On October 2nd, 2023, the new Resolution CVM 175 partially entered into force to regulate investment funds in Brazil. It is said partially because while most of the changes brought by Resolution CVM 175 came into force on October 2nd, 2023, there are still a few changes that will come into force only in 2024.
The Resolution groups 38 different already existing regulations into one and brings some important new rules about the formation, operation and information disclosure of investment funds, as well as rules about investment funds’ services providers.
One of the most significant changes brought by Resolution CVM 175 is that it allows for the existence of limited liability funds. Up until the entry into force of Resolution CVM 175, only unlimited liability funds were permitted. Now, investment funds’ members may have their responsibilities limited to the value of their membership interest, so long as the funds’ regulation expressly establishes so.
Also, Resolution CVM 175 allows investment funds to invest up to 100% of its net asset value abroad, as long as they comply with the Resolution’s rules. Nevertheless, there are still limits for Financial Investment Funds (FIFs) that have foreign investments: the applicable limit for classes destined to the general public is of 20% of its net asset value, and the limit for classes destined exclusively to qualified investor is of 40% of its net asset value.
Another important change is the regulation of funds’ service providers. The investment fund manager will now have the title of an essential service provider, and, alongside the fund administrator, will perform the fund’s core operational activities. This alteration was important to adjust the rules to the actual reality of the funds, that now usually have both an administrator and a manager.
Moreover, to guarantee more transparency to its members, the funds will have the obligation to disclose, in a separate manner, the administration, management and maximum distribution fees. That means that the funds’ regulations will have to disclose separately the remuneration of the administrator, manager and distributors in its text. Previously, the funds only needed to disclose the fee as a whole; it was not necessary to disclose the information separately. It is important to note, however, that this obligation will only enter into force on April 1st, 2024.
Another significant alteration that will come into force only on April 1st, 2024, is the creation of a multiclass structure. The funds will be able to be divided into classes and subclasses, each of them having its individual assets, rights and obligations. This means that the same set of assets can be linked to different liabilities without the need to create separate investment funds for each type of investor profile. This implies that assets can be grouped or associated with different liabilities or obligations, thus catering to the needs of different types of investors without the creation of multiple separate funds. This will provide flexibility in investment management, since the fund manager will not need to manage assets from more than one vehicle.
Resolution CVM 175 marks a significant milestone in the country’s financial sector, being a testament to Brazil’s commitment to creating a more transparent, efficient, and investor-friendly environment. Investment funds now have a new resolution that not only groups multiple regulations the country had about the theme, organizing the legal framework on the subject, and investors now have more enticing factors to invest in Brazil.
Written by Mariana Tavares and Mariana Belisario