Capital Markets

The Open Capital Market is coming! CVM President explains what it is

The Open Capital Market is an initiative introduced by the president of the Securities and Exchange Commission (CVM), João Pedro Barroso do Nascimento, aimed at strengthening and expanding the capital market in Brazil. The aim is to make the capital market more attractive, inclusive, and competitive, contributing to the country’s economic growth. The actions mentioned below are an integral part of this initiative:

• Investor PIX: Instant and cost-free portability of investments between brokers via a mobile application.
• Encouraging Activism: Increasing the engagement of individual investors in meetings by revising resolution 81.
• Simplified Registration: Simplification of client registration by brokers, with a single shared registration.
• Funds Framework: New regulatory framework for funds in force as of October, empowering investors.
• Crowdfunding: Adjustments to crowdfunding rules to include small and medium-sized companies.
• Review of takeover bids: Promise of a “revolution” in the way takeover bids are thought of in 2024.
  In addition to adjustments to existing regulations and the creation of new financial products, CVM aims to focus on the development of the following key sectors:

1. Agribusiness: Despite accounting for around 25% of Brazil’s GDP, agribusiness still has a limited presence in the capital markets, accounting for only 5%. The CVM plans to expand the regulation of Fiagros in order to attract more participants from this sector.
2. Sustainable Finance: The commitment to environmental issues offers significant opportunities for Brazil. The CVM is seeking to attract investors of different profiles to invest in sustainable finance.
3. Cryptoassets: CVM recognizes the potential of cryptoassets as a way to modernize and innovate the capital market. It seeks to bring market players more in line with regulations and offer opportunities for different investor profiles who wish to participate in the organized market.
4. Soccer Corporations (Sociedades Anônimas do Futebol - SAFs): With the implementation of Law 14.193/2021 (Sociedade Anônima do Futebol Law), the CVM is identifying opportunities for funds to invest in the soccer industry. It intends to adopt a similar approach to that of crypto assets.

In short, the Open Capital Market initiative promises to reinvigorate and expand the capital market in Brazil. Through innovative actions and strategic plans, it seeks to simplify the investment journey, increase investor engagement, and create a more favorable environment for the Brazilian capital market.

Investment Funds

New Rules on Brazilian Investment Funds Come into Force

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.

Labor law

Brazilian Supreme Court considers collection of contributions to unions valid

In a judgment concluded on 09/11/2023, the Federal Supreme Court (STF) considered the collection of the so-called assistance contribution valid. This contribution is intended to fund activities such as collective negotiations for collective work agreements.
In the decision, the STF makes it clear that the decision does not represent the return of the union tax, which was changed by the labor reform in 2017.

With the STF’s decision, the assistance contribution will now be charged to all workers, whether or not they are members of the union. However, for those who are not members of the union, the discount can only be made if:

• The payment is agreed in an agreement or collective convention of the category.
• If unaffiliated workers give express authorization for the discount, or do not present opposition within the period defined in collective bargaining.

Foreign Exchange

Brazilian Foreign Exchange Rules Simplified

Brazilian Federal Law No. 14.286/21 entered into force on December 30th, 2022, and established a new legal framework for the Brazilian foreign exchange market. The legal provisions aim to modernize, simplify, and consolidate the legislation of the foreign exchange and international capital market in Brazil, promoting the development of the business environment and making foreign exchange operations less bureaucratic.
With the purposes of reducing barriers to exports and imports of goods and services and to promoting the free movement of capital, Law No. 14.286/21 and the Resolutions published by the Brazilian Central Bank to regulate the Law brought significant changes in the operational aspects of the Brazilian exchange market, such as:

• The execution of exchange agreements is no longer required for the closing of FX transactions, which may be carried out by any means such as telephone call, WhatsApp or e-mail.
• Bank accounts held by residents and non-residents in Brazil shall be granted equal treatment.
• Brazilian bank accounts may now be held in foreign currencies. We note that this rule still needs to be regulated by the Central Bank of Brazil so that it becomes available for personnel accounts. So far, this possibility is only available for brokerage houses, insurance companies and credit managers.
• Remittances abroad by way of profits, dividends, interests no longer need to be registered with the Brazilian Central Bank.
• Individuals are now allowed to trade foreign currency in kind provided that such transactions are carried out occasionally and not professionally and do not exceed the US$500 cap per transaction.
• The list of transactions which set forth obligations enforceable in Brazil that can be paid in foreign currency was expanded.
• Private compensation of credits and debits between residents and non-residents through simple accounting entries are now permitted.
• The external interest indicator was updated due to the extinction of LIBOR.
  The legal changes make foreign capital more attractive, both for investments in the financial and capital markets as well as for direct investment in long-term opportunities such as companies and infrastructure projects and concessions.
  The Law will contribute to make transactions in Brazil involving foreign currency simpler, more agile, and competitive for individuals and companies, making the exchange market more accessible for those who send or receive funds from abroad.
  

Investment Funds

Resolution 175 CVM: Investment Funds Compilation of Rules and Modernization
The Resolution 175 issued by the Brazilian Securities Commission (CVM) was published in the end of 2022 for the purposes of regulating the constitution, operation, and disclosure of information of investment funds, as well as the rendering of services for such funds. The Resolution replaces 38 existing rules on the subject and consolidates the rules on investment funds in a single normative act.
In addition to disciplining important concepts about funds already introduced by the “Economic Freedom Law” of 2019 (Law No. 13,874/2019), the Resolution formalizes practices already adopted by the market and seeks to align the local industry with international standards, increasing the attractiveness for foreign investors and the access from local investors to more diversified and sophisticated investment opportunities.
In this sense, Resolution 175 details how “classes” and “subclasses” of quotas/shares can be created.
Moreover, the law establishes that shareholders’ liability may be limited to the value of the acquired shares. It may not seem like an important change, but until then, if an investment fund assumed a leveraged position, for example, which resulted in losses to the point of its net worth becoming negative, the shareholders could be called upon to contribute additional capital. According to the Resolution, funds need to define, in regulations, what type of liabilities shareholders will have before the fund.
It is believed that the new structure of division of funds into classes and subclasses, with limited and unlimited liability, will allow the creation of several layers, simplifying, in the medium and long terms, the operation of investment funds.
Another point raised by the new rule was the distribution of risks and responsibilities among the agents involved. Currently, within the universe of funds, there are four major roles: manager, administrator, custodian, and distributor. Before the Resolution, the custodian and the administrator were responsible for most of the obligations and, consequently, were responsible for most of the risks. However, the manager was entitled to most part of the remuneration. CVM updates brought more transparency to investors regarding service providers fees, and more balance to fund managers responsibilities.

Tax

Provisional Measure No. 1,171/2023: Innovations to the tax regime for assets abroad held by individuals residing in Brazil.
On April 30, 2023, the Brazilian Federal Government published Provisional Measure (“MP”) No. 1.173/2023 providing for a new tax regime for income received abroad. Among other aspects, the new rule aims to institute the automatic taxation of income tax on income earned by individuals with residence in Brazil from financial investments, controlled entities, and trusts abroad.
According to Article 2 of the MP, this income must be reported in the Annual Tax Return and separated from other income and capital gains, observing the following progressive table:

Offshore entities: Members of offshores will be highly impacted by the new rule. The main impact is the end of deferral, a tax instrument widely used by people who invest in offshore entities. The members of these offshore companies were only taxed when the resources of these companies were distributed. With the new MP, the profits and capital gain obtained abroad will be taxed regardless of distribution and in proportion to the interest held by the members in the offshores capital stock or equivalent.

Trusts: Foreign trusts will also be impacted by the rule. Assets and rights under foreign trusts will be considered as remaining under the settlor’s ownership even after the creation of the trust for purposes of taxation. Thus, the income and capital gains relating to the assets and rights held by the trust will be taxed as if they were under the settlor’s titularity.
The MP does not have automatic application and needs to be approved by the Brazilian National Congress and converted into law within 60 days (extended for another 60 days) to take effect as of January 2024. If approved, it is expected that the text will undergo changes.