The Asset Management ReviewThe Asset Management

Review

Law Business Research

Fourth Edition

Editor

Paul Dickson

The Asset Management Review

The Asset Management ReviewReproduced with permission from Law Business Research Ltd.

This article was first published in The Asset Management Review - Edition 4(published in September 2015 – editor Paul Dickson)

For further information please emailNick.Barette@lbresearch.com

The Asset Management

Review

Fourth Edition

EditorPaul Dickson

Law Business Research Ltd

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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

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Acknowledgements

ii

MANNHEIMER SWARTLING ADVOKATBYRÅ AB

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iii

Editor's Preface ..................................................................................................viiPaul Dickson

Chapter 1 EUROPEAN OVERVIEW ........................................................ 1Edward Burrows

Chapter 2 AUSTRALIA ............................................................................ 40Lucinda McCann, Nikki Bentley and Vinod Kumar

Chapter 3 BELGIUM ............................................................................... 55Thierry Tilquin, Tom Van Dyck, Greet Bontinck and Steven Peeters

Chapter 4 BERMUDA .............................................................................. 68Sarah Demerling and Sally Penrose

Chapter 5 BRAZIL ................................................................................... 81Fernando J Prado Ferreira and José Paulo Pimentel Duarte

Chapter 6 BRITISH VIRGIN ISLANDS ................................................ 95Jeffrey Kirk and David Mathews

Chapter 7 CANADA ............................................................................... 104Alix d’Anglejan-Chatillon and Jeffrey Elliott

Chapter 8 CAYMAN ISLANDS ............................................................. 121Nicholas Butcher, Anna Goubault and Krista-Lynn Wight

Chapter 9 CHINA .................................................................................. 136Richard Guo and Zhen Chen

CONTENTS

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Contents

Chapter 10 FINLAND.............................................................................. 152Janne Lauha, Leena Romppainen and Hannu Huotilainen

Chapter 11 FRANCE ................................................................................ 166Arnaud Pince

Chapter 12 GERMANY ............................................................................ 180Thomas Paul and Christian Schmies

Chapter 13 HONG KONG ...................................................................... 193Jason Webber, Peter Lake and Ben Heron

Chapter 14 INDIA .................................................................................... 211Ashwath Rau, Ganesh Rao and Aditya Jha

Chapter 15 IRELAND .............................................................................. 224Kevin Murphy, Elizabeth Bothwell, David O’Shea, David Kilty and Sarah McCague

Chapter 16 ISLE OF MAN ...................................................................... 238Simon Harding and Katherine Johnson

Chapter 17 ITALY ..................................................................................... 250Giuseppe Rumi, Daniela Runggaldier, Riccardo Ubaldini and Michele Dimonte

Chapter 18 JAPAN .................................................................................... 267Yasuzo Takeno and Fumiharu Hiromoto

Chapter 19 LUXEMBOURG ................................................................... 286Jacques Elvinger, Olivier Gaston-Braud and Joachim Kuske

Chapter 20 NETHERLANDS .................................................................. 304Lotte Boon and Joost Steenhuis

Chapter 21 NIGERIA ............................................................................... 316Dan Agbor, Folake Elias-Adebowale and Christine Sijuwade

v

Contents

Chapter 22 NORWAY .............................................................................. 331Peter Hammerich and Markus Heistad

Chapter 23 PORTUGAL .......................................................................... 347Carlos Costa Andrade, Marta Pontes, Diogo Tavares, Hélder Santos Correia and Gerard Everaert

Chapter 24 RUSSIA .................................................................................. 361Pavel Karpunin, Dmitry Churin and Anastasia Fomicheva

Chapter 25 SAUDI ARABIA .................................................................... 376Nabil A Issa and James Stull

Chapter 26 SINGAPORE ......................................................................... 388Stefanie Yuen Thio and Yvonne Lee

Chapter 27 SOUTH AFRICA .................................................................. 399Johan Loubser and Magda Snyckers

Chapter 28 SPAIN .................................................................................... 416Juan Carlos Machuca Siguero and Joaquín García-Cazorla Taboada

Chapter 29 SWEDEN .............................................................................. 438Emil Boström and Jonas Andersson

Chapter 30 SWITZERLAND ................................................................... 451Shelby R du Pasquier and Maria Chiriaeva

Chapter 31 UNITED ARAB EMIRATES................................................. 467James Stull and Macky O’Sullivan

Chapter 32 UNITED KINGDOM .......................................................... 476Paul Dickson

Chapter 33 UNITED STATES ................................................................. 517Jason E Brown, Leigh R Fraser and John M Loder

Appendix 1 ABOUT THE AUTHORS .................................................... 535

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ... 559

Contents

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EDITOR’S PREFACE

Following several challenging years in the wake of the global financial crisis of 2007–2008, recent years have seen a more sustained economic recovery take hold. However, despite significant improvements in the global economic landscape, 2014 was marked by significant geopolitical events, which have taken their toll on financial markets outside the US and Japan. In the UK, both the Scottish referendum and predictions of a close general election outcome in May 2015 created an uncertain political environment. At a European level, markets have been faced with continuing tensions in Eastern Europe, as well as the ongoing sovereign debt issues, with the Greek crisis featuring heavily in news headlines over the past 12 months. The collapse of oil prices, the spread of the Ebola virus in West Africa and the ongoing conflict in the Middle East have also had a significant impact on the global economy.

Nevertheless, the importance of the asset management industry continues to grow. Nowhere is this truer than in the context of pensions, as the global population becomes larger, older and richer, and government initiatives to encourage independent pension provision continue. By way of example in the UK, changes to the rules governing what retirees can do with their pension benefits look set to open up a new section of the market to discretionary managers and product providers.

The activities of the financial services industry remain squarely in the public and regulatory eye, and the consequences of this focus are manifest in ongoing regulatory attention around the globe. Regulators are continuing to seek to address perceived systemic risks and preserve market stability through regulation. In Europe, major changes to the regulatory landscape were introduced by the Alternative Investment Fund Managers Directive, which has applied in full since July 2014, and this trend is set to continue in other areas of the asset management industry with the implementation of changes to the UCITS regime and the revised Markets in Financial Instruments package. In the UK, the Financial Conduct Authority has announced plans for a market study on the asset management industry and the charges it levies on investors.

Editor’s Preface

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It is not only regulators who continue to place additional demands on the financial services industry in the wake of the financial crisis; the need to rebuild trust has led investors to call for greater transparency around investments and risk management from those managing their funds. Investors and regulators’ demands for greater clarity on fees and commissions charged by fund managers for services provided also remain a constant presence.

This continues to be a period of change and uncertainty for the asset management industry, as funds and managers act to comply with regulatory developments and investor requirements and adapt to the changing geopolitical landscape. Despite the challenges outlined above, confidence has begun to return across a number of areas, buoyed by increasingly positive assessments of the global economic outlook, which raises the prospect of increased investment and returns. Although the challenges of regulatory scrutiny and difficult market conditions remain, a return of risk appetite has also evidenced itself. The industry is not in the clear but, prone as it is to innovation and ingenuity, it seems well placed to navigate this challenging and rapidly shifting environment.

The publication of the fourth edition of The Asset Management Review is a significant achievement, which would not have been possible without the involvement of the many lawyers and law firms who have contributed their time, knowledge and experience to the book. I would also like to thank Gideon Roberton and his team at Law Business Research for all their efforts in bringing this edition into being.

The world of asset management is increasingly complex, but it is hoped that the fourth edition of The Asset Management Review will a useful and practical companion as we face the challenges and opportunities of the coming year.

Paul DicksonSlaughter and MayLondonSeptember 2015

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Chapter 5

BRAZIL

Fernando J Prado Ferreira and José Paulo Pimentel Duarte1

I OVERVIEW OF RECENT ACTIVITY

Brazil has been subject to important regulatory changes recently with regard to asset management activities by virtue of several new regulations issued by the National Monetary Council (CMN), the Brazilian Securities Commission (CVM) and the Central Bank of Brazil (CBB) aimed at modernising and optimising the regulatory framework in light of recent market practices.

As further detailed below, noteworthy CVM regulations include CVM Instruction No. 539, of 13 November 2013, which establishes suitability rules related to securities distribution; CVM Instruction No. 554, of 17 December 2014 (CVM Instruction 554) regarding the new classification of qualified and professional investors; CVM Instruction No. 555, of 17 December 2014 (CVM Instruction 555), which established the new general regulatory framework applicable to investment funds; and, more recently, CVM Instruction No. 558, of 26 March 2015 (CVM Instruction 558), which establishes the new rules applicable to the professional management of securities portfolios.

The CMN in its turn has updated its regulation on foreign investments in Brazil with the issuance of Resolution No. 4,373, of November 29, 2014 (CMN Resolution 4,373). In addition to modernising and simplifying the rules applicable to foreign investments, the new rule also implements new mechanisms to increase the volume of foreign investments in Brazil.

Within their respective areas of authority, on 27 March 2015, the CBB enacted Circular No. 3,752 and the CVM enacted Instructions Nos. 559 and 560, which further regulate foreign capital in Brazil, especially with regard to the registration of non-investors and investments via depositary receipts.

1 Fernando J Prado Ferreira is a partner and José Paulo Pimentel Duarte is an associate at Pinheiro Neto Advogados.

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An important amendment brought by such regulations involves the possibility for depositary receipts to have debt securities (also known as global depository notes) as underlying securities. Previously, only equity securities (shares or other securities that represent equity rights issued by publicly held companies in Brazil) were authorised to be traded abroad via depositary receipts.

This means that Brazilian publicly held companies and financial institutions may now issue depositary receipts in foreign markets that represent, inter alia, debentures, notes and certificates of real estate receivables, all of them issued in Brazil.

As exemplified above, an attempt to diversify and facilitate the possibility and variety of investment opportunities by the Brazilian authorities has been noticed. Another example worth mentioning is CVM Instruction No. 551, of 25 September 2014, which amended CVM Instruction No. 476, of 16 January 2009, to include equity securities, convertible debt securities and structured transaction certificates within the scope of public offerings with restricted efforts (without prior registration with the CVM).

II GENERAL INTRODUCTION TO THE REGULATORY FRAMEWORK

The Brazilian financial system can be divided in three tranches: normative agencies, supervisory agencies and market participants.

From a general perspective, federal laws applicable to the capital markets in Brazil contain general provisions with the purpose to establish what the Brazilian capital markets comprise, which entities may be the agents of the market, the different independent agencies that have powers to oversee it and the limits of their authorities.

The normative agencies are responsible for enacting the general regulations and guidelines of the financial system under their respective areas of authority. Such normative agencies are CMN, which is the main normative agency of the Brazilian financial system; the National Private Insurance Council (CNSP), related to the insurance, capitalisation and open-ended private pension segments; and the National Supplementary Pension Council, related to private pension funds.

The supervisory agencies are generally responsible for monitoring and enforcing the regulations and the compliance of relevant market participants (financial institutions, stock exchanges, investment funds, portfolio managers etc.). They are responsible for regulating, supervising, developing and controlling their corresponding segment of the financial system. Such supervisory agencies are the CBB, the CVM, the Private Insurance Authority (SUSEP) and the National Supplementary Pension Authority (PREVIC).

Therefore, the supervisory agencies also have normative functions. For instance, Law 6,385, of 7 December 1796 (Brazilian Securities Market Law), which created the CVM, delegates authority on the CVM to, inter alia, establish the regulations governing the activities of asset managers, advisory entities and investment funds.

In summary, the regulations setting forth the specific set of rules that each player and transaction has to comply with are the CVM instructions, CBB circulars and CMN resolutions.

The structure of the Brazilian financial and capital markets is also composed of a self-regulatory agency named the Brazilian Financial and Capital Markets Association

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(ANBIMA), which created a set of rules with increased corporate governance for its associates (e.g., asset managers, banks and brokerage firms) to comply with.

i Portfolio management

The local professional management and administration of securities portfolios can only be carried out in Brazil by a natural person or a legal entity duly authorised by the CVM. It is important to highlight that such natural person must be resident in Brazil, and the legal entity must be organised and headquartered in Brazil.

The development of portfolio management activity in Brazil has led to the distinction of two types of portfolio managers with different areas of expertise: fiduciary administration, with direct or indirect responsibility for the custody and controllership of assets and liabilities and, generally, for the supervision of the markets; and asset management, with responsibility for the decision-making process of investments.

After receiving comments in that regard by the industry during the drafting process of CVM Instruction 558, the rule finally recognised the reality of such distinction. As a result, portfolio managers, depending on the activities performed, shall request their registration under the fiduciary administrator category, under the asset manager category, or under both.

Additionally, CVM Instruction 558 introduces some other significant changes on rules applicable to the management of securities portfolios. The following changes are worth mentioning:a assignment of certain responsibilities to statutory officers;b possibility of distribution of quotas of investment funds under management; andc improvement of rules of conduct and information duties.

Regarding the new information duties required from portfolio managers, it is important to note that they must now publish their internal policies and manuals on the internet, as well as disclose and keep an updated reference form similar to a prospectus applicable to listed companies.

The rendering of securities advisory services is also subject to the prior authorisation of the CVM. Another innovation introduced by CVM Instruction 558 is that asset managers accredited with the CVM pursuant to such rule will be automatically authorised to provide securities advisory services.

ii Investment funds

Portfolio management in Brazil is usually carried out through investment funds. Under local regulations, investment funds are considered as a pool of resources incorporated under the form of a condominium (i.e., they are not corporate organisations) intended for investments in financial instruments and securities, as well as in any other asset traded in the financial and capital markets, according to the terms and conditions established in their by-laws.

A condominium is a type of unincorporated entity in which two or more persons hold joint title to certain assets, being attributed a notional part (quota).

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A condominium has no legal personality apart from that of its owners. Even though funds do not have a legal identity under Brazilian law, orders for the purchase and sale of securities are carried out in its name.

Investment funds can be divided into closed-ended and open-ended funds.Generally, open-ended funds are characterised by the possibility of quotaholders

to redeem their quotas at any time, and a prohibition, as a general rule, of quotas being assigned or transferred.

Closed-ended investment funds, on the other hand, do not allow the redemption of quotas at any time, except in the case of liquidation of the fund; and its quotas may be transferred, by means of a term of assignment and transference, or through a stock exchange or over-the-counter (OTC) market.

The creation, management and operation of most investment funds in Brazil are currently regulated by CVM Instruction No. 409, of 18 August 2004, as amended (CVM Instruction 409), which sets forth the respective reporting requirements as well. Such rule shall also be replaced in the near future by CVM Instruction 555, which will become effective on 1 October 2015.

However, certain types of funds are subject to specific regulations, including, inter alia, receivables investment funds (FIDCs); real estate investment funds (FIIs); and private equity funds (FIPs), as further detailed in Section VI, infra.

CVM Instruction 555 will introduce relevant changes to the Brazilian investment fund industry. Among such changes, the following are worth mentioning:a new classification of investment funds;b clearer obligations for portfolio liquidity management;c higher threshold for offshore investments by investment funds;d no minimum investment required for investing in foreign investment funds;e new rules regarding performance fees; andf all communication with quotaholders may be carried out electronically.

As a general rule, the distribution of fund quotas must be carried out by duly qualified entities pertaining to the Brazilian securities dealership system. As mentioned above, however, CVM Instruction 558 authorises portfolio managers, even if they are not accredited as a securities distributor, to distribute quotas of managed funds (i.e., they are not authorised to distribute quotas of third-party funds).

iii Investor classification

In order to improve and structure the market, CVM Instruction 554 establishes three categories of investors in the Brazilian financial and capital markets, each requiring their own appropriate level of regulation. The rules set forth the criteria for an investor to be characterised as a qualified and as a professional investor. Retail investors are, therefore, those that do not fall under the previous categories (by exclusion).

Pursuant to CVM Instruction 554, the following shall be considered professional investors:a financial institutions and other entities authorised to operate by the CBB;a insurance companies and capitalisation societies; b open and closed-ended pension funds;

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c individuals or legal entities that hold financial investments in an amount in excess of 10 million reais;

d investment funds; e investment clubs managed by a professional manager; f portfolio administrators and securities consultants authorised by the CVM, in

relation to their own monies; and g non-resident investors.

Likewise, the following shall be considered qualified investors:a professional investors; b individuals or legal entities that hold financial investments in an amount in excess

of 1 million reais; c individuals that have been approved in specific certification exams; and d investment clubs managed by quotaholders.

CVM Instruction 554 will come into effect on 1 October 2015, jointly with CVM Instruction 555.

iv Foreign investment considerations

Pursuant to CVM Instruction 555, investment funds have different limits to investments in offshore assets depending on their target public, as detailed below. In general, such limits were increased when compared with the limits imposed by CVM Instruction 409.

Classification LimitFixed-income investment fund – foreign debt 100% (unlimited)

Funds targeted exclusively to professional investors 100% (unlimited)

Funds targeted exclusively to qualified investors that meet the certain additional requirements 100% (unlimited)

Funds targeted exclusively to qualified investors that do not meet the above-mentioned conditions 40%

Funds targeted to the public in general (retail) 20%

Funds targeted exclusively to professional investors may invest 100 per cent of their assets offshore. As explained above, there is no minimum investment required from investors in order to acquire quotas of such funds, but they must be professional investors.

Previously, pursuant to CVM Instruction 409, in order for a fund to invest up to 100 per cent of its assets offshore the fund had to be targeted exclusively to qualified investors and set forth a minimum investment per investor of 1 million reais.

It is important to stress that Brazil still has very strict controls on foreign exchange transactions (i.e., on the inflow and outflow of funds to and from the country). According

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to the Brazilian foreign exchange regulations, all exchange transactions must be carried out through an authorised exchange entity in Brazil.2

With regard to foreign investments in the Brazilian capital and financial markets, CMN Resolution 4,373 establishes that they must be duly registered with the CBB and the CVM, as well meet other requirements established therein. As a general rule, such investments must be made in organised capital markets (e.g., stock exchanges and OTC markets).

In addition to investing in the Brazilian capital and financial markets, foreign investments can also be made directly in the form of equity of Brazilian companies. Such investments shall also be registered with the CBB, under the Electronic Registration System – Foreign Direct Investment.

v Offering of foreign securities

Under Brazilian law, the offering of foreign securities is subject to regulation that affects the possibility of offering such products on a public basis in Brazil.

The public offering of securities in Brazil is primarily regulated by the Brazilian Securities Market Law and CVM Instruction No. 400, of 29 December 2003, as amended (CVM Instruction 400). According to such regulations, as a general rule, public offerings must be previously registered with and authorised by the CVM.

Foreign securities are generally not eligible for registration in Brazil. Therefore, in order for foreign entities to offer their products in Brazil, they shall adopt certain procedures to avoid their public disclosure in Brazil.

Brazilian law does not provide a definition of what constitutes a private placement of securities. Consequently, the concept of private placement is based on what would not constitute a public offering under Brazilian law and, therefore, would not require registration with the CVM.

Individuals or legal entities resident in Brazil are permitted to invest abroad, provided that information relating to such assets owned abroad is fully disclosed to the CBB and the Brazilian tax authorities. The obligation to disclose to the Brazilian authorities the existence of assets owned abroad lies exclusively with the owners of such assets.

Nevertheless, specific entities of the Brazilian financial system, such as pension plans, insurance and reinsurance companies, governmental entities, banking companies and investment funds, have certain limitations when it comes to investing abroad (e.g., rules regarding portfolio diversification and asset concentration limits per investor and type of asset). The main rules regarding foreign investment restrictions by Brazilian entities are detailed in Section II.iv, supra, and Section VI, infra.

2 In addition to all foreign exchange transactions having to be carried out through an authorised exchange entity, other requirements include that a relevant foreign exchange contract must be signed describing the respective parties, the date, the nature of the transaction and the exchange rate, among other information; and that all foreign exchange transactions must be registered at the CBB electronic data system (SISBACEN).

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III COMMON ASSET MANAGEMENT STRUCTURES

As mentioned above, investment funds are the main vehicle for investment in Brazil, and face important amendments in their regulatory framework.

With the objective of streamlining and updating the structure of the investment fund industry, CVM Instruction 555 has modified the main existing types of investment funds. The new structures permitted by CVM Instruction 555 are as follows:

Classification Main risk factor Possible subcategoriesFixed-income investment fund Variation of interest rate, price

indices or botha short-termb long-termc indexedd simplee foreign debtf private creditg foreign investment

Shares investment fund Price variation equity securities of traded in the organised market

a Brazilian Depositary Receipts Level I

b access market c foreign investment

Exchange investment fund Price variation of foreign currency or the variation of exchange coupon

a foreign investment

Multimarket investment fund Various risk factors (operates with different strategies and in different markets)

a long-termb private credit c foreign investment

Other important types of funds not regulated by CVM Instruction 555 are further detailed in Section VI, infra.

IV MAIN SOURCES OF INVESTMENT

The Brazilian fund industry represents a significant target for investments in the country. Its industry is placed among the top six asset management industries in the world, reaching over 2.7 trillion reais in assets under management, distributed across approximately 14,000 funds with 11.5 million quotaholders.3 Thus, it represents more than 50 per cent of the national GDP.

Nevertheless, even the fund industry has not been immune to the current adverse economic and political situation of the country. Since the second semester of 2013, a substantial reduction in net sales has been observed. In 2014, the balance was negative, with net redemptions totalling 1.1 billion reais, the lowest result since 2008.

In addition to political and economic factors (internal and external), which have led investors to become more conservative, ANBIMA concludes that disproportionate

3 Based on information provided by the ANBIMA 2015 Brazilian Mutual Fund Industry Yearbook, which is based on data from the Investment Company Institute, from 2 April 2015. The other numbers indicated in this section are also based on ANBIMA’s Yearbook.

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competition for investment funds was created through the increase in the offer of income tax-free investment solutions such as real estate credit bills and agribusiness credit bills.

Despite such scenario, most funds generated higher returns in 2014 when compared with 2013 due to the profitability of the existing investment funds. On the other hand, equity funds suffered the most, and presented negative results at the end of the year.

In particular, fixed-income indices funds, after ending 2013 with losses, posted returns of 12.54 per cent in 2014. DI-linked funds also performed well, generating returns of 11 per cent.

Multimarket funds were also under the spotlight, being the best performing class among the funds analysed by ANBIMA. Noteworthy within such category are funds with investment policies directed at gaining from short-term movements in asset prices. Such funds have benefited from market volatility, and ended 2014 with an average positive performance of 14.53 per cent.

Conservative investors, however, were attracted to DI-linked and pension funds, which recorded in 2014 net sales of 45.3 billion reais (the highest since 2002) and 32.3 billion reais respectively.

In that regard, it should be noted that retail investors were responsible for net sales of 36.2 billion reais in 2014, most of which went to DI-linked funds.

V KEY TRENDS

After being expected by market participants for a long time, a new regulatory framework for the investment fund industry was recently created, especially with the enactment of CVM Instructions 554, 555 and 558.

Ten years after the enactment of CVM Instruction 409, the new regulations have been designed to bring more efficiency, transparency and competitiveness to the fund industry. They also mark a maturity of the local market, demanding stricter structures, transparency and professionalism from market participants.

In addition, the regulator demonstrated a better understanding of the market’s dynamic, thus creating and regulating new sought-after investment opportunities. This could prove essential for making the Brazilian market more attractive to international investors and pave the way for the continuous growth of the industry.

Moreover, the Brazilian regulatory authorities have been demonstrating a stricter stance on compliance. Since the strengthening of the anti-money laundering regulations in 2012 with the enactment of Law 12,683, of 9 July 2012, important anti-corruption rules have also been enacted (Law 12,846, of 1 August 2013, and Decree No. 8,420, of 18 March 2015).

VI SECTORAL REGULATION

i Insurance

Brazilian accredited insurers are regulated by three separate authorities: CNSP, SUSEP and CMN.

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Pursuant to CMN Resolution No. 3308, of 31 August 2005, as amended, insurers can only invest in three different types of assets: fixed income, variable income and real estate.

Brazilian insurance companies are prevented from investing offshore, except through local investment funds and Brazilian insurance companies’ branches located offshore. With respect to the former, Brazilian companies are allowed to invest up to 10 per cent of their funds and financial resources in quotas of local investment funds qualified as ‘foreign debt’. Thus, the Brazilian insurance company would invest in a local investment fund, which, in its turn, would invest in the offshore market.

ii Pensions

Under Brazilian legislation, there are two types of pension funds: private funds, which are alternatively classified as open-ended and closed-ended; and public funds, which are exclusively composed of pension plans whose members are employees of authorities and government-held companies of the union, states, Federal District and municipalities.

While the pension plans offered by open-ended pension funds may be contracted by any individual or group of individuals, those offered by closed-ended pension funds are generally accessible only by sponsors.

The private pension segment is generally governed by Supplementary Law 109, of 29 May 2001, as amended.

While open-ended pension funds are organised as regular joint-stock companies, being regulated by the above-mentioned authorities, closed-ended pension funds can only be organised as foundations or non-profit companies, and are regulated by PREVIC.

The investment restrictions applicable for Brazilian accredited insurers outlined in Section VI.i, supra, are the same for open-ended private pension companies.

In addition, CMN Resolution No. 3,792, of 24 September 2009, as amended, further regulates closed-ended pension funds, and sets forth the limits and rules for investment by closed-ended pension funds.

Closed-ended pension funds may invest in: a fixed income assets; b variable income assets; c structured transactions; d offshore investments; e real estate; and f transactions with members of the related pension plan.

Brazilian closed-ended pension funds are only allowed to invest up to 10 per cent of their net equity offshore through a local investment fund (e.g., feeder fund). In addition, a single Brazilian closed-ended pension fund may not hold more than 25 per cent of the net equity of an investment fund.

The restrictions are due to a governmental attempt to prevent Brazilian residents’ savings being invested outside the country and exposed to offshore risks.

There are discussions on the possibility of changing the above-mentioned thresholds; however, there is still no concrete proposal in place in this regard.

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iii Real property

FIIs are governed by Law 8,668, of 25 June 1993, as amended, and further regulated by CVM Instruction No. 472, of 31 October 2008, as amended.

Such funds are designed to invest in real estate projects and are necessarily closed-ended funds. Permitted investments are in:a real estate properties and rights; b equity of real estate companies; c special purpose entities with real estate business; d other funds (FIPs, FIIs, FIDCs); and e real estate receivables certificates and other instruments.

iv Hedge funds

There are no specific rules regarding hedge funds in Brazil. Local authorities do not consider them as a separate category of investment funds, being generally regulated by CVM Instruction 555. Therefore, such funds may be organised as, for instance, multimarket investment funds with diverse investment policies.

v Private equity

FIPs are primarily governed by CVM Instruction 391, of 16 July 2003, as amended (CVM Instruction 391).

Pursuant to CVM Instruction 391, FIPs are characterised as a closed-ended investment fund that shall invest in shares (stock), convertible debentures, subscription warrants and other securities either convertible into or exchangeable for shares issued by either publicly or privately held corporations; and that actively participate and monitor the management of the invested company.

At least 90 per cent of the FIP’s net equity must be invested in such permitted investments.

In addition, FIPs shall have a definite term of duration and be targeted exclusively to qualified investors with a minimum investment of 100,000 reais. Such requirement may be amended once CVM Instruction 554 comes into force.

CVM Instruction 391 sets forth that most of the operational rules governing the FIP and its operations, particularly those involving, inter alia, governance matters, minimum net equity requirements, investment policy, capital calls, distributions of proceeds and duration, may be established in the FIP’s by-laws. Therefore, the FIP structure is very flexible.

vi Other sectors

FIDCsFIDCs are specifically governed by CVM Instruction No. 356, of 17 December 2001, as amended.

FIDCs enable the securitisation of virtually all types of receivables, thus being the main vehicle currently used for securitisation in the local market.

Moreover, FIDCs must invest at least 50 per cent of their portfolio in receivables. The quotas of FIDCs may be divided into senior and subordinated quotas. As a

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general rule, senior quotas shall have priority for amortisation and redemption, while subordinated quotas permits the creation of over-collateral.

Brazilian regulations also set forth rules regarding non-standardised FIDCs. Pursuant to CVM Instruction No. 444, of 8 December 2006, such funds broaden the possibility of investment in receivables, such as government bonds and litigated claims.

Exchange traded funds (ETFs)Governed by CVM Instruction No. 359, of 22 January 2002, as amended (CVM Instruction 359), Brazilian ETFs are index-tracking funds and, therefore, their portfolio reflects a given index of reference (benchmark).

Until 2013, Brazilian ETFs investments could only reference Brazilian stock and variable-income asset indexes.

However, the enactment of CVM Instruction No. 537, of 16 September 2013, which amended CVM Instruction 359, finally made international and fixed-income ETFs accessible from a regulatory perspective.

As of 2014, upon the concession of a few waivers, the first international ETFs were launched under CVM Instruction 359, giving such ETFs investors exposure to foreign assets.

The number of Brazilian standard ETFs has grown since the first of its kind was established; however, the number of Brazilian ETFs referencing foreign indexes is still unfortunately extremely low, and to date, there is no Brazilian fixed-income ETF.

VII TAX LAW 4

i Overview

Given that Brazilian investment funds are treated as condominiums and not as legal entities, any income or gains obtained by such funds from their transactions are not subject to taxation in Brazil. The taxation occurs only when the income or gains are eventually distributed to quotaholders.

As a general rule, foreign exchange transactions are subject to tax on financial transactions (IOF F/X) pursuant to Decree No. 6,306, of 14 December 2007.

Remittance of funds to or from Brazil are generally subject to IOF tax at a rate of 0.38 per cent. However, foreign exchange transactions carried out by Brazilian investment funds in connection with the execution of investments in the international market are subject to IOF at a rate of zero per cent.

ii Open-ended investment fund – Brazilian quotaholders’ taxation

Under Brazilian tax legislation (Normative Ruling No. 1,022 of 2010 (IN 1022/10)), as a general rule,5 income and gains distributed from open-ended funds to quotaholders

4 This section was reviewed by Andre Duarte Montuori, an associate at Pinheiro Neto Advogados.

5 Not comprising shares investment funds, FIIs and other types of funds that are governed by particular tax rules.

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resident in Brazil related to the redemption, amortisation or disposal of fund’s quotas would be subject to a withholding income tax (WHT) assessment at variable regressive rates (22.5 to 15 per cent) depending on the holding period of the investment and on the maturity term of a fund’s portfolio.

If the fund has a long-term portfolio (assets with a redemption term exceeding 365 days), the WHT would be assessed at the following rates:a 22.5 per cent for a holding period of up to 180 days; b 20 per cent for a holding period of between 181 and 360 days; c 17.5 per cent for a holding period of between 361 and 720 days; and d 15 per cent for a holding period of longer than 720 days.

In its turn, if the fund has a short-term portfolio (assets with a redemption term less than 365 days), the WHT would be assessed at the following rates: 22.5 per cent for a holding period of up to 180 days; and 20 per cent for a holding period longer than 180 days.

In addition to the above, Brazilian quotaholders of open-ended funds would be subject to the WHT assessment on a semi-annual basis (on the last days of the months of May and November – ‘come cotas’) at rates of 15 or 20 per cent, depending on the classification of the fund as either long-term or short term.

This twice-yearly taxation is also known as come cotas taxation, which is deemed an advance payment of the WHT to be assessed in cases of redemption, amortisation or disposal of quotas, and shall not result in an increase of the overall tax burden of the investment (i.e., the WHT will be offset by the come cotas previously paid).

In the event that the quotaholder happens to be a legal entity, the WHT tax potentially paid by the investor as a result of its funds investment would be considered as a prepayment of the corporate taxes due by such investor, which means that the investor would be entitled to offset the WHT tax against the corporate income tax (IRPJ and CSL) assessed at a combined rate of 34 per cent on the taxable income derived by such entity.

Moreover, financial income derived by Brazilian legal entities from investment in funds would be subject, as a general rule,6 to the assessment of the contribution on gross revenues (PIS/COFINS) at a combined rate of 4.65 per cent.

iii Closed-ended investment fund – Brazilian quotaholders’ taxation

Closed-ended investment funds are only taxed upon their liquidation or the disposal of quotas in accordance with the regressive rates established by IN 1022/10:7

a 22.5 per cent for a holding period of up to 180 days; b 20 per cent for a holding period of between 181 and 360 days; c 17.5 per cent for a holding period of between 361 and 720 days; andd 15 per cent for a holding period of longer than 720 days.

6 More precisely, to legal entities subject to the non-cumulative regime of the PIS/COFINS taxation, and financial institutions and equated entities pursuant to the applicable regulations.

7 See footnote 5.

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Unlike open-ended investment funds, the come cotas taxation (explained above) is not applicable to closed-ended funds.

As for investors who are legal entities, the income derived from the closed-ended investment fund will be generally subject to the assessment of the IRPJ and CSL at a combined rate of 34 per cent, and the investors will be allowed to offset such tax with the WHT previously levied on their investment in the fund.

Income derived from investment in the fund will be also subject to the PIS/COFINS, as a general rule,8 at a 4.65 per cent rate for corporate entities.

iv Non-resident quotaholders taxation

Currently, foreign investments into quotas of an investment fund (regardless of whether they are open or closed-ended) carried out pursuant to CMN Resolution 4,373 are generally9 subject to WHT at a rate of 15 per cent on the income and gains distributed by the fund, unless the quotaholder is located in a tax haven jurisdiction,10 in which case the investor will receive the same tax treatment applicable to Brazilian individuals (WHT rate ranging from 15 to 22.5 per cent).

As mentioned above, as a general rule, foreign investments in investment funds are currently subject to IOF on the inflow of the funds into Brazil at a flat rate of zero per cent. Remittances of funds abroad derived from amortisation or redemption of quotas of a Brazilian investment fund are also currently subject to IOF at a zero per cent rate.

v IOF bonds

Finally, the IOF assessed on bonds and securities transactions (IOF bonds) may be levied on the disposition of investment fund quotas by both Brazilian and non-Brazilian investors. The maximum rate of IOF bonds payable in such cases is 1 per cent per day, limited to the amount equal to the gain recognised in the transaction, and decreases based on the length of time that the investment is held by the investor. For transactions with maturities of at least 30 days, the IOF bonds tax is assessed at a rate of zero per cent.

VIII OUTLOOK

The new regulatory framework is expected to improve the structure and profile of the Brazilian investment fund industry, creating great potential for growth and development for managers, national and international investors, and savers.

8 See footnote 6.9 Exception made for certain investment funds, inter alia, shares investment funds (WHT rate

of 10 per cent); FIPs, which, provided certain statutory requirements are met, may benefit from a more favourable tax treatment; and investment funds with portfolios composed of at least 98 per cent of government bonds (WHT rate of zero per cent).

10 Normative Ruling No. 1,037 of 2010, as amended, lists the jurisdictions considered tax havens for the purposes of Brazilian tax law.

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CVM Instruction 554 improves the definitions of the classes of investors, and clarifies the regulations that each of such classes is subject to, thus increasing the transparency of and accessibility to asset management products.

In addition, CVM Instruction 555 offers new and efficient investment opportunities for local and foreign investors, especially with regard to the accessibility of foreign markets by Brazilian investment funds. The internationalisation of investments can also benefit the ever-increasing pension fund segment, which may be intensified by the new rule.

The rules created by the CVM Instruction 558 also evidence progress in the continuous improvement of the Brazilian investment funds market. The modernisation of the rules applicable to portfolio managers stands out especially with regard to the requirement to specifically assign the responsibility for compliance to a statutory officer; the improvement of the rules of conduct and internal controls; the segregation of custody and controllership of assets and liabilities activities from management activities; and the distribution of funds quotas by portfolio managers, even though such portfolio managers are not financial institutions.

Notwithstanding the above, CVM Instruction 558 tends to, directly or indirectly, generate additional costs to market participants considering that it increases monitoring and disclosure duties regardless of the size of the portfolio manager.

CVM Instruction 558 intensified the enforcement of transparency, diligence and loyalty principles required from portfolio managers. The CVM’s intention was to implement mechanisms to allow investors to analyse and compare the way that portfolio managers are more or less structured.

Professional asset management activity has been the target of several regulations in advanced markets such as Europe and United States since the financial crisis of 2008. The current regulation in such jurisdictions, in addition to various requirements regarding disclosure, also contains requirements related to, for example, the custody of assets, disclosure of systemic risks, book-keeping, registration of financial statements and, in some cases, the necessity to fulfil minimum financial requirements, all under strict supervision by the competent authorities. Therefore, it is possible to identify an approach from regulations applicable to investment funds towards those applicable to banking and insurance markets.

It would not be a surprise if, in the near future, once the local market is duly mature, stricter rules also become mandatory in Brazil.

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Appendix 1

ABOUT THE AUTHORS

FERNANDO J PRADO FERREIRA Pinheiro Neto AdvogadosFernando J Prado Ferreira is a partner in Pinheiro Neto Advogados’ corporate department, and has practised in the São Paulo office for over 30 years. He advises corporate, banking and investment management clients on corporate and regulatory matters, such as the incorporation of companies in Brazil, M&A transactions, foreign investments in Brazil, as well as the incorporation and accreditation of asset managers. Mr Ferreira holds an LLM from the University of Michigan, US. He worked as a foreign associate at Sullivan and Cromwell, New York between 1989 and 1990.

JOSÉ PAULO PIMENTEL DUARTEPinheiro Neto AdvogadosJosé Paulo Pimentel Duarte is an associate in Pinheiro Neto’s corporate department, practising in the São Paulo office. He advises corporate, banking and investment management clients on corporate and regulatory matters, such as the incorporation of companies in Brazil, M&A transactions, foreign investments in Brazil, as well as the incorporation and accreditation of asset managers.

PINHEIRO NETO ADVOGADOSRua Hungria, 110001455-906 São PauloBrazilTel: +55 11 3247 8400Fax: +55 11 3247 8600fpradoferreira@pn.com.br jduarte@pn.com.br www.pinheironeto.com.br