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Brazil

On August 18 2004 the Brazilian Securities and Exchange Commission (CVM) issued a new set of rules applicable to the organization and operation of mutual funds in Brazil, which will be effective as of November 22, 2004 (Rule 409).

Rule 409 has consolidated the rules that apply to fixed income funds and variable income funds, which were originally regulated and inspected by the Brazilian Central Bank and the CVM, respectively. According to Rule 409, both fixed and variable income funds will now be subject to the CVM supervision and must comply with the set of rules and provisions provided for therein.

Rule 409 provides more clarity in the information disclosed to shareholders and to the market in connection with mutual funds; more responsibility and decision-making power to the shareholders/investors; and standardization and agility in the processes of incorporation of investment funds and distribution of shares of investment funds.

Shareholders that are not considered institutional and qualified buyers will have access to more detailed and complete information on mutual funds and their operations.

Rule 409 will apply to all fixed-income investment funds and variable-income investment funds available in the Brazilian market except certain mutual funds, which will remain regulated by and subject to their specific applicable regulation (that is the case, for example, of real estate investment funds and ETFs).

The investment funds regulated by Rule 409 may have a determined or undetermined term of duration. They may be constituted either as open-end funds, which allows shareholders to redeem shares at any time during the term of the investment fund, or as closed-end funds, which only allows shareholders to redeem shares at the end of the term of the fund. The amortization of shares will also be allowed in both open-end and closed-end funds.

Investment funds' incorporation and registration proceedings before the CVM will be simplified. Investment funds will be incorporated upon resolution of the fund manager and their respective functioning will be subject only to prior registration with the CVM through the internet. The incorporation and/or functioning of any investment fund regulated by Rule 409 will no longer depend on the CVM's prior approval. However, the CVM will continue to be responsible for the supervision of mutual funds and their respective managers and investment advisers.

All mutual funds regulated by Rule 409 will be organized under one of seven different categories, which will vary according to the portfolio composition, risk factors, restrictions on investments and diversification requirements. The categories of mutual funds allowed by Rule 409 will be: (i) short-term investment funds (similar to money-market funds in the US market); (ii) benchmark tracker funds; (iii) fixed-income funds; (iv) stock funds; (v) foreign currency funds; (vi) Brazilian sovereign debt funds; and (vii) multi-market funds.

Rule 409 established a new set of rules and guidelines that fund managers and investment advisers will have to follow regarding compliance with portfolio composition and risk factors, and restrictions on investments and diversification requirements. If the portfolio composition limits and diversification requirements are not complied with due to facts beyond the fund manager and investment adviser's control, Rule 409 provides for the applicable proceedings to be followed by them, such as calling a general shareholders' meeting to resolve on transferring the fund and/or portfolio management of the investment fund, merging the investment fund into another fund or terminating the investment fund.

In the case of extraordinary events of illiquidity of the fund's portfolio, including those resulting from redemption requests incompatible with the existing liquidity of the assets, the fund manager may determine the interruption of redemption of shares by the shareholders of the fund. The fund manager must call a general shareholders' meeting, according to the terms of Rule 409, to resolve on replacement of the fund manager and/or the investment adviser, reopening the fund for redemption requests or continuance of the interruption, and the possibility of redemption payment in securities.

Rule 409 expressly authorizes investment funds designed for a single investor, provided that the shareholder is considered an institutional and qualified investor pursuant to Rule 409.

Rule 409 established a new set of rules and proceedings related to the calculation of the issuance and redemption prices of the shares of the mutual funds.

Fund managers and/or investment advisers will be subject to a new set of rules and proceedings related to the charge of performance fees for investment funds directed at retail investors.

Rule 409 established a new definition of qualified and institutional investors. They are: (i) financial institutions; (ii) insurance and capitalization companies; (iii) pension funds; (iv) individuals or legal entities that own financial investments valued at more than R$300,000 (about $100,000) and that, additionally, state in writing to be a qualified investor; (v) investment funds directed only to qualified and institutional investors; and (vi) investment advisers and securities consultants accredited with the CVM, in relation to their own capital/funds.

According to Rule 409, the hiring of service renderers to the fund is limited to the services expressly indicated by the Rule and must be effected in writing by the fund manager on behalf of the investment fund. The main innovation is that the fund manager and the hired service renderers are expressly jointly liable before the shareholders of the investment fund if any losses are caused by the practice of any acts contrary to the laws, by-laws and applicable regulation enacted by the CVM.

The disclosure of information and results to the CVM, the market and shareholders will be subject to a new set of rules introduced by Rule 409, which are more detailed than the previous regulation. Among other innovations, Rule 409 provides for the obligation of the fund manager to simultaneously disclose to the market and shareholders any and all privileged information disclosed or made available in any way to third parties.

The new set of rules brought by Rule 409 will be effective as of November 22, 2004. The investment funds that are regulated by the Brazilian Central Bank and the CVM and are currently operating must proceed with the necessary measures and amendments to their respective by-laws and other organization documents until December 31 2004.

José Eduardo Carneiro Queiroz, Marina Procknor and Juliana Garcia Gevevini

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