Publications

Category: Banking, insurance and finance

Given the unprecedented high volatility of the Brazilian capital markets and the restrictions imposed by governments on the movement of people due to the coronavirus pandemic, the Brazilian Securities Commission (CVM) has adopted several measures to foster the economy and provide more flexibility for market participants to comply with the rules governing the Brazilian capital markets.

To help companies navigate the various measures introduced by CVM in this context, we present below a brief analysis of the main rules concerning the Brazilian investment funds industry issued since the beginning of the covid-19 pandemic crisis:

Public offering of quotas issued by investment funds

• Quotas of investment funds can be publicly offered to investors pursuant to either (i) the regular procedure set forth in CVM Instruction No. 400/03, as amended, which requires prior registration with CVM, or (ii) the restricted efforts procedure set forth in CVM Instruction No. 476/09, as amended. Under the latter, a public offering exempt from registration with CVM could be directed to up to 75 professional investors, provided that only 50 of them would be able to subscribe or acquire the quotas issued by the relevant investment fund.

• CVM Instruction No. 400/03: CVM introduced the following flexibilization rules concerning public offerings of investment funds implemented pursuant to CVM Instruction No. 400/03:

• Changes to public offerings already registered with CVM: as a rule, changes to public offerings that have already been registered but not yet liquidated require prior approval from CVM according to article 25 of CVM Instruction No. 400/03. As an exception, CVM issued Circular Letter Nº 2/2020-CVM/SRE, on February 28, 2020, pursuant to which the autarchy will automatically approve requests that fulfill the following requirements, extending the distribution of the offering for an additional 90-days period: (i) the requests are filed with CVM during 30 days as of March 13, 2020, and (ii) the requests are justified by the proven deterioration and volatility of the investment scenario. In the latter case, the modifications of public offerings could be immediately implemented by submitting the amended documentation to CVM and issuing a communication to investors in this regard. If the change is implemented under the exception described, investors shall be given an opportunity to withdraw from the investment commitment within 5 days as from the receipt of the communication on this regard.

• Interruption of the analysis period by CVM: according to article 10 of CVM Instruction No. 400/03, the issuer and the leading bookrunner of a public offering could request the interruption of the analysis of a public offering for a period of up to 60 business days. Upon the issuance of CVM Deliberation No. 846, on March 16, 2020, however, the interruption period of a particular public offering could be extended to up to 180 business days. CVM will monthly review the effectiveness of the provisions of Deliberation No. 846, including such possible extended interruption period.

• Quiet period and limitation on the trade of quotas: article 48 of CVM Instruction No. 400/03 sets forth limitations for issuers, bookrunners and individuals involved in the relevant offering on (i) the disclosure and use of certain information until the offering is formally disclosed to the market, and (ii) the trade of the securities that will be publicly offered until a notice informing the end of the public offering is issued to the market. As an exception to such general rule, Circular Letter No. 3/2020-CVM/SRE, issued on March 18, 2020, sets forth that, during the interruption of a public offering based on CVM Deliberation No. 846, those agents will not be required to comply with such general limitations until the issuer and the bookrunners decide to resume the analysis of the public offering request by CVM.

• CVM Instruction No. 476/09: CVM introduced the following flexibilization rules regarding public offerings with restricted efforts implemented under CVM Instruction No. 476/09:

• Restriction on public offerings with restricted efforts of the same type of securities: article 9 of CVM Instruction 476/09 prevents the issuer or the person offering securities from carrying out public offerings with restricted efforts of the same type of securities under CVM Instruction 476/09 for four months as of the end or cancellation of the preceding offering. Pursuant to item IV of CVM Deliberation No 848, issued on March 25, 2020, the effectiveness of the provisions setting forth the restriction on the implementation of public offerings with restricted efforts of the same type of securities under CVM Instruction 476/09 was interrupted for four months, as from March 27, 2020 to July 27, 2020. CVM clarifies, under item 3 of Circular Letter No. 4/2020-CVM/SRE, issued on April 9, 2020, that such interruption applies to all public offerings of securities distributed with restricted efforts initiated during the period mentioned above, provided that there is no other offering with restricted efforts of the same type of securities outstanding.

• Restriction on the trade of securities: article 13 of CVM Instruction 476/09 sets forth that investors acquiring investment fund quotas in the context of a public offering with restricted efforts are prevented from trading those securities on regulated markets for 90 days as from the date of the relevant acquisition or subscription. As an exception to such general rule, CVM Deliberation No. 849, issued on March 31, 2020, interrupts the effectiveness of the provisions setting forth such lock-up for 4 months period as from April 1, 2020. CVM also clarifies, under item 4 of Circular Letter No. 4/2020-CVM/SRE, that such interruption shall apply to securities subject to public offerings distributed with restricted efforts subscribed or acquired (i) before the validity of CVM Deliberation No. 849, or (ii) during the validity of CVM Deliberation No. 849, which is April 4, 2020 to August 1, 2020, even if the relevant 90-days lockup goes beyond August 1, 2020. In this context, it is worth mentioning that the subscription or acquisition of securities under a particular public offer with restricted efforts can take place during a certain period, in the sense that subscriptions or acquisitions could occur after the August 1, 2020 deadline. In this case, provided that the investment fund quotas are subscribed or acquired during the validity of CVM Deliberation No. 849, the interruption will apply even if the lock-up restriction theoretically goes beyond August 1, 2020.

General Meetings

• Virtual general meetings: item VI of CVM Deliberation No. 849 authorizes all types of investment funds to hold virtual ordinary or extraordinary general meetings to approve any matters during 2020, regardless of the existence of a provision in their bylaws on this subject, provided that all investment fund's quotaholders are duly informed and given the opportunity to participate in such meetings within the deadlines required under the applicable regulations.

• Cancellation or adjournment of general meetings: considering that physical general meetings conflict with the determinations of the Brazilian Ministry of Health and the recommendations of the World Health Organization regarding social distancing, CVM clarifies, under item 4 of Circular Letter No. 6/2020/CVM/SIN, issued on March 26, 2020, that, in the light of the public interest and given the current circumstances, it is justified to cancel or adjourn general meetings, even if they have already been called, in cases in which it is not possible to hold them remotely, either through virtual meetings or formal consultations, provided that the deadlines set forth in the applicable regulations, as extended by CVM Deliberation No. 848 (as we will explain below), are complied with.

Fulfillment of regulatory obligations

• Submission of financial statements to CVM: item IV of CVM Deliberation No. 848 extended for an additional 30-days period, as of March 25, 2020, the deadline for submission to CVM of audited financial statements of all types of investment funds.

• Approval of financial statements by general meetings

• Deadline for approval of financial statements: CVM extended for an additional 3-months period the deadline for general meetings of credit rights investment funds (FIDCs), hedge funds (ICVM 555 funds), and private equity funds (FIPs) to approve their financial statements, according to subitems (c), (k), and (m), respectively, of item VII of CVM Deliberation No. 848.

• Automatic approval of financial statements: as an exception to the general rule, item VII of CVM Resolution No. 849 authorizes the automatic approval of financial statements of all types of investment funds, for the fiscal years ended between December 31, 2019 and March 31, 2020, provided that (i) a virtual meeting is called pursuant to item VI of CVM Deliberation No. 849 (as explained above) and is not installed due to the absence of investors, and (ii) the corresponding audit report does not contain a modified opinion.

• Confirmation and update of the enrollment of market participants with CVM: items VII, (g), and VIII, (m), of CVM Deliberation No. 849 extended the deadline for market participants (including administrators of investment funds) to (i) confirm that the information contained in their enrollment with CVM continues to be valid, which usually needs to be done by March 31 of each year, for an additional 3-months period, and (ii) update their enrollment with CVM in case there is any change in the information previously provided (which usually needs to be done in 7 business day) for an additional 7-business days period.

• Submission of internal controls and procedures report: subitems (f), (h), (i), (j) and (l) of item VII of CVM Deliberation No. 848 extended for an additional 3-months period the deadline for the submission of assessment and recommendation reports by the executive officers responsible for internal controls and procedures of intermediary institutions (companies authorized to participate in the Brazilian securities distribution system), centralized depositary agents (companies rendering services of centralized deposit of securities), custodians, bookkeepers, as well as administrators and portfolio managers of investment funds to their management bodies.

• Submission of reference form: subitem (l) of item VII of CVM Deliberation No. 848 extended for an additional 3-months period the deadline for investment funds’ administrators and portfolio managers submitting their reference forms to CVM.

• Concentration and diversification requirements: as a general rule and subject to the penalties that may be imposed by CVM in case of non-compliance, investment funds’ administrator and portfolio managers are required to follow the concentration and diversification rules outlined in the applicable legislation and in the investment funds’ bylaws. In response to market participants’ concerns to the compliance of such rule in view of the current high volatility of the market and the lack of liquidity of certain assets, CVM clarified that the timeframe for adjusting investment funds’ portfolios could be relaxed depending on the circumstances. In this regard, CVM expressed the understanding, under item 2 of Circular Letter No. 6/2020/CVM/SIN, that, in situations in which the unpredictability and materiality of the market conditions make it impossible to adopt measures to adjust the investment funds’ portfolio during the timeframe normally required under the applicable regulations, CVM could decide, based on the assessment of circumstances on a case-by-case basis, not to apply penalties to investment funds’ administrators and portfolio managers if: (i) the non-compliance results from abrupt exogenous facts causing unpredictable and material changes to the capital markets conditions (e.g., passive market conditions), and (ii) timeframe required for the adjustment of the investment fund’s portfolio is considered reasonable, taking in consideration for that purpose (a) the nature and liquidity of the investment fund’s assets, and (b) the best efforts adopted by the portfolio managers, in line with their fiduciary duties, to solve the problem.

• Temporary substitution of time reference for calculating the value of quotas issued by hedge funds: some of the hedge funds offering intraday liquidity governed by CVM Instruction No. 555/14, as amended, may opt in their bylaws to calculate the value of their quotas based on their reference in the opening of the market. Due to unprecedented high volatility of the capital markets caused by the covid-19 pandemic crisis, several hedge funds that made such option have been experiencing operational hurdles to maintain such time reference. In response to investment funds` administrators concerns in this regard, CVM clarified, in item 3 of Circular Letter No. 6/2020/CVM/SIN, that it is admissible for hedge funds offering intraday liquidity to, exceptionally and during the peak of adverse, extreme and unpredictable market conditions, to replace the opening of the market for its closing as a reference for calculating the value of quotas, for purposes of making payments and redemptions to investors. This rule only applies, however, if the hedge fund in this situation informs the market, through a material fact notice, about its operational hurdles and the decision to temporarily make use of such alternate time reference for calculation of quotas.

• Provision for doubtful debts by credit rights investment funds (FIDCs): in response to investment funds’ administrators questions in this regard, CVM clarified, under item 6 of Circular Letter No. 6/2020/CVM/SIN, that the delay in payment or the need of negotiation in connection with a certain credit does not necessarily require the investment fund to make a provision for doubtful debt if its administrator concludes that those events do not represent evidence, per se, of a reduction in the recoverable value of the asset, but are rather a result of an exceptional and temporary market situation. However, CVM alerts investment funds’ administrators that such interpretation shall not be used as an excuse to avoid creating a provision when the other facts and circumstances indicate a material deterioration in the recovery capacity of the relevant credit.

• Exchange of documentation among investment funds’ service providers: in response to market participants’ questions in this regard, CVM clarifies, under item 5 of Circular Letter No. 6/2020/CVM/SIN, that the exchange of information and/or documents among administrators, portfolio managers, custodians and distributors of investment fund’s quotas do not necessarily have to be done physically or in person in accordance with the applicable regulations. Therefore, from a regulatory standpoint, there is no limitation on the exchange of documents and information among those market participants remotely and in a virtual manner.

Category: Labor and employment

On April 1, 2020, the Federal Government published Executive Order No. 936/20 ("MP 936"), providing for two (2) mechanisms for confronting the coronavirus (covid-19): proportional reduction in work hours and salary and temporary suspension of employment contracts.

As a way to facilitate adoption of the measures, MP 936 expressly authorized negotiation of those measures directly with employees, therefore, without the labor union's intervention, except for suspension of employment contracts and reductions in salary and work hours of more than 25% for employees who receive salaries between R$ 3,135.01 and R$ 12,202.11, in which case collective bargaining should be adopted.

The Sustainability Network ("REDE") filed Direct Action of Unconstitutionality No. 6,363/DF ("ADI") with the Federal Supreme Court, requesting a declaration of unconstitutionality of MP 936, due to violation of, among others, article 7, VI, of the Federal Constitution, which allows for reduction of salary only through collective bargaining.

On the evening of April 6, the reporting judge for the ADI, Justice Ricardo Lewandowski, granted preliminary injunctive relief to REDE, ordering that, once the individual agreement for salary reduction or contractual suspension under MP 936 is signed, “it will only be co-validated, that is, it will only have full legal effects after a response by the employees' labor unions."

He also considered that, in the absence of a response by the labor union in the manner and within the time limits provided for in the laws and regulations, "it will be permissible for interested parties to proceed directly with the negotiation until its end."

So the consequences could be:

As pointed out above, if the labor union expresses its agreement or remains silent, the Individual Agreement shall be co-validated and its effects will be retroactive to the date of signature of the document between the company and employee.

However, in the event of opposition from the labor union, we believe that if the employer maintains the effects of the Individual Agreement after the disagreement has been expressed, it will eventually be subject to:

a) Filing a collective or individual suit, seeking to have the company, including via in limine injunctive relief, reinstate the employment contracts and pay salaries;

b) Invalidation of individual agreements that are not ratified collectively, with full payment of salaries and any damages arising from cancellation of priority payments; and

c) Enrollment as outstanding debt of amounts unduly paid by the Ministry of Economy, as an Emergency Benefit for the Preservation of Employment and Income to employees submitted to reduction or suspension of contract.

The in limine injunctive relief granted by Justice Ricardo Lewandowski, although it may still be reviewed by the STF, not only deprived the issue of the urgency and agility that gave rise to the issuance of MP 936/20, but it will also require companies to review their strategy for implementing the alternatives provided for in the MP, especially in light of their financial conditions for dealing with the crisis and the track record of the labor union representing their employees.

[1] Article 617 of the CLT, with a reduction by half in light of article 17, III, of MP 936.

Category: Tecnology

On April 3, the Federal Senate passed via floor vote Bill No. 1,179/20,[i] which provides for the Emergency and Transitional Legal Framework for private law legal relations during the covid-19 pandemic. Among other provisions, the final version of the bill, proposed by Senator Antonio Anastasia (PSD/MG), changes the entry into force of the General Data Protection Law (LGPD) to January 1, 2021, with the exception that the articles on administrative sanctions (article 52 to 54) can only be applied as of August 1^st of next year.

With the approval of the Senate, the text will be forwarded to the Chamber of Deputies for revision, which may approve it in its entirety or make adjustments.

In addition to this bill, the proposal to postpone the LGPD was the subject of three other bills previously referred to the Senate. At the end of 2019, Bill No. 5,762/19 proposed changing the entrance into force of the LGPD from August of 2020 to August of 2022. The justification was the lack of installation of the National Data Protection Agency (ANPD) and the small number of large companies with plans to adapt to the law.

It is important to clarify that the ANPD's scope will not be restricted to the role of an oversight and sanctions agency. It will also be responsible for conducting studies and promulgating regulations and guidelines on best data protection practices, ideally in coordination with regulatory agencies and economic sectors, to provide guidance on the impacts of LGPD. In this sense, the Executive Branch's slowness in providing for its installation has always been worrying.

The context in which we live is evidence of this, since the lack of safeguards for fundamental rights and legal certainty for companies makes it extremely difficult for public bodies to coordinate the processing and sharing of personal data with the private sector.

With the establishment of the new coronavirus pandemic (covid-19), the movement for the postponement of the LGPD, which had low accession, gained strength and resulted in the publication of two other bills in the Senate.[ii] They were appended to the bill and, consequently, prejudiced with the approval of their final version by the Senate.

In the current scenario, with the ANPD still to be installed and most public and private entities far from the implementation of governance programs in privacy (article 50, 2, I, LGPD), there is a good chance that the delay of the law will be approved.

The urgency to install the ANPD is, more than ever, patent. Although the entry into force of the LGPD is postponed, the promulgation of official guidelines would enable Brazil not only to act more efficiently in terms of processing personal data in the context of the pandemic, but would also bring about greater legal security to public and private sector adaptation processes.

[i] https://legis.senado.leg.br/sdleg-getter/documento?dm=8081779&ts=1585615400034&disposition=inline

[ii] Bill No. 1,027/2020, by Senator Otto Alencar (PSD/BA), and Bill No. 1,164/2020, proposed by Senator Álvaro Dias (Podemos-PR), which, respectively, proposed postponing the entry into force to February of 2022; postponing the application of sanctions to 12 months after the entry into force currently provided for (August of 2020) and not extending them to the other provisions of the law.

Category: Tax

Executive Order No. 930/20, published on March 30 (MP 930), provides for the tax treatment applicable to exchange variations in investments made by financial institutions and other institutions authorized to operate by the Central Bank of Brazil (Bacen) in a foreign controlled company.

The purpose is to mitigate the influence of these transactions on the Brazilian foreign exchange market and reduce operating costs, especially those related to margin deposits. To this end, MP 930 seeks to reduce the asymmetry between the tax treatment applicable to foreign exchange variations related to investments made by Brazilian financial institutions in foreign controlled companies and the effects of hedge transactions implemented to cover exposure in foreign currency.

As a practice, domestic banks that hold investments in foreign controlled companies contract hedge transactions in order to neutralize the effects of the foreign exchange variation of these investments on their assets. Normally, these transactions are carried out through dollar futures contracts.

The results of the foreign exchange variation of the investment abroad do not affect the taxation by the Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL). However, the result of the hedge transaction is included in the calculation basis for these taxes. This asymmetry in tax treatment imposes on banks the need to contract for excess protection (overhedge).

According to the explanatory memorandum for MP 930, this asymmetry in tax treatment produces various undesirable effects, with increased transaction costs and impact on tax collection. These effects are worsened at times of greater volatility in the foreign exchange market, as in the current scenario. Considering that the financial institution may, at some point, decide to divest itself of its investments abroad, the dismantling of foreign exchange positions in Brazil could exert unwanted influence on the foreign exchange market.

In order to eliminate the need to contract for an overhedge, MP 930 proposes equity in the tax treatment: both the foreign exchange variation of the portion of the investment in a foreign controlled company covered by the hedge and the foreign exchange variation itself from the respective hedge will now be considered in the calculation basis of the IRPJ and CSLL due.

Thus, as of the fiscal year of 2021, the foreign exchange variation of the portion of the amount of the investment made by financial institutions and by other institutions authorized to operate by Bacen in a foreign controlled company with coverage of risk (hedge) shall be computed in the determination of the IRPJ and CSLL of the controlling legal entity domiciled in Brazil, in the proportion of:

1. 50% in the fiscal year 2021; and
2. 100% from the fiscal year 2022 onwards.

MP 930 also dealt with the presumed credit calculated by financial institutions whose extrajudicial liquidation or bankruptcy has been declared (pursuant to article 3 to article 9 of Law No. 12,838/13). According to MP 930, this presumed credit will be applied, until December 31, 2022, to the balance of credits arising from tax losses and negative social contribution basis arising from foreign exchange risk hedging transactions of the investment in a foreign controlled company, originated in the period from January 1, 2018, to December 31, 2020.

The presumed credit shall be calculated only by financial institutions whose extrajudicial liquidation or bankruptcy has been declared after publication of the executive order.

Category: Labor and employment

As an alternative measure to tackle the current crisis scenario caused by covid-19, Executive Order No. 936/20 was published on April 1 (MP 936), which stipulates the conditions for a proportional reduction in the hours and wages of employees and for the temporary suspension of employment contracts.

The emergency program for maintaining employment and income also covers intermittent employment contracts provided for in article 443 of the Consolidated Labor Laws (CLT), provided that they have been formalized by the date of publication of the executive order. According to the article, such contracts are those in which individuals render services in a discontinuous manner, in alternate periods of work and inactivity, which may be determined by hours, days, or months, regardless of the activities of the employer or employee.

According to MP 936, employees with intermittent employment contracts will be entitled to a monthly emergency benefit in the amount of R$ 600 for a period of three months, starting on the date of publication of MP 936 and with payment within 30 days (the grant and payment procedure will be regulated by an act of the Ministry of Economy).

In order to fulfill the social function of this rule, payment of the benefit was stipulated regardless of compliance with any accrual period, employment period, and number of salaries received.

No employee is entitled to the benefit who:

• holds a public office or employment, position of trust of free appointment and dismissal or holder of elective office; or
• is receiving a benefit of the General Social Security System or of the Special Social Security Systems, except pensions due to death or accident aid (sole paragraph of article 124 of Law No. 8,213/91); unemployment insurance, of any type; of professional training scholarships intended for employees who have their employment contracts suspended due to their participation in a course or professional training program offered by their employer (article 2-A of Law No. 7,998/90).

If there is more than one intermittent employment contract, no more than one monthly emergency benefit will be granted, i.e., there is one benefit, regardless of the number of intermittent employment contracts entered into by the employee. The monthly aid also cannot be combined with the payment of other emergency aid.

The benefit will be funded with funds from the Federal Government and will be managed and paid by the Ministry of Economy.

Should the Emergency Benefit for Preservation of Employment and Income be paid unduly or paid in excess of the amount due, the debts created as a result thereof will be enrolled as outstanding debt of the Federal Government and the provisions of Law No. 6,830/80 will be applied for judicial enforcement.

Category: Labor and employment

Executive Order 936/20 (MP 936/20), published on April 1, aims to mitigate the damage caused by the covid-19 pandemic by introducing measures such as a proportional reduction in work hours and salary and temporary suspension of employment contracts. The text also amends provisions of the CLT and presents rules on employment guarantees and on the actions of labor inspection agencies.

Executive Order 927/20 (MP 927/20), published on March 22, refers to the actions of labor inspectors of the Ministry of Economy, making changes in the inspection of labor issues. For a period of 180 days after the publication of the order (according to article 31), agents shall serve to provide guidance regarding irregularities found.

During this period, infraction notices shall be issued only for serious infractions, provided for in subsections I and IV of article 31. Auditors shall be charged with guiding companies on how to remedy other irregularities, instead of fining them.

MP 936/20 complements the provisions of MP 927/20 on labor inspection by establishing that failure to comply with the procedures for reaching agreements to reduce work hours and wages or to temporarily suspend employment contracts will lead to the issuance of an infraction notice.

The sole paragraph of article 14 provides that the process of inspection, notice, assessment, and imposition of fines must comply with the rules contained in Title VII of the Consolidated Labor Laws (CLT), which deals with the penalties and the processing of administrative proceedings, establishing the inapplicability of the criterion of the double visit and the rule of article 31 of MP 927/20.

In the event of non-compliance with the procedures relating to the measures provided for in MP 936/20, pursuant to the head paragraph of article 14, a fine shall be imposed, as provided for in article 25 of Law No. 7,998/90, which regulates the Unemployment Insurance Program. This provision refers to the fine provided for in subsection I of article 634-A of the CLT, as amended by Executive Order 905/19 (MP 905/19), which establishes a scoring system in accordance with letters "a" to "d".

Although MP 905/19, known for introducing the Green and Yellow Employment Contract, provides for new criteria for the imposition of administrative fines, no specific regulations have yet been defined by the Federal Executive Branch regarding the classification of the seriousness of violations, whether light, medium, serious, or very serious.

Thus, in the event of violation of the procedures for adoption of the measures introduced by MP 936/20, one applies the rule set forth in article 25 of Law No. 7,998/90, before the amendment provided by MP 905/19.[1] The amounts vary between R$ 2,132.98 and R$ 213,297.65, fixed according to the number of employees affected. The fine may be doubled in the event of recidivism, opposition to supervision, or contempt of authority.

In view of this scenario, MP 936/20 reiterates the federal government's concern with the inspection and fining of companies in the event of non-compliance with serious obligations, activities of extreme importance, especially for the procedures applicable to the proportional reduction of work hours and salary and temporary suspension of employment contracts.

Article 19 of MP 936/20 itself proves the federal government's intention to reinforce the need for companies to comply with labor rules, especially those regulating occupational safety and health.

After various criticisms of the provisions of article 31 of MP 927/20 regarding the actions of guidance by labor inspectors, blocking, for 180 days, the issuance of infraction notices on matters other than those set forth in subsections I to IV, the inclusion of article 19 in MP 936/20 demonstrates the unequivocal need for companies to continue complying with other labor obligations.

[1] Employers who violate the provisions of this law will be subject to fines of 400 to 40 thousand BTN, according to the nature of the violation, its extent, and the offender’s intent. The amount shall be doubled in the event of recidivism, opposition to supervision, or contempt of authority.