Hedge Fund Regulation in Brazil

Brazil is both the largest economy in the Latin American region and the most developed in terms of the liquidity and sophistication of its financial services industry. It has long nurtured a vigorous hedge fund industry serving both the domestic market and offshore investors. Brazil is gradually building a reputation as a hedge fund centre for the reasons outlined below.

With increasing global demand for its agricultural commodities and mineral wealth, and having the benefit of an extended period of political and economic stability, Brazil now enjoys balance of payments and fiscal surpluses, low and controlled inflation and an improving level of public debt. This has created an appropriate environment for public offerings, a longer-term curve and increasing liquidity in derivatives. All these factors generate more opportunities for hedge fund managers.

In the past, managers in Brazil and other Latin American countries followed predominantly macro strategies, but today there is a second wave of funds, using long/short equity strategies such as pair trading and equity hedge, as well as arbitrage funds and the establishment of genuine multi-strategy funds with independent books for each strategy.

The mutual industry fund in Brazil is highly regulated and is subject to the control and supervision of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM)1. The law that instituted CVM established that it should observe the following objectives:

to assure the proper functioning of the exchange and over-the-counter markets;
to protect all securities holders against fraudulent issues and illegal actions performed by company managers, controlling shareholders, or mutual fund managers;
to avoid or inhibit any kind of fraud or manipulation which may give rise to artificial price formation in the securities market;
to assure public access to all relevant information about the securities traded and the companies which have issued them;
to ensure that all market participants adopt fair trading practices;
to stimulate the formation of savings and their investment in securities; and
to promote the expansion and efficiency of the securities market and the capitalization of Brazilian publicly held companies.
Under the current applicable regulations, an investment fund (fundo de investimento), also known as a mutual fund, is the gathering of capital, in the form of a condominium, aimed at the investment in certain financial assets available in the financial and capital markets. Therefore, unlike other jurisdictions, a Brazilian fund is a condominium and not a legal entity.

A fund may invest in the following financial assets:

public debt securities;
derivatives contracts;
shares, debentures, subscription bonus, their coupons, rights, subscription slips and share split certificates, certificates of deposit of securities, debenture bills, quotas of investment funds, promissory notes, and any other securities that are not referred to in item (iv) below, with the condition that the issuance of the negotiation is the object of the registry or the authorization granted by CVM;
collective investment contracts or titles registered at CVM and publicly offered that generate participation, partnership or remuneration rights, including those resulting from the provision of services whose revenue comes from the efforts of the entrepreneur or of third parties;
certificates or slips of deposit issued abroad and backed by securities issued by a Brazilian publicly-held corporation2;
gold financial assets, if negotiated at an internationally accepted standard;
any titles, contracts and financial institution obligation or co-obligation operational modalities; and
warrants, trading contracts for the purchase and sale of products, merchandise or services for future delivery or future provision, titles or certificates representing such contracts and any other credits, titles, contracts and operational modalities if expressly stated in the regulation.
The assets whose liquidation can be performed by means of a delivery of products or services shall be negotiated in a commodities and futures exchange that guarantee their liquidation, or be the object of a contract that assures to the fund the right of its alienation before its term, with a guarantee of a financial institution or of an insurance company, observing, in the latter, the applicable regulations of the Brazilian Private Insurance Superintendence (Superintendência de Seguros Privados – SUSEP).

The fund’s portfolio can only be composed of financial assets approved for trading on either the stock exchange or the futures and commodity exchange3, or recorded in the registration system, with custody or financial net liquidation duly authorized by the Central Bank of Brazil (Banco Central do Brasil – Bacen) or CVM, in their respective areas of competence. This registration shall be performed in specific accounts opened directly under the name of the fund. However, quotas4 of open-end investment funds do not depend on such registration.

The expression “financial assets” also include the financial assets of the same nature traded abroad, in the cases and in the limits admitted in the regulation, if the possibility of its acquisition is expressly stated therein, and: (a) is admitted to negotiation in the stock exchange and in the commodities and futures exchange, or is registered in the registry, custody or financial liquidation systems duly authorized in their original countries and supervised by a recognized local authority. This registration shall also be performed in specific accounts opened directly under the name of the fund; or (b) which existence is assured by the custodian of the fund, which shall hire, specifically for this purpose, third parties duly authorized for such activity of custody in signatory countries of the Asuncion Treaty or in other jurisdictions, since, in this case, the third parties are supervised by a recognized local authority.

In this regard, CVM has signed a mutual cooperation agreement that allows the exchange of information for operations performed in the markets supervised by it, or with any party that is a signatory to the multilateral memorandum of understanding of the International Organization of Securities Commissions – IOSCO.

Furthermore, the financial assets negotiated in countries signatory of the Treaty of Asunción are considered to be financial assets negotiated in the domestic market in Brazil, and the Brazilian Depository Receipts (BDRs), classified as level I, are considered to be financial assets negotiated abroad. BDRs are certificates that represent stocks issued by publicly-held corporations or similar, based overseas, and issued by a depositary institution in Brazil. The main characteristics of level I BDRs are: (a) trading is limited exclusively to the non-organized over-the-counter market and only between the persons referred to below in item (d); (b) exception from the need to provide information about the issuing company other than that required by law in its country of origin (in the Portuguese language); (c) exemption from the need to register the company with CVM; and (d) exclusive acquisition by financial institutions and other institutions authorized to function by Bacen, by employees of the sponsoring company or its subsidiary, by insurance brokerage firms and savings capitalization corporations, by corporate entities with a net worth of more than R$ 5 million, and by securities portfolios worth more than R$ 500 thousand, carefully administrated by an administrator authorized by the CVM and by employees of the sponsoring company or its subsidiary.

Multimarket funds (fundos multimercados), which are deemed to be the Brazilian hedge funds, must have investment policies in place that provide the various risk factors, without any required concentration on a given factor or different factors from the other fund classes5.

Furthermore, it is possible to have a fund aiming exclusively at qualified investors, which include: financial institutions; insurance companies and capitalization societies; private welfare opened or closed capital organizations; individuals or legal entities that hold financial investments in an amount superior to R$ 300 million and that additionally in writing their qualified investor condition; investment fund directed exclusively to qualified investors; portfolio administrators and securities consultants authorized by CVM, in relation to their own monies; and own social security regimes related to the Federal Government, the States, the Federal District or the Municipalities.

It is also important to mention the “exclusive” fund. The funds for qualified investors constituted to receive applications exclusively from a sole quotaholder are considered as “exclusive”.

Last but not least, there is the investment fund that invests in quotas of investment funds. Normally these funds shall keep at least 95% of its invested assets in quotas of investment funds of the same class, except when they invest in quotas classified as “multimarket”, that can invest in quotas of funds of different classes. The investment funds that invest in quotas classified as “multimarket” can invest in quotas of real state investment funds, credit rights investment funds and investment funds that invest in quotas of investment funds, if this is previewed in their regulations, up to the limit of 20% of its equity. If they are aimed exclusively at qualified investors, investment funds that invest in quotas qualified as “exclusive” or “multimarket” may acquire quotas of venture capital mutual investment funds, real estate investment funds, participation in investment funds, credit rights investment funds, investment funds that invest in credit rights investment funds up to the limits provided for in their regulations and brochures if any.

The Brazilian hedge funds industry has grown more rapidly than the rest of the other investment funds since 2000 as a result of the decrease of the local interest rates during the period, which are still some of the highest in the world, and the creation of several independent asset managers, not affiliated with any Brazilian or foreign banks.

The investment funds industry in Brazil has been traditionally dominated by banks, mostly retail banks with large distribution channels. As a result of the consolidation of the banks, many senior executives who were employed by banks that merged with or acquired other banks, including those involved with their employers´ asset management or investment businesses, were unhappy with the new situation and decided to leave their banks or were simply dismissed. This resulted in the establishment of a significant number of new independent asset managers, which were formed with the main purpose of managing hedge funds.

There are several different types of Brazilian hedge funds. According to the classification adopted by the Brazilian Association of Entities of the Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais – ANBIMA)6, the multimarket funds are classified according to the risks represented by the various classes of assets as follows:

1. Multimarket Funds Without Variable Income
Funds classified in this segment are those which seek a long term return through investments in various asset classes (fixed income, currency, etc.) except variable income (equities, etc.). These funds have no explicit comparable mix of assets (asset allocation benchmark) and can also be compared to a performance parameter, which reflects one asset class alone (for example: 100% CDI7). No leverage is acceptable. A fund is considered as leveraged whenever there is the possibility (different from zero) of a loss higher than the funds asset value, ignoring cases of default in the funds assets.

2. Multimarket Funds With Variable Income
Funds classified in this segment are those which seek a long term return through investments in various asset classes (fixed income, currency, etc.) including variable income (equities, etc.). These funds have no explicit comparable mix of assets (asset allocation benchmark) and can also be compared to a performance parameter, which reflects one asset class alone (for example: 100% CDI). No leverage is acceptable.

3. Multimarket Funds Without Variable Income with Leverage
Same as 1 above but leverage is acceptable.

4. Multimarket Funds With Variable Income with Leverage
Same as 2 above but leverage is acceptable.

5. Balanced
Funds classified in this segment are those which seek a long term return through investments in various asset classes (fixed income, currency, etc.). These funds use an investment strategy and roaming tactics between classes of assets or an explicit short term rebalancing strategy. The asset mix of these funds must be explicit (percentage of each asset class) with which they shall be compared (asset allocation benchmark). As such these funds cannot be compared with a performance indicator which reflects a single class (for example: 100% CDI). No leverage is acceptable.

6. Protected Capital
This type of fund seeks returns in risk markets aiming to partially or totally protect the principal value invested. Portfolio protection or hedge is understood as any operation, the purpose of which is to neutralize risks different from the benchmark parameter of the fund or to synthesize risks that link the fund to the benchmark parameter, limited to the asset value.

7. Long and Short – Variable Income
This type of fund constructs operations of assets and derivatives linked to the variable income market with bought and sold positions. The result will be largely a factor of the difference between these positions. Resources remaining in cash are invested in operations admissible for DI Benchmarked funds. Leverage is acceptable.

In addition, it should also be mentioned that the ANBIMA classification includes as a separate category of investment fund the Offshore Fund. For the purposes of this classification, an offshore fund shall be considered as one constituted outside Brazil but the portfolio manager of which is located in Brazil. There are three types of these funds: (i) Offshore Fixed Income Funds; (ii) Offshore Variable Income Funds; and (iii) Offshore Mixed Funds.

The rules are basically the same for the incorporation of any investment fund. The fund is constituted by a deliberation of a manager that must fulfill the requirements established by CVM, to whom it is entrusted to approve the fund’s regulation, in the same act. Legal persons approved by CVM for the professional exercise of portfolio management can be investment fund managers in compliance with Article 23 of Law No. 6.385, of December 7, 1976 (the Brazilian Securities Act).

According to CVM regulations, the fund name shall include the expression “Investment Fund” in Portuguese (Fundo de Investimento), added by the reference of the fund class – Multimarket (Multimercado). No other terms or expressions that might induce an undue interpretation of its objectives, its target public or possible specific tax treatment that the fund or its quota holders might be subjected to shall be added to the fund’s name. Furthermore, the fund classified as “Multimarket” that states in its regulation or brochure that it is committed to obtaining the tax advantages designed for long term funds provided for in the current tax legislation shall be obliged to: (i) include the expression “Long Term” (Longo Prazo) in the denomination of the fund; and (ii) meet the conditions provided for in the referred regulation in order to obtain the above-mentioned tax advantages.

The fund can be constituted as an open-end condominium, in which quotaholders can request a redemption of their quotas at any time, or close-end, in which quotas can only be redeemed at the end of the fund’s term. The amortization of quotas is admitted both in the open-end and in the closed-end fund by means of the uniform payment to all quotaholders of a part of the value of their quotas without the reduction of the number of issued quotas, made in compliance with what is disposed in this respect by the ruling of the quotaholders general assembly.

The fund will be governed by its regulation and needs to disclose its main characteristics to the public through a brochure.

4.1. Brochure
The brochure shall contain all information relevant to the investor related to the fund’s investment policy and the risks involved. The updated brochure shall be at the disposal of potential investors during the distribution period, in places where it is done in sufficient number. The fund administrator shall send CVM, by electronic means through the Document Sending System available on the CVM webpage, all alterations made in the brochure, which shall be made available for public consultation, in a term of one business day.

The brochure shall contain, in clear and accessible language to the fund´s target public, information regarding the following topics, as well as any other information considered relevant:

management targets as well as fund´s objectives and target public;
investment policy and range of assets allocation, explaining their process of analysis and selection;
list fund service providers;
clear specification of fund taxes and other expenses;
detailed presentation of the administrator and manager, whenever the case, with information about their registration in the CVM, their technical departments and other resources and services used to manage the fund;
fund´s quotas acquisition conditions, comprehending the minimum and maximum limits of investment, as well as minimum values for the movement and permanence of the fund;
conditions for quotas´ redemption and, if applicable, grace period;
policy of results distribution, if there is any, specifying terms and payment conditions;
identification of the fund assumed risks;
information about the administration policy for risks incurred by the fund, including the methods used to manage such risks;
information on the fund and quotaholders applicable taxes, contemplating the policy to be applied by the administrator as to the tax treatment to be followed;
policy related to the exercise of the voting right of the fund, by the administrator or by its legally constituted representatives in general meetings of the companies in which the fund holds an investment;
policy of information disclosure, including the information related to portfolio composition, which shall be identical to all who request it;
identification of the fund’s risk classification agency, whenever there is one, as well as the obtained classification;
the indication on the place, means and form of obtaining the fund results in previous years, as well as other information regarding previous years, such as accounting statements, reports of the fund administrator and other pertinent documents that might have been disclosed or elaborated due to applicable ruling dispositions; and
the maximum percentage of quotas one sole quotaholder can retain.
In case the regulation establishes a conversion date different from those of the redemption request or the redemption grace period, such facts shall be included in a way that stands out, in the brochure cover and in all advertisement material in a clear and legible form.

In the event the administrator has hired a risk classification agency, the brochure shall include a warning that the maintenance of this service is not obligatory, and may be discontinued by the administrator of the fund or the general assembly of the quotaholders.

In the description of the risk administration policy, the brochure shall contain a warning that the methods used by the administrator to manage risks do not constitute a guarantee against possible property losses that the fund might incur.

In order to advise of the risks assumed by the fund, whenever applicable, the fund must mention in its brochure the possibility of losses as a result of price volatility of the assets that are part of its portfolio.

Where the investment policy provides for the possibility of allocation of more than 30% of the equity of the fund in private credits, the brochure shall emphasize such possibility. A multimarket fund that makes applications in any of the assets and operational modalities that are the responsibility of individuals or legal entities (private credits), or from public issuers different from the Federal Government that, on the whole exceeds the percentage of 50% of its equity, shall observe the following rules, cumulatively to those provided for its class: (a) the expression “Private Credit” shall be stated in the denomination of the fund; (b) the regulation, brochure and sales material of the fund shall contain a clear warning that the fund is subject to the risk of substantial equity loss in the event of situations that might incur in the non-payment of the assets that are part of its portfolio, or because of an intervention, liquidation, temporary administration regime, bankruptcy, judicial or extrajudicial recuperation of the issuers responsible for the assets of the fund; and (c) entry to the fund shall be conditional on the signature of an acknowledgement term for the risks inherent to the composition of the fund´s portfolio, the use of electronic systems for this purpose are forbidden. However, there are certain assets that are not included in such limitation applied to private credits, such as stocks listed on the stock exchange or the organized over-the-counter markets (listed stocks), bonus or subscription receipts and certificates of deposit of listed stocks, quotas of stock funds and quotas of index of stocks traded in the stock exchange or the organized over-the-counter markets and BDRs classified as level II and III.

The main characteristics of a Level II BDRs Program are: (a) admission to trading on stock exchanges, organized over-the-counter markets or electronic trading systems; and (b) registration of the company with the CVM.

The level III BDRs presents the following characteristics: (a) public distribution on the market; (b) admission to trading on the stock exchange, the organized over-the-counter market or on the electronic trading system; and (c) registration of the company with CVM.

Alterations to the risk administration policy shall be advertised as a relevant fact.

The following facts shall be explicit in the disclosure of information policy definition: (a) minimum periodicity of the advertising of the fund’s portfolio composition; (b) level of information detail; and (c) place and the medium of information request and dissemination.

4.2. Regulation
The regulation of the fund is required to deal with:

the qualification of the fund administrator;
whenever is the case, reference to the qualification of the fund’s portfolio manager;
the custodian’s qualification;
kind of the fund, if opened or closed;
term of duration, if determined of undetermined;
the investment policy which characterizes the class of the fund;
administration fee, fixed and expressed in annual percentage of net equity (base 252 days);
performance, entrance and exit 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;
other expenses8 of the fund;
conditions for application and redemption of quotas;
distribution of results;
target public;
reference to the establishment of an interval to update the quota value whenever applicable;
fund´s fiscal year;
the information disclosure policy, including those regarding the portfolio;
policy related to the exercise of the voting right of the fund, by the administrator and its legal constituted representatives, in general assembly of the companies in which the fund holds a participation;
information on the tax applicable to the fund and to its quotaholders; and
risk administration policy with a description of the methods used by the administrator to manage the risks to which the fund is subject to.
In the definition of the investment policy, the following information shall be disclosed: (a) the maximum percentage of application in securities issued by the administrator, manager or any company linked to them; (b) the maximum percentage of application in investment fund´s quotas managed by the administrator, manager or a company connected to them; (c) the maximum percentage of application in securities owned by the same issuer; and the purpose of the fund is to make operations in a value superior to its assets, with the indication of their levels of exposition in risk markets.

The information disclosure policy shall encompass at least the following: (i) the minimum periodicity for the disclosure of the fund’s portfolio composition; (ii) the level of detailing of information; and (iii) the place and means of request and disclosure of information. The disclosure policy shall be identical to all investment consultants, classification agencies and other interested parties.It will always be given identical treatment to the group of quotaholders as to the disclosure of information, and, if it’s the case, those constant of the disclosure policy to which they referred to.

In the event the fund hires a risk classification agency: (a) the agency’s remuneration will constitute an expense to the administrator; (b) 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; (c) the administrator shall immediately disclose any relevant facts to the market; and (d) the information disclosed to it shall encompass those supplied to the quotaholders.

Termination of the contract signed with the risk classification agency may only be permitted with the observance of a grace period of 180 days, and at the end of this period a risk classification report issued by the same agency must be presented. Once this hypothesis is verified, from the termination date, the brochure must include a summary of the last report elaborated by the 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.

The remuneration of the risk classification agency hired by the fund may be an expense of the fund when: (i) it is deducted of the administration fee; and (ii) this possibility is stated in the regulation.

The administrator can directly destine to the quotaholders the amounts that are attributed to the fund regarding dividends, interests on own capital or other yields coming from the assets that are part of its portfolio, if expressly authorized by the regulation.

Regarding the alteration of the regulation, any such alteration depends on a previous approval on the part of the general quotaholders´ meeting, being valid from the date stated by the meeting. Unless unanimously approved by all the quotaholders of the fund, the alteration of regulation will be valid at least 30 days after the communication to the quotaholders in the following cases: (i) increase or alteration of the calculation of administration, performance, entry and exit fees; (ii) alteration in the investment policy; (iii) change in the conditions for redeem; and (iv) merger, division or consolidation that involves the fund in the form of a closed-end condominium or that might cause an alteration, for the quotaholders involved, of the conditions described in the aforementioned items (i), (ii) and (iii).

The administrator shall send the following documents through the Document Sending System available at the CVM webpage on the date the alterations decided in a general meeting become valid: (a) a brochure of the regulation, consolidating the alterations done; and (b) an updated brochure, if that is the case.

The regulation can be altered independently from the general meeting, always when such alteration arises exclusively from the need to meet CVM express requirements for compliance with the legal or regulation norms or due to the updating of the registration data of the administrator, manager or custodian of the fund such as alteration of company name, address and telephone. These alterations shall be communicated to the quotaholders by mail within a maximum term of 30 days, counted from the date in which they are implemented.

Except if determined otherwise, the administrator has a term of 30 days to proceed the alterations determined by CVM, counted from the reception of the correspondence that formulate such requirements.

The regulation of the fund for qualified investors shall be explained regarding the exclusive participation of the qualified investors.

Regarding the investment fund that invests in quotas, the brochure and the regulation of the fund shall specify the maximum percentage of the assets that can be applied in only one investment fund. The brochure of the investment fund that invests in quotas shall also dispose on the investment policy and the administration fee of the funds in which it intends to invest. The brochure of the investment fund that invests in quotas that applies its monies in only one investment fund shall disclose the sum of the administration fee of the investment fund that invests in quotas and the invested fund.

The fund functioning depends on a previous registration with CVM, which shall be processed through the sending, by the administrator of the documents indicated below, through the Document Sending System available on the CVM webpage, and shall be automatically granted on the date of the respective sending protocol.

The registration request shall be instructed together with the following documents and information:

the fund´s regulation;
the data regarding the regulation registration in the civil registry office;
a brochure;
declaration by the fund administrator stating that he/she has signed the contracts hiring duly qualified or authorized third parties to provide administration services and independent auditing services, if it is the case, and that these contracts are at the disposal of the CVM;
name of the independent auditor;
enrollment of the fund with the National Register of Legal Entities (Cadastro Nacional da Pessoa Jurídica – CNPJ); and
a standard form duly filled out with the fund basic information, according to a model available at the CVM webpage.
CVM shall cancel the registration:

of the open-end fund, which, after 90 days of the beginning of its activities, does not keep at any time an average net equity inferior to R$ 300 thousand for the period of 90 consecutive days; or
of the closed-end fund, when the minimum number of quotas representing its initial capital were not subscribed within a term of 180 days. However, due to a well-founded request and at its own discretion, CVM can extend this 180 day-term once, for a maximum period equal to the initial term.
The quotas of the fund correspond to ideal fractions of its net equity and shall be nominative and registered. The quotas shall confer equal rights and duties to the quotaholders.

The value of the quota of the day will be the result of the division of the value of the stockholders’ equity by the number of fund quotas, both of which shall be verified the end of the day, which is understood for the purposes of this Instruction as the time the markets close in the areas where the funds operate.

The fund´s regulation can establish that the value of the quota of the day be calculated based on the previous day’s equity and duly updated by one day when it is an investment fund: (i) classified as “short term”, “fixed income” and “referred”; or (ii) registered as “exclusive”. For this purpose, the possible adjustments arising from the movements occurred during the day shall be registered against the applications or redemption of the quotaholders that have made those movements or, still, against the fund assets, as the regulation sets.

When dealing with funds that trade on foreign markets, the value of the quota of the day can be calculated at the time of market closing as indicated in the regulation.

The quality of quotaholder is characterized by the inscription of the title holder’s name in the fund’s quotaholders register. The entities responsible for this registration are the fund administrator, the duly qualified or authorized third party to provide administration services hired for this aim, and the intermediary institution that is part of the Brazilian securities distribution system hired to distribute the quotas, according to the case.

The quotas of an open-end fund cannot be assigned or transferred, unless by a legal decision, execution of guarantee or universal succession.

The quotas of a closed-end fund can be transferred, by means of a term of assignment and transfer, signed by the assignor and the assignee, or through a stock exchange or organized over-the-counter legal entity in which the fund´s quotas are admitted for trade. The transfer of a closed-end fund quotas´ title holding is conditioned to the checking on the part of the administrator on the fulfillment of both the ruling and formalities required by the applicable regulations.

In the event of a negative equity, the quotaholders may respond without prejudicing the responsibility of the administrator or manager, in the case of non-observance of either the investment policy or the concentration limits put forward in the regulation and in the applicable regulations. However, the administrator and the manager, if there is one, shall be responsible before the quotaholders for the non-compliance with the investment policy or the concentration limits set forth in the applicable regulations.

6.1. Quotas Issuance and Redemption
In the issuance of fund´s quotas the value of the quota/day and day following the day of effective availability shall be used by the invested resources administrator or intermediary, according to what was set forth in the fund´s regulation.

The subscription of the fund´s quotas value shall be made in national current money (reais). The only exception to this rule is the fund addressed exclusively to qualified investors, if set forth in its regulation, which can admit the use of securities in the payment and redemption of quotas with the establishment of detailed and precise criteria for the adoption of these procedures, still meeting, when the case requires, the correspondent tax obligations.

The fund´s quotas redemption shall obey the following rules:

the fund´s regulation shall establish the term between the request of the redemption and the date the quotas were converted, as such, for the effects of the applicable regulations, the date the quota value was found in order to pay the redemption;
the conversion of quotas shall be calculated considering the value of the quota on the day of conversion, and observed, depending on the case, in the form of the calculation of the quota of the day;
the redemption payments shall be in check, deposit into current account or payment order at the terms established in the regulation, and shall occur within five business days since the date of the conversion of the quotas;
the regulation shall establish a grace period for the redemption, with or without yield;
a fine of 0,5% of the redemption value shall be due to the quotaholder, to be paid by the fund manager per day of payment delay on the quotas redemption.
The fund which regulation establishes a different date for the quotas conversion and redemption, a different date for redemption payment and request of redemption and grace period for redemption shall disclose such facts in a way that stands out, in the brochure cover and in all advertisement material in a clear and legible form.

In exceptional cases of non-liquidity of assets which are part of the fund’s portfolio, including the ones arising from redemption requests incompatible with the existing liquidity, or that might imply in an alteration of the fund tax treatment or the quota holders group, to the harm of the latter, the administrator shall declare the closing of the fund for redemptions, being the call for an extraordinary general meeting compulsory in a maximum term of one day, in order to deliberate on the following possibilities in a term of 15 days from the date it was closed for redemption: (a) substitution of the administrator, manager or both; (b) reopening or maintenance of the fund closing for redemption; (c) possibility of redemption payment in securities; (d) division of the fund; and (d) liquidation of the fund. The administrator is responsible for the non-use of powers conferred herein, in the event its omission causes harm to the remaining quotaholders.

The fund´s closing for redemption shall, in any case, be immediately communicated to CVM. The above-mentioned extraordinary general meeting shall be held even if the administrator deliberates to re-open the fund before the meeting set up date. The administrator shall request CVM for a specific authorization to proceed with the fund division before its re-opening for redemptions, being new applications in the fund resulting from its division forbidden in this case, and being obliged, in any case, to hold the above-mentioned extraordinary general meeting set forth. It is the duty of the officer to take the necessary measures to avoid the occurrence of the hypothesis of non-liquidity of assets due to the physical liquidation of the funds assets, when the liquidation can be performed by means of a delivery of products or services negotiated in a commodities and futures exchange that guarantee their liquidation.

It is to the administrator´s discretion to suspend new applications on the fund at any moment, since such suspension is applied indistinctively to new investors and present quotaholders. The suspension of new applications for one day does not impede future re-opening of the fund for applications. The administrator shall immediately communicate the intermediaries about the possible existence of funds that are not admitting funding. The fund shall remain closed for applications for the duration of redemptions suspension.

The fund´s regulation shall foresee the reception of applications and redemptions conditions during state and municipal holidays.

6.2. Registration of Quota Distribution
There are separate rules for registration and distribution of quotas, depending as to whether it is an open-end or close-end fund.

The open-end fund quotas distribution is independent from previous registration in CVM and shall be done through intermediary institutions integrating the securities distribution system9.

The closed-end fund quotas distribution depends on the previous registration in CVM and can only be accomplished by institutions integrating the securities distribution system.

The administrator is obliged to supply hired intermediaries with all the fund´s advertising material required by the regulation in force, responding for its contents´ precision of information. The investment fund administrator is obliged to inform hired intermediaries of any alteration that might occur to the fund, especially if it arises from a change in the regulation, occasion in which the administrator shall immediately replace the advertising material in the hands of hired intermediaries.

6.3. Registration of Closed End Funds Distribution
The distribution of closed-end fund quotas that is not directed exclusively to qualified investors shall be preceded by a registration of a public distribution offer.

The registration of closed-end fund quotas directed exclusively to qualified investors shall depend on the sending of the documents and information indicated herein, through the Document Sending System available in the CVM webpage and shall be considered automatically granted in the date written in the respective sending slip. In this regard, the request for distribution of closed-end fund quotas directed exclusively to qualified investors shall be followed by: (a) advertising material to be used during the quota distribution; (b) information regarding maximum and minimum number of quotas to be distributed, emission value and other distribution important information; (c) declaration by the administrator that a distribution agreement was signed with an institution that is part of the distribution system and that it is at the disposal of CVM whenever applied; and (d) brochures, when applicable.

A brochure shall be sent to the quotaholders in the distributions that follow the initial one, with a communication about the beginning of distribution in at least ten days notice, and a communication about the end of distribution in up to ten days after such end, explaining the result of the distribution. The administrator shall keep for five years at the disposal of CVM the proofs of sending both communications.

The administrator shall send, through the Document Sending System available in the webpage of CVM, the list of closed-end quota subscription in a two-business day’s term after the closing of the quota subscription.

The fund´s quotas new distribution shall not be admitted before the previous distribution is subscribed.

The subscription of closed-end fund quotas shall be closed in a maximum term of 180 days from the distribution starting date. In case the administrator decides, during the quotas distribution process, to alter some previously disclosed conditions, the distribution shall be suspended, so that the subscribers may agree with the new conditions. Quotaholders who do not agree with the proceeded alterations, shall have the right to a subscribed value refund, added proportionally of the fund application income gain, net from duties and taxes. Once observed this course of action, effective restitution of dissident quotaholders´ values included, and previously to the distribution restart, the correction of the brochure and the other documents and information shall be proceeded, from which date a new term of 180 days for the quotas placement shall start.

The amounts received from the quotas subscription during the closed-end fund quotas distribution process shall be deposited in a commercial bank or a multiple bank with commercial portfolio or a savings bank in the name of the fund, being compulsory its immediate application in federal government bonds or investment fund classified quotas.

During the distribution period, the administrator should send the portfolio applications report monthly through the Document Sending System available on the CVM webpage within a maximum term of ten days from the closing of the month.

In the case of an already functioning fund, the new quotas´ distribution related values shall be kept separately from other fund applications in the books up to the closing of the distribution.

The quotaholders meeting that deliberate on the closed-end fund new quotas´ distribution shall dispose on both the minimum number of quotas that shall be mandatorily subscribed so that distribution continues and the treatment to be applied in case the total subscription of predicted quotas does not occur. In this the case, if the minimum number of quotas previewed is not subscribed in a term of 180 days extendable for an equal period, counted from the date of the concession of the registration, the subscribed values shall be immediately restituted to the subscribers, added proportionally of the yield gained by the applications of the fund, net from duties and taxes. If the total distribution of the quotas previewed does not occur and the deliberation of the quotaholders meeting has not fixed a minimum number of quotas to be subscribed, the subscriber of the quotas can opt between stay in the fund or receive the devolution of the subscribed value, added proportionally by the yield gained by the applications in the fund, net from duties and taxes.

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1. The current basic regulations on the incorporation, administration, operation and disclosure of information of the investment funds in Brazil have been approved by CVM Instruction No. 409, of August 18, 2004, published in the Official Gazette of the Union (Diário Oficial da União – DOU) of August 24, 2004, and subsequently amended by: (i) CVM Instruction No. 411, of November 26, 2004, published in the DOU (Brazil) of December 1, 2004; (ii) CVM Instruction No. 413, of December 30, 2004, published in the DOU (Brazil) of December 31, 2004; (iii) CVM Instruction No. 450, of March 30, 2007, published in the DOU (Brazil) of April 3, 2007; (iv) CVM Instruction No. 456, of June 22, 2007, published in the DOU (Brazil) of June 26, 2007; and (v) CVM Instruction No. 465, of February 20, 2008, published in the DOU (Brazil) of February 21, 2008. All these regulations and the consolidated and updated text are available at www.cvm.org.br.

2. A Brazilian corporation shall be publicly-held or closely-held depending on whether its securities are accepted for trading in the securities market. Only the securities of a corporation registered in the CVM may be traded in the Brazilian securities market. No securities may be publicly distributed in the market without the previous registration with CVM.

3. In the case of Brazil the exchange responsible for stock and futures and commodity is BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&F BOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros), a new legal entity created in 2008 with the integration between the two major Brazilian exchanges, the Brazilian Mercantile & Futures Exchange (BM&F) and the São Paulo Stock Exchange (Bovespa), which is deemed to be the third largest exchange worldwide in terms of market value, the second largest in the Americas, and the leading exchange in Latin America.

4. “Quotas” are the units of a Brazilian investment fund and “quotaholders” is the name given to the holders of such quotas.

5. The other fund classes are: short term funds (fundos de curto prazo), backed funds or benchmarked funds (fundos referenciados), fixed income funds (fundos de renda fixa), shares funds (fundos de ações), foreign exchange funds or FX funds (fundos cambiais) and foreign debt funds (fundos de dívida externa).

6. ANBIMA is the main representative of the entities operating in the Brazilian financial and capital markets and its aim is to strengthen the domestic financial and capital markets as an instrument for fostering Brazilian development. It was formerly known as National Association of Investment Banks (Associação Nacional dos Bancos de Investimento – ANBID). As of October 21, 2009, ANBID absorbed the activities of the National Association of Institutions of the Financial Market (Associação Nacional das Instituições do Mercado Financeiro – ANDIMA) and its name was changed to ANBIMA.

7. The CDI (Certificado de Depósito Interfinanceiro) is the rate calculated to remunerate the interbanking lending transactions in Brazil.

8. The following expenses can be directly debited to the fund: (i) fees, taxes or federal, state, municipal or autarchic contributions that might fall upon the assets, rights and obligations of the fund; (ii) expenses for registration of documents in the notary, printing, mailing and publication of reports and periodic information required by CVM; (iii) expenses with correspondence that are of the fund’s interest, including communications to the quotaholders; (iv) fees and expenses of independent audit; (v) emoluments and commissions paid for the fund’s operations; (vi) lawyers fees, costs and expenses for related procedures, incurred due to the defense of the fund’s interest, in court or outside it, including the value of a conviction of the fund, if it is the case; (vii) a part of a damage non covered by insurance policies and non directly due to guilt or fraud of the administration service providers in the fiscal year of their respective functions; (viii) expenses directly or indirectly related to the exercise of the fund´s voting right by the administrator or by its representatives legally constituted in general meetings of the companies in which the fund holds a participation; (ix) expenses with the custody and liquidation of operations with securities, financial assets and operational modalities; (x) expenses with the closing of exchange, linked to its operations or with certificates or deposit slips of securities; (xi) in the case of a closed-end fund, the annual contribution due to the stock exchanges or entities of the organized over-the-counter market in which the fund have its quotas admitted to trade; and (xii) the administration and performance fees. Any expenses not set forth as expenses of the fund, including the ones related to the elaboration of a brochure, shall be at the administrator’s expense, and should be hired by him/her.

9. The Brazilian securities distribution system comprises: (i) financial institutions and other corporations engaged in the activity of distributing securities issues as agents of the issuing corporation or for their own account, underwriting or purchasing the issue in order to place it on the market; (ii) corporations engaged in the activity of purchasing securities available on the market, in order to resell them for their own account; (iii) corporations and independent agents engaged in intermediation activities in the trading of securities, on stock exchanges or the over-the-counter market; (iv) stock exchanges; (v) organized over-the-counter markets; (vi) commodities brokers, special operators and the commodities and futures exchanges; and (vii) securities clearing and settlement entities.