Hedge Fund Regulation in Brazil - Part 2

8. ADMINISTRATION OF THE FUND

   The administration of the fund comprehends the group of services related directly or indirectly to the functioning and maintenance of the fund that can be provided by the administrator himself or by third parties hired by him, in writing, in the name of the fund.

   On behalf of the fund, the administrator shall hire duly qualified or authorized third parties for the following services, with the exception of any other not listed:

   the management of the fund's portfolio; the investment consultancy; the securities treasury, control and processing activities; the distribution of quotas; the writing of the issuance and redemption of quotas; the custodianship of the securities and other financial assets; and risk classification per specialized agency constituted in the country. Management of the fund's portfolio is the professional management, as established in the regulation, of its securities, developed by an individual or a legal entity registered in the administrator of the securities portfolio by CVM, having the manager powers to trade, in the name of the investment fund, these securities.

   The hiring of duly qualified or authorized third parties to provide administration services is a faculty of the fund, but the hiring of independent auditing services is obligatory when the administrator is not duly authorized or qualified for the provision of the services related to the securities treasury, control and processing activities, the distribution of quotas, the writing of the issuance and redemption of quotas and the custodianship of the securities and other financial assets.

   It is the administrator's duty, in the quality of representative of the fund, to hire the service providers, after a previous and sensible analysis and selection of the hired person, with the need of being in the contract as an approved intervenient.

   The contracts signed for providing services related to the management of the fund's portfolio, the securities treasury, control and processing activities and the writing of the issuance and redemption of quotas shall contain a clause that states a common responsibility between the officer of the fund and the third parties hired by the fund for possible harm caused to the quotaholders due to conducts contrary to the law, to the regulation and the normative acts issued by the CVM. Independently from this solidary responsibility, the administrator responds for losses arising from own acts and omissions that he admits to have been the cause always when he/she admits to have acted in a way contrary to the law, regulation and normative acts issued by CVM.

   The administration service provision contracts signed with third parties by the administrator in the name of the fund shall be kept by the administrator and respective contracted people at the disposal of CVM.

   The funds managed by financial institutions do not need to hire the services related to the securities treasury, control and processing activities and the writing of the issuance and redemption of quotas, when these services are done by their administrators, that in this case are considered authorized for its rendering.

   The administrator has the power to practice all the necessary acts to the functioning of the investment fund, being responsible for the constitution of the fund and for providing information to CVM in the form of the applicable regulations and whenever asked.

   In case the administrator is not registered at CVM as a service provider for securities custodianship, the fund shall hire a registered institution for such activity. The custodian contract should contain clauses establishing that:

   the custodian institution can accept only the orders issued by the administrator, by the manager or by their legal representatives or attorney; the custodian is forbidden to execute orders that are not directly linked to the fund's operations; and the price of the services. Sales and purchase orders of securities and other assets available in the scope of the financial and capital market shall be issued with a precise identification of the investment fund in whose they should be executed. The grouping of orders between the funds of sales and purchases made through equal and pre-established criteria will be admitted when the same legal entity manages many funds and if the administrator has implemented a system that allows the share, being such department's registration available to CVM for the minimum period of five years.

9. REMUNERATION

   The fund's regulation shall contemplate the administration fee that will remunerate all the services related to: (a) the management of the fund's portfolio; (b) the investment consultancy; (c) the securities treasury, control and processing activities; (d) the distribution of quotas; and (e) the writing of the issuance and redemption of quotas. A performance fee is allowed, based on the result of the fund, as well as an entrance fee and an exit fee. The administration fee shall encompass not only the expenses associated with these services but also the expenses for the services related to the risk classification per specialized agency constituted in the country.

   In the event that the fund hires a risk classification agency, the agency's remumeration shall constitute an expense to the administrator. The contract shall contain a clause obliging the risk classification agency to immediately disclose on its webpage and communicate to the CVM and the administrator any changes in the fund's classification or termination of the contract. If any such situation occurs, the administrator shall immediately disclose any relevant facts to the market and this disclosure shall encompass any information supplied to the quotaholders. Once the contract is terminated, from the termination date the brochure must include a summary of the last report elaborated by the risk classification agency, the history of the grades obtained by the fund, an indication of the electronic address at which the complete version of the report may be consulted and information stating that it is also available at the administrator's headquarters. Remuneration of the risk classification agency hired by the fund may be an expense of the fund when it is deducted of the administration fee and this possibility is stated in the fund's regulation.

   It is the administrator's duty to watch over in order that the hiring of third parties' expenses do not exceed the total amount of the administration fee fixed in the regulation, incurring the payment of any expenses exceeding this limit at his/her expenses.

   The fees cannot be increased without the general assembly's previous approval, but they can be reduced unilaterally by the administrator, who shall immediately communicate CVM and the quotaholders this fact, making the due alteration to the regulation and, if that is the case, to the brochure.

   In the open-end funds, the administration and performance fees shall be provisioned per business day, always as a fund expense, and they shall be in accordance to what is established in the regulation.

   The investment funds and quota investment funds, not directed exclusively to qualified investors who acquire quotas from other investment funds, shall establish in their own regulation that the administration fee charged by the administrator include the administration fee of the investment funds in which they invest. This does not impede that the fund's regulation establishes a maximum administration fee, including the administration fee of the funds in which they invest, and a minimum administration fee that do not include the administration fee of the funds in which they invest, case in which: (a) the brochure and any other advertising material that mentions the administration fee shall stand out both fees, explaining their differences; and (b) the brochure and any advertising material that makes a comparison of any nature between the funds, shall refer, in the comparison, only to the maximum tax allowed to the reference, in note, and to the minimum tax and the effective tax in other periods, if any.

   The performance fee is admitted when its collection is in the fund's regulation other than funds classified as "short-term", "referenced" and "fixed income", which are expressly prohibited from charging a performance fee. The collection of the performance fee shall meet the following criteria: (a) bond to a reference parameter compatible with the fund investment policy and with the securities that are effectively part of it; (b) prohibition of a bond to the performance fee in a percentage that is inferior to 100% of the reference parameter; (c) collection per period, at least half-yearly; and (d) collection after the deduction of all expenses, including the administration fee. The collection of a performance fee is forbidden when the value of the fund's quota is inferior to its value when the collection was made. The collection of an adjustment over the quotaholder's individual performance that applies monies in the fund after the date of the last collection, is allowed exclusively in the cases in which the acquired quota value is inferior to its value on the date of the last collection for the performance accomplished. The funds dedicated exclusively to qualified investors are not subject to the prohibitions discussed herein and can charge a performance fee according to what is set forth in their regulation.

   Advisory councils, technical or investment committees can be constituted, without harm to the responsibilities of each one of the fund's administration service providers, by the initiative of the quotaholders, administrator or manager, who cannot be remunerated at the fund expenses. The attributions, composition and requirements for a call and the deliberation by councils and committees shall be established in a regulation. The existence of councils does not exempt the administrator or manager from the responsibility over the...