Introduction
This article provides an insight into key legal and practical aspects related to the enhanced flexibility in asset allocation overseas by Brazilian investment funds. It briefly scrutinises the basic features of these investment funds, covering areas such as structure and investment parameter. Finally, it highlights the new regime for Brazilian private pension funds to ultimately invest overseas.

The Brazilian regulatory framework

General overview
On 18 August 2004, the Brazilian Securities Commission (Comissão de Valores Mobiliários - “CVM”) issued Instruction No. 409, as amended (“I-CVM 409/04”), which provides for the incorporation, management and operation of most domestic investment funds designed to invest in financial assets traded in the financial and capital markets in Brazil (“Investment Funds”).

An Investment Fund assumes the legal form of a collective investment vehicle organised as a condominium (condominio), i.e., a joint-ownership of assets with no direct operations. Therefore, an Investment Fund is a sui generis form of condominium (not a corporate entity, LLC, LP or unit trust), in which two or more persons hold joint title-rights over certain financial assets, being attributed a pro rata notional fraction of all financial assets (units or interests known as “quotas”).

Investment fund structure
The structure of an Investment Fund usually involves different key players, particularly:

• Fund Manager (Administrador de Carteiras): the fund manager of an Investment Fund is typically a local independent legal entity or natural person accredited with the CVM as administrador de carteiras. A fund manager can generally retain all of the roles to which it is authorised to perform, such as routine administration and activities of the Investment Fund, placement of the quotas, as well as control and processing of all financial assets traded by the Investment Fund. If it cannot retain all such activities due to the lack of license or authorisation, it must delegate these services to other qualified entities (e.g., banks, dealers, brokers, etc);
• Portfolio Manager (Gestor de Carteiras): the fund manager may decide to delegate this role to another legal entity or natural person, provided that it is also accredited by the CVM (for example, in view of intragroup economies of scale). If so, the portfolio manager will be responsible for the asset allocation of the Investment Fund (including the exercise of voting rights). An agreement between the fund manager, which will remain as the Investment Fund’s administrator, and the Portfolio Manager must be executed to segregate the rights and obligations between them; and
• Custodian/Depositary (Custodiante): this role is usually performed by few CVM authorized entities. The custodian/depositary is responsible for the custody/depositary of all Investment Fund’s financial assets.

Investment parameters
As a general rule, Investment Funds must be classified in accordance with their targeted investment policies, pursuant to I-CVM 409/04:

• Short-Term Investment Fund (Fundo Investimento de Curto Prazo): it may invest exclusively in public debt instruments and low-risk pre-fixed securities or linked to SELIC (main public interest rate) or other interest rate;
• Referenced Investment Fund (Fundo de Investimento Referenciado): it may have, at least, up to 80% of its portfolio in public debt instruments or low-risk fixed-income securities. It has to indicate that, at least, 95% of its portfolio follows the fluctuation of an index (indicador de desempenho);
• Fixed Income Investment Fund (Fundo de Investimento em Renda Fixa): it may invest, at least, 80% of its portfolio in fixed-income assets linked to the fluctuation of a specific interest rate or price index;
• Foreign Exchange Investment Fund (Fundo de Investimento Cambial): it may invest, at least, 80% of its portfolio in assets linked to the fluctuation of a specific foreign currency or exchange note;
• Stock Investment Fund (Fundo de Investimento em Ações): it may invest, at least, 67% of its portfolio in stocks traded in the market (e.g., shares, subscription receipts, securities deposit certificates, Brazilian Depository Receipts - BDRs);
• Sovereign Debt Investment Fund (Fundo de Investimento em Dívida Externa): it has to invest, at least, 80% in Brazilian sovereign bonds; and
• Multimarket Investment Fund (Fundo de Investimento Multimercado): it may involve many risk factors in its portfolio, without the concentration in any specific financial asset.

With respect to the flexibility in asset allocation overseas, all Investment Funds can invest up to 10% of their portfolios in financial assets issued abroad, except for Sovereign Debt Investment Funds and Multimarket Investment Funds, which can invest up to 20% of its portfolio in those assets.

Enhanced flexibility in asset allocation overseas

Brief evolution of applicable rules
In previous public hearings supported by the CVM, the CVM has clearly expressed an interest for Investment Funds to allocate higher portions of their portfolios in financial assets traded overseas, considering this ability positive given that investors would have more exposure to different opportunities and risk factors than those in Brazil. In the CVM and market players’ opinions, the previous 10% threshold was inefficiently constraining asset allocation strategies pursued by domestic fund managers.

Within this context, in the Public Hearing No. 05, held on 4 May 2007, the CVM stated that it has chosen not to foster a sudden migration from a system in which overseas investments were almost totally restricted to a regime in which such investments are totally free. According to the CVM, this easing change should be made gradually.

FIEX 100%
Against this backdrop, the CVM introduced a new classification applicable to the existing types of Investment Funds: the so-called FIEX 100%. Pursuant to Instruction No. 465, issued by the CVM on 10 February 2008, Investment Funds are now able to invest up to 100% of their portfolios, without limitation, in securities and/or financial assets traded abroad, provided that:

• the expression “Investment Fund Abroad” (Fundo de Investimento no Exterior) is adopted in their name; and
• targeted investors must subscribe quotas in the minimum amount of R$ 1 million. (i.e., known as “super-qualified investors”).

The securities and/or financial assets purchased overseas by an Investment Fund must have the “same economic nature” of those assets available in Brazil and must:

• be traded on stock exchanges, future and commodities exchanges, or registration and settlement entities duly authorized/supervised by a “local recognized authority”; or
• have their existence confirmed by the foreign custodian/depository entity hired by the Investment Fund’s custodian/depository for such purpose. This foreign custodian entity must be duly authorized/supervised by a “local recognized authority”.

For purposes of I-CVM 409/04, a “local recognized authority” means an authority that (i) has entered into a mutual cooperation agreement for the exchange of information with the CVM; or (ii) is signatory to the multi-lateral memorandum of understanding with OICV/IOSCO.

In this sense, the Directive-Release No. 4, issued by the CVM on 12 September 2012, clarifies that, if the FIEX 100% invests in interests of foreign investment funds that are not traded in a regulated market duly supervised by a “local recognized authority”, the fund manager of the FIEX 100% shall use best reasonable efforts to ensure the existence of the underlying eligible assets held by the such foreign investment funds.

Getting access to private pension funds market share
Nowadays, the main trend within the investment fund industry in Brazil is the considerable and sound growth of institutional investors’ investments, particularly by private pension funds. According to the Brazilian Private Pension Association (Associação Brasileira de Entidades Fechadas de Previdência Complementar), private pension funds have approximately R$ 600 billion of assets under management.
The increased institutional investor participation is mainly due to a new regime introduced by the National Monetary Council (Conselho Monetário Nacional - “CMN”). The CMN issued Resolution No. 3,792 on 24 September 2009, as amended (“Resolution 3,792/09”), which sets out revised rules for private pension funds in Brazil regarding investment restrictions and composition of portfolios.

Among other developments, Resolution 3,792/09 sets forth that private pension funds are now allowed to invest up to 10% of their net worth in assets classified as “foreign investments”, which comprehend:

• financial assets issued abroad which belong to portfolios of Investment Funds incorporated in Brazil;
• quotas of investment funds and quotas of fund-of-funds, classified as “Sovereign Debt”;
• quotas of foreign index investment funds negotiated in the Brazilian stock exchange market;
• Brazilian Depository Receipts - BDRs; and 
• shares issued by companies which have their headquarters within the Common Southern Market area (Mercado Comum do Sul - “MERCOSUL”).

As a result of this new regime, private pension funds in Brazil are now able to, for example, directly invest in FIEX 100% for purposes of ultimately investing overseas.

Conclusion
Brazilian public authorities have gradually increased the ability for Investment Funds and private pension funds to allocate (directly or indirectly) higher portions of their portfolios in financial assets traded overseas.

Within this panorama, domestic and international players have designed different investment structures and strategies (mainly through Multimarket-FIEX 100%, which allows the greatest flexible asset allocation) so as to offer access and exposure to financial assets traded overseas.

^{Ricardo G. Binnie is an associate in the Banking, Finance & Corporate areas of Pinheiro Neto Advogados, São Paulo branch. He is currently on secondment to the Investment Fund & Derivatives area of Macfarlanes LLP. The views expressed in this article are those of the author and do not represent the official views of Pinheiro Neto Advogados or Macfarlanes LLP. This article has been prepared for information purposes only and should not be viewed as advice.}