CVM Changes Investment Fund Regulations

In recent years, the Brazilian government has implemented various measures to attract national and foreign investors to the Brazil's financial and capital markets. One example is the government's decision to lift the tax burden, on certain conditions, for foreign investors resident or domiciled outside Brazil (with the exception of those countries considered to be tax havens under Brazilian law) on income from investments in investment funds restricted to foreign investors and in equity investment funds, enacted in Law 11,312/2006. Following this lead, on March 30, 2007 the Brazilian Securities Commission (Comissão de Valores Mobiliários - CVM) published Instruction 450, amending Instruction 409/04, which governs investment funds in the Brazilian market.

According to the CVM, the changes introduced by Instruction 450 are intended to bring the regulation governing the Brazilian investment fund industry into line with the current scenario in the capital market, where lower yields on government paper - for many years the mainstay of Brazilian fixed income funds - has caused investors to migrate to variable income funds, while part of the fixed income funds' portfolios has moved to private debt instruments, among other assets that carry a higher return, but also greater risk.

Instruction 450 brings significant changes to the Brazilian investment fund market, particularly with respect to better information on the funds, greater freedom for fund managers in investing the funds' resources, and the increased liability of fund managers as a result of the greater freedom in investment decisions.

Among the changes that are intended to improve the information provided to investors on the types of investment funds, some of the more important are: (i) a reformulation of the issuer limits, with the creation of a new limit of 5% of the fund's assets for investment in issuers which are natural persons or private companies that are not financial institutions or listed companies; (ii) new limits for each type of financial asset, which apply cumulatively with the issuer limits; (iii) special rules for investment or mutual funds that have more than 50% of their assets invested in private sector debt instruments or public debt instruments issued by government entities other than the federal government of Brazil.

With respect to the greater freedom accorded to fund managers in their investment decisions, the most striking change is that, provided certain...