 (including, still, the distribution fee), and will have until December 2024 to adapt to the new requirement of fee segregation (administration, management, and maximum distribution), under the terms of CVM Resolution No. 175, observing the possibility provided for in item 1 of this document; and

(ii) from April 1, 2024, must already observe the provisions of Resolution 175 in its entirety, including the obligation to disclose segregated fees for administration, management, and maximum distribution, without prejudice to the possibility provided for in item 1 of this document.

Without prejudice to the above, it should be noted that (i) the maximum administration and management fees subject to this question are not confused with the mandatory maximum fee for funds intended for the general public (retail) currently under CVM Instruction 555, which continues to apply to the funds to which it is intended, created until April 1, 2024, when they will also be subject to the new regime of CVM Resolution No. 175; and (ii) funds classified as exclusive under CVM Resolution No. 175 are exempt from disclosing maximum administration and management fees, observing the other conditions already clarified by the technical areas in item 23 of Joint Circular No. 1/2023/CVM/SIN/SSE.

d. Considering the new validity schedule of Resolution 175 given by Resolution 181, what will be the validity date for the new conduct rules regarding rebates, currently regulated by article 92 of CVM Instruction 555? In addition, when will it become mandatory for funds intended for non-qualified investors to remunerate the distributor only based on a percentage of the fund’s net asset value, class, or subclass (i.e., no longer with a percentage of the performance fee)?

Answer: Without prejudice to the other clarifications already given by this Technical Area through Joint Circular CVM/SIN/SSE No. 01 of 2023, the commands of Resolution 175 regarding fund fees (remuneration of service providers) and the new conduct rules regarding the remuneration of service providers of funds (including rebates) will be in effect on April 1, 2024. Therefore, invested funds and investors, as applicable, constituted:

(i) before April 1, 2024 and not yet adapted may bring the remuneration item and related commercial agreements under the terms of CVM Instruction 555. As provided in item 1 of this document, the service providers of such funds may maintain commercial agreements under the conditions already agreed upon until December 2024 on a transitional basis, even if the investment funds subject to such arrangements adapt their regulation to CVM Resolution No. 175, or observe the guidance contained in item 31 of Joint Circular No. 1/2023/CVM/SIN/SSE.

(ii) after April 1, 2024 must be subject to all rules of CVM Resolution No. 175 to the extent in force all commands of Resolution 175.

COMMISSION OF SECURITIES AND EXCHANGE
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2. Distribution by Account and Order
   Is it possible for the distributor, acting in the account and order modality, to subcontract an authorized registrar to meet the requirement of § 2 of article 34 of CVM Resolution 175?

Answer: Yes, the subcontracting of an institution qualified with the CVM as a registrar of securities is regular and possible (i) within the economic group of the distributor acting in the account and order modality; or (ii) by third parties not related to the respective distributor, in both cases through the celebration of a specific contract that supports such subcontracting, without prejudice to the maintenance of the responsibility of the distributor acting in the account and order modality regarding full compliance with the provisions of CVM Resolution No. 175, and of the registrar regarding CVM Resolution No. 33.

1.3 Absence of provision for the maximum distribution fee for funds without sales effort
A relevant part of the industry is composed of funds constituted upon demand of their respective investors and, in this sense, without distribution effort. We cite as examples the exclusive products and/or aimed at specific institutional investors, such as exclusive funds and/or managed by the shareholder themselves; funds intended to receive resources from plans managed by Closed Complementary Pension Entities (EFPC), Closed Complementary Pension Plans (EAPC), exclusive insurance company funds, private banking funds, and exclusive funds for families.

In this sense, these funds are not usually constituted with the purpose of being offered widely to the market, but rather as a means to meet the specific demands of their target audience, that is, the shareholder is the one who seeks the manager/administrator to enable such a structure to meet their specific needs regarding such investments, a scenario in which there is no active distribution of such funds.

Additionally, it is worth highlighting the possibility, even clearer, in which the investors themselves assume the role of managers of their exclusive funds, a fact that also ratifies the absence of distribution effort in such cases.

In view of the above, we would like to confirm that the provision in item 50 of Joint Circular No. 1/2023/CVM/SIN/SSE applies only to funds that, in fact, have sales effort that justifies the determination of remuneration for distribution purposes.

Answer: The understanding is correct. For those investment funds without effective distribution effort and, consequently, eventual cost attributed to this activity, a distribution fee will not be charged to the shareholder in practice and, therefore, there is no need to speak of the obligation to disclose the maximum distribution fee.

COMMISSION OF SECURITIES AND EXCHANGE
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

1.4 Exclusive classes
a. Currently, benefit plans managed by Closed Complementary Pension Entities (“EFPC” and “Plans”) have their own CNPJ registration, even though they do not have legal personality. Thus, investment fund classes intended, directly or indirectly, to a single EFPC may contain, in their shareholder table, different CNPJs relative to each Plan. Is it correct to understand that such classes, despite this, would continue to be understood as exclusive, given that the investments would result from the same professional investor, the EFPC?

Answer: Yes, classes intended, directly or indirectly, to the same EFPC fall under the concept of exclusive class brought by article 115 of the Resolution, even if the investments are made by different Plans, each containing its own CNPJ.

b. Is it correct to understand that a class will be considered exclusive when receiving investment from different classes of the same target audience, provided that the investing classes are framed under the concept of exclusive class? As an example, we can cite a class intended to receive resources from a specific shareholder directly and indirectly (through exclusive investor funds of the same shareholder). Would this receiving class of investment also be considered exclusive?

Answer: Yes, a class must be considered exclusive when receiving resources, directly or indirectly, from a single professional investor, from shareholders who have a family corporate link or from shareholders linked by a unique and inseparable interest.

1.5 Limited Liability
a. Regarding the requirement for the signature of ‘SUPPLEMENT A – TERM OF KNOWLEDGE AND ASSUMPTION OF UNLIMITED LIABILITY (“Term”), can we state that, in the event of changing the class from limited liability to unlimited liability, the Term will be required only from new shareholders who enter the class after the change?

Answer: Correct. Shareholders who were in the fund before the date of the assembly that deliberated the change of class to unlimited liability are exempt from signing supplement A, present in CVM Resolution 175.

b. Still regarding the Unlimited Liability Term, is it possible to apply the same rule currently applicable to the adherence term upon total redemption by the shareholder? In other words, would the shareholder who already had a position in the fund be exempt from signing a new Term if the class has not undergone a change in the condominium regime – limited / unlimited – during the time the shareholder was out of the condominium?

COMMISSION OF SECURITIES AND EXCHANGE
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Answer: Yes, the formalization of a new term is exempt in this case.

1.6 Hiring of Custodian/Registrar Abroad
a. Article 42, I of Normative Annex I – Financial Investment Funds, provides for the obligation of the custodian of the investing class to perform due diligence on the custodian or registrar of the fund or investment vehicle abroad. Considering that the custodian of the investing class often does not have a relationship with the custodian or registrar of the fund or investment vehicle abroad, making access to information difficult, would it be possible to interpret that the administrator and the custodian could establish, contractually, that the administrator would be responsible for the due diligence?

Answer: It is possible, given that the administrator is the essential service provider responsible for hiring the custodian, including. Therefore, custodian and administrator can establish contractually that the administrator would remain responsible for the due diligence. In this case, the fund documents must be explicit regarding this delegation.

1.7 Charging of Performance Fee at the Class/Subclass Level
a. Should the performance fee be charged at the class or at the subclass? Although this point is not clear in art. 5, §5, of CVM Resolution 175, our interpretation is that the performance fee should be accommodated at the subclass:

Art. 5 The fund regulation may provide for the existence of different classes of shares, with distinct rights and obligations, and the administrator must constitute a segregated patrimony for each class of shares.
(...)
§ 5 Subclasses of shares may be differentiated exclusively by:
I – Target audience;
II – terms and conditions for application, amortization, and redemption; and III – administration, management, maximum distribution, entry, and exit fees.

Answer: The performance fee may be calculated both at the class and at the subclass level.

1.8 Liquidity Management Tools
a. Side Pocket. Article 44 mentions the possibility of activating a side pocket: (i) in the case of market closure and (ii) in exceptional cases of asset illiquidity. In this line, we have doubts about the possibility of its use in situations derived from prices, such as credit events, among others that are not necessarily correlated to the lack of liquidity of the class.

Answer: Yes, it is possible to extend the application of the side pocket to all situations that would originally lead to the closure of the fund for redemption, such as those derived from supervening price uncertainties (unexpected and relevant credit events).

It is worth remembering that the side pocket, as well as redemption barriers or the closure of the fund for redemptions, are exceptional liquidity management measures, and thus, can only be used in extreme and unpredictable situations. Its use under ordinary fund operating conditions reveals a deficiency in the liquidity management controls of the essential service providers, which may lead to the initiation of an administrative sanctioning process against any of them or both, in light of the individual conduct identified in each case by each.

b. In the cases below of side pocket, is it possible to reincorporate the illiquid portion (asset) into the class?
(i) when the same shareholders remain in the fund and the proportion of shares at the time of the spin-off is maintained; (ii) the asset regains liquidity and mark-to-market, and; (iii) upon approval of the reincorporation in assembly.

Answer: Yes, the reincorporation of the illiquid (spun-off) portion into the original class is possible, but will depend on approval in a general meeting of shareholders. This without failing to recognize that the ideal and desired scenario is the return of resources to shareholders as the illiquid class receives any resources resulting from the liquidation of the positions of the spun-off portion. Even because, of the 3 cumulative conditions presented above, the first seems quite difficult to occur in practice within the scope of open funds.

c. When the side pocket is activated, it is imagined that redemption requests should be proportionally distributed among the classes resulting from the spin-off. In the class that houses the problematic assets, is it possible to cancel any redemption requests already requested and not converted?

Answer: Yes, provided that the regulation establishes the criteria and procedures to be adopted in this case. In any case, it is worth remembering that this tool is activated by stress situations arising from the portfolio (for example, credit events or liquidity of specific assets in the portfolio), and not by stress situations arising from the liability. Thus, even if the side pocket can be activated reaching unsubscribed redemptions, it should not be activated on the basis of excess redemptions.

COMMISSION OF SECURITIES AND EXCHANGE
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

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares – Centro – Rio de Janeiro - RJ – CEP: 20050-901 – Brasil Tel.: (21) 3554-8686 - www.cvm.gov.br d. Is there a possibility of rule flexibility for split classes that contain illiquid assets from side pockets? We cite as an example the possibility of maintaining net equity below R$ 1MM and the portfolio composition and concentration limits. Answer: The side pocket can be described as a specific-purpose vehicle and with application in exceptional situations; for this reason, it is not subject to the ordinary rules of minimum equity and classification provided for in the general regulation of funds. e. Is it possible to include in the split resulting from the side pocket a liquid portion to cover expenses/payments of the charges attributed to the new class created to receive the illiquid asset? We cite as an example legal and fund maintenance expenses (notaries, taxes, etc.). Answer: Yes, it is not only possible, but necessary that the split portion also carry resources necessary for its subsistence and conduct of its own activities, for the period foreseen for its existence. f. Regarding redemption gates, is it correct to understand that, in retail funds, the reduction of redemption requests must be carried out in the same proportion for all unitholders? For restricted funds, is it reasonable that the barrier can be defined as a percentage limit that an individual investor can redeem from the fund? Answer: We understand that in classes intended for the general public, the criterion used for the reduction of redemption requests must be carried out in the same proportion for all unitholders. For restricted classes, we understand that the bylaws may freely dispose on the method to be adopted. g. What happens to redemption requests not executed because they exceed the barrier value: must they be cancelled or postponed and executed upon disengagement of the tool? Answer: The fund bylaws must regulate and make transparent to unitholders the treatment that will be given to redemptions that exceed the limit (whether they will be cancelled or postponed, for example).
1.9 Operational process of adapting funds to CVM Resolution No. 175
h. How will fund administrators practically provide information on the adaptation of their funds to CVM Resolution No. 175?
Answer: As is known, the deadline for the adaptation of investment funds will begin to run on 10/02/2023, in accordance with article 140 of the Resolution, and even in the format of a single class for all funds.

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares – Centro – Rio de Janeiro - RJ – CEP: 20050-901 – Brasil Tel.: (21) 3554-8686 - www.cvm.gov.br As the adaptation will necessarily involve the adequacy of the current fund documents, such changes must be reported in an ordinary manner to the CVM through the system already available for this purpose (“SGF”), accompanied by the upload of the pertinent documents. In addition, investment fund administrators must inform the CVM through a message directed to the address edyr@cvm.gov.br, on November 30, 2023, January 31, 2024, and April 1, 2024, which funds have already been adapted to the new Resolution since the last information and up to that date, so that such information can impact the Autarchy's database in a structured manner. The information must be provided by filling out a file in Excel format (to be made available previously in the public environment of that system for consultation and reference), which will follow the standard set forth below:

Fund CNPJ	Adaptation Date	ESG Fund?	Can invest 100% abroad?
CNPJ A	10/12/2023	Y	N
CNPJ B	14/12/2023	N	Y
CNPJ C	18/12/2023	N	N

For funds registered from 10/02/2023 onwards, specific fields will already be provided in the SGF registration screens for the administrator to inform whether the fund is qualified as ESG or if it invests up to 100% abroad. For these funds, naturally, no information related to the adaptation process will be required, as they must already be registered as adherents to CVM Resolution No. 175. It is worth noting, in this context, that article 134 of CVM Resolution No. 175 provides that:
Investment funds that are in operation on the date of commencement of the validity of the norm must fully adapt to the provisions of this Resolution by December 31, 2024, with the exception of credit rights investment funds - FIDC, which must adapt by April 1, 2024.
In the interpretation of the technical areas, “in operation” for the purposes of this provision should be interpreted as those funds that are effectively operating on 10/02/2023, i.e., already with resources contributed and in normal operation. Thus, funds that register with the CVM before the entry into force of CVM Resolution No. 175, or even those with an ongoing offering, will only be able to collect resources and start their operations from 10/02/2023 onwards if they are already fully adapted to the Resolution. This adaptation, of course, may be carried out through a Private Instrument of Amendment (“IPA”).