On February 5, 2014, the Central Bank opened a public hearing to discuss a draft resolution updating the rules applicable to non-resident investments in the Brazilian financial and capital markets.

The proposed changes aim not only at revamping and streamlining foreign exchange rules applicable to foreign investments (currently set forth in Resolution 2689/2000), but also at introducing new mechanisms to increase foreign investments in Brazil (for instance, the possibility of using the mechanism of Depositary Receipts for fixed-income securities).

Update on Resolution 2689/2000

The draft resolution not only updates the text of Resolution 2689/2000, but also makes certain concepts clearer. Within this context, the following changes are worthy of note:

  1. Representation. Foreign investors must now be mandatorily represented in Brazil by a financial institution (or by an entity authorized to operate by the Central Bank). In addition, their corporate documents must expressly contain the representation powers of the institution, which include updating records, rendering information to the Central Bank and to the Brazilian Securities Commission (CVM), keeping track of inflows and outflows on an individual basis, safekeeping documents, receiving services of process or notices on behalf of the foreign investor, among other powers;
  2. Transfer of Investments. The draft resolution makes clear that simultaneous foreign exchange transactions (without actual cash inflows) can be carried out in situations involving (a) conversion of Brazilian currency funds held by foreigners in Brazil into foreign investments in the local market; (b) transfer of foreign direct investments into investments in the Brazilian financial and capital markets; (c) transfer of investments held through Depositary Receipts into other types of investments in the local market, among others;
  3. CVM’s Authority. As a rule, funds invested in the local market by foreign investors through the mechanism under Resolution 2689/2000 cannot be used in the sale or acquisition of securities off organized OTC markets. The public hearing notice now expressly sets out that CVM may create specific circumstances as an exception to this rule; and
  4. Investment Funds. The draft resolution establishes that foreign investments in investment funds must be posted in keeping with the new rule, including Startups Mutual Fund (Fundo Mútuo de Investimento em Empresas Emergentes - FMIEE) and Real Estate Fund (Fundo de Investimento Imobiliário - FII).

Depositary Receipts

Foreign exchange rules currently providing for foreign investments via Depositary Receipts (DRs) are contemplated by National Monetary Council Resolution No. 1927 of May 1992.

The Central Bank proposal comes in at the right time, amid the evolution of the financial and capital markets since the 1990’s, the ever-growing importance of the local bond market and the recent creation of new mechanisms in this market (for instance, the infrastructure debentures and other tax-advantaged securities, as dealt with in Law 12431/2011).

DRs are certificates issued overseas, representing certain Brazilian assets issued by local companies. Therefore, local companies may have access to foreign investors, which may acquire receipts representing local securities and trade in such receipts overseas.

Under the draft resolution:

  1. Eligible Securities. DRs may represent any securities, including debt securities (and not only shares, as currently established). These assets must be outstanding and owned by resident investors;
  2. Issuers. Eligible securities must be necessarily issued by Brazilian publicly-traded companies, including financial institutions;
  3. Authority. Funds entering Brazil under DR programs must be registered with the Central Bank. CVM is in charge of reviewing and approving the DR programs (financial institutions must apply for the Central Bank’s prior approval); and
  4. Proceeds. Once DRs are issued overseas, local entities or individuals holding the eligible securities can keep abroad the proceeds from their sale (that is, there is no need for inflow of such proceeds into Brazil).

The draft Resolution proposed by the Central Bank is expected to remain open for public hearing until mid-April and the definitive rule should be issued still this year. Similarly, the tax impacts caused by the new measures should be examined in due course. The updated rules and the suggested amendments are very positive and keep pace with the current scenario faced by the Brazilian financial and capital markets.