Investment In Structured Financial Instruments (SFIs) In Brazil

On August 25, 2015, the Supervision of Relations with Institutional Investors (Superintendência de Relações com Investidores Institucionais - SIN) of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) issued Circular-Letter No. 6/2015/CVM/SIN (CL 6/2015) that aims to guide securities portfolios' managers as to the recommended procedures regarding the investment of third party resources in structured financial instruments (SFIs). These recommendations are outlined herein.

This subject is of undisputed importance since the financial instruments of this type have their own features which must be carefully evaluated by the managers in order to comply with the due diligence requirements referred to in the applicable regulation[1].

In the exercise of his/her duties, a securities portfolio's manager shall employ the same care and diligence which an industrious and honest person customarily employs in the administration of his/her own affairs, working with loyalty in relation to the interests of the investors, avoiding practices that could hurt the fiduciary relationship maintained with them, and accounting for any infringements or irregularities that may be committed under his/her administration or management.

The fiduciary duty that securities portfolios' managers must have to their clients implies the need to act with professionalism, always doing the appropriate analysis on any financial assets in which they decide to invest. SFIs, however, have very specific features that make the diligence required of such professionals in the process of investing in these assets different from that it is needed in the case of simpler assets. The risks involved are distinct and, therefore, it takes a tailored due diligence process specifically adapted to these risks[2].

In the context of CL 6/2015, SFIs means securitized and structured finance instruments, that may basically be considered as complex (as opposed to more traditional or plain vanilla investment instruments) notably in consideration of their specific features in particular: where these instruments have a complex capital structure; are difficult to value (so that their valuations require specific skills and systems); and/or have a very limited or no secondary market (and are therefore potentially illiquid).

CVM adopted the same definition used by the Technical Committee of the International Organization of Securities Commissions (OICV - IOSCO) in its Final...