New rules for Brazil’s credit rights investment funds

Author: | Published: 23 Apr 2013
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On February 6 2013, the Comissão de Valores Mobiliários – CVM (the Brazilian Securities Exchange Commission) enacted the CVM Normative Instruction 531 (Normative Instruction 531/13), which changed the CVM Normative Instruction 356/01. Both Normative Instructions regulate the constitution and operation of credit rights investment funds (FIDC).

Through the Normative Instruction 531/13, CVM has authorised the funds' administrator to gather the management and custody activities of the FIDC. Until now, this was forbidden. The market sees this as a positive revision, which aims to develop management and custody activities, and creates a cost reduction for the fund, which previously had to contract different entities to exercise each activity.

Such accumulation of activities is allowed provided they are completely segregated – via a so-called Chinese wall, for example - to avoid eventual conflict of interests between the services.

In addition, the Normative Instruction 531/13 clearly defines those activities that are considered management and those that relate to the custody. This makes their classification easier and allows for their segregation.

Moreover, the Normative Instruction 531/13 makes the custody agent responsible for verifying the credit rights to confirm if they satisfy the eligibility criteria. This verification is to be made based on the information gathered by the custody agent, the service providers engaged by the custody agent, or that information which can be obtained by the custody agents using 'reasonable efforts', such as those provided by credit protection companies.

The Normative Instruction 531/13 has also maintained the provision that the collection and receipt of payments must be made at a FIDC's bank account, but also enabled the utilisation of an escrow account. This aims to reduce the risk of financial flows related to the credit rights assigned to the FIDC. The changes also enable the FIDC to hire a collection agent to collect and receive defaulted credit rights.

According to CVM, the use of agreement mechanisms or an escrow account by the collection agent would allow for the effective control and segregation of the collection agent's efforts. This improves the effectiveness and success of the collection in a way that does not mix, at first, such financial resources with the credits ordinarily collected by the FIDC.

Further, the Normative Instruction 531/13 made possible the hiring, by the custody agent, of service providers to verify the validity of the credit rights assigned to the FIDC and to deposit the correspondent documentation. Even though the custody agent decides to delegate such activities, the control will remain under their responsibility.

The 20% FIDC equity cap imposed on single debtors has been maintained. But, in addition to the ones then existent, the following have now been carved out of this threshold: federal government bonds, repurchase agreements backed by government bonds, and the fund quotes that have as investment policy the exclusive allocation of such federal bonds.

The proposed changes brought by the Normative Instruction 531/13 clarified obscure topics of the Normative Instruction 356/01, which shall result in cost reduction for the FIDCs.

FIDCs already in operation must adapt to the Normative Instruction 531/13 by February1 2014. Alternatively, if they want to proceed with a public offering before then, the FIDC must meet the Normative Instruction 531/13 requirements immediately.

By Byung Soo Hong, Gabriel Sollero Figueira and Camilla Paiva of Madrona, Hong, Mazzuco, Brandão (MHM)