The Brazilian Monetary Council (CMN) recently enacted a new resolution concerning the investments of closed pension funds. CMN Resolution 3,792 supersedes CMN Resolution 3,456 and provides a new regulatory framework for the subject matter.
One of the new resolution's highlights is the increase of the monitoring role played by pension funds. This regulatory approach is noted in two aspects: (i) the growing concern with environmental policies; and (ii) incentives for the adoption of better standards of corporate governance by investees.
Pension funds are now required to pay more attention to environmental issues. Although the new resolution does not impose strict rules on environmental investments, the annual investment policy of pension funds must, from now on, clearly state whether it will follow social and environmental principles or not. Moreover, certain credits of the carbon market may now be included in the investment portfolio of pension funds, namely a Certified Emission Reduction (RCE) and a carbon credit from the voluntary market, listed on the stock market, organised in an over-the-counter market, or registered in a register system, custody or financial settlement is now part of the variable income segment.
With respect to corporate governance, the new resolution encourages the adoption of higher standards of corporate governance by investees. Companies that have adhered to the São Paulo Stock Commodities and Future Exchange's (BM&FBovespa) special segments for enhanced corporate governance are now eligible for bigger investments from pension funds. For instance, companies listed on the Novo Mercado segment (which imposes the highest standards) may receive up to 70% of a pension fund's resources; only 35% can be allocated to companies that have not adhered to any special segment.
The global integration of capital markets is also reflected in the new resolution. In the previous regulation, only 3% of pension funds' portfolios could be offshore assets. In the new resolution, investments abroad receive more attention and are part of an independent investment segment. Pension funds can now invest in: (i) offshore assets (through Brazilian investment funds); (ii) quotas of external debt investment funds; (iii) quotas of investment funds referenced to foreign indices, listed on the Brazilian stock market; and (iv) Brazilian Depositary Receipts BDR. Moreover, the investment limit has increased to 10% of the pension fund's resources.
As we pointed out here in March 2009, Brazilian regulation on public offerings has changed, since the Brazilian Securities Commission (CVM) enacted on January 16 2009 CVM Rule 476 addressing public offerings of securities to be distributed with limited underwriting efforts, with waived registration from the CVM. This voluntary offering procedure has proved fast and uncomplicated and has found broad acceptance among Brazilian issuers. However, many avoided this procedure because the previous regulation prohibited pension funds from investing in securities offered under CVM Rule 476. With the new resolution, this problem has been solved and pension funds are now able to invest in securities distributed with limited underwriting efforts.
Finally, the previous regulation set forth a limited list of assets that could compose the portfolio of pension funds. The New Resolution follows this pattern, but innovates by including in the fixed income segment any negotiable instrument or security whose payment has been guaranteed by a financial institution authorised to operate by the Central Bank of Brazil.
José Eduardo Carneiro Queiroz and Alexei Bonamin