CIVIL CONTRACTUAL JOINT LIABILITY BETWEEN THE INVESTMENT FUND'S ADMINISTRATOR AND MANAGER
José Edwaldo Tavares Borba*
Gustavo Tavares Borba**
Summary: This article analyzes the civil liability of an investment fund manager in a scenario where the contract includes a clause of joint and several liability for damages caused by irregular acts committed by the fund manager, as well as whether any collusion between the fund manager and the director of the shareholder legal entity would have any repercussions on the contractual joint and several civil liability of the fund manager.
Keywords: Investment fund manager. Fiduciary duties. Joint and several contractual liability clause.
Abstract: The article analyzes the civil liability of an investment fund administrator when there is a contractual clause defining out the joint and several liabilities for the damage caused by any irregular acts performed by the investment fund manager, as well as whether any collusion between the investment fund manager and the director of the shareholding legal entity would have any repercussions on the joint and several contractual liabilities of the investment fund administrator.
Keywords: Investment fund administrator. Fiduciary duties. Contractual clause of joint and several liabilities.
SummaryIntroduction. 1. Responsibility of the Investment Fund Administrator for Overseeing Irregular Acts Committed by the Manager. 2. On the Possibility of Delegating Fund Management and the Contractual Rule of Joint and Several Liability between the Administrator and the Manager (among other contracted professionals). 3. On the Potential Irregular Actions of the Shareholder's Directors in Collusion with the Investment Fund Manager. Conclusion.
Introduction.
This article will analyze the role to be played by the investment fund administrator in overseeing the manager chosen by him when establishing the fund, as well as whether any collusion between the investment fund manager and the director of the investing legal entity (unit holder) would have any repercussions on the joint liability established in the management contract signed between the administrator and the manager, for the purpose of compensating the unit holder for losses resulting from illegal management acts.
1. Responsibility of the Investment Fund Administrator for Overseeing Irregular Acts Committed by the Manager.
Investment fund managers and administrators, as well as all those who manage third-party assets, have a duty to safeguard these assets not only as if they were their own, but also with the competence expected of a specialized professional.
Specifically regarding private equity funds, investors allocate their resources to the investment vehicle so that the administrator or manager (if a third party is hired) can make informed and technical decisions about the investments to be made by the investment fund.
It should be noted that management and administrative functions, as well as the costs associated with these services, are only justified to the extent that the accredited entities are capable of properly performing this task. This is not, of course, a bureaucratic function of mere registration and monitoring. Managers seek opportunities, scrutinize the future, and define the fund's investment strategy..
Otherwise, the roles of manager and administrator would not be justified, and the fund could be represented, just as a condominium administrator would be, by any of its members.
Investment funds have the nature of a special type of condominium. Thus, their holders are co-owners of a mass of assets or resources that are entrusted to a third party (the administrator) for the purpose of holding these resources in trust and managing them in the best way, so that this patrimony, which belongs to a collective of shareholders, can serve the purposes for which these assets were gathered, namely, to make them productive and profitable.
Certainly, managers and administrators are not faced with an obligation of result, but rather an obligation of means; that is, they cannot be held accountable for profit and success, but they can be required to demonstrate competence, care and vigilance (duty of diligence), as well as high ethical standards (duty of loyalty).
These duties, known as "fiduciary duties," effectively extend to all those who act in the role of managing the assets of others, encompassing a universe that includes everyone from the simple agent, who receives a power of attorney to perform a specific act, to the administrators of small or large companies, all invested with the function of acting in the name and interest of third parties.
This condition has its origins in Roman fiducia, which would later become stratified in trust In Anglo-American law, this applies to the representation of collective entities, both legal entities such as corporations and associations, and non-legal entities such as investment funds and pension funds.
André Tunc, in analyzing the role of company directors, had the opportunity to state what can be applied to any administrator of other people's assets:
They will not be able to prove themselves worthy of this confidence. Ils héritent des devoirs fiduciaires (fiduciary duties) which normally applies to trustee, here, in the traditional chair of trust, se voient confidence des biens dans l'intérêt d'autrui. Of course, that's not exactly the case trustees: ils ont pour mission essentielle, non pas de manage, mais de faire fructifier. (…) Les directeurs, dans leurs décisions, ne doivent considérer que les interêts qui leur sont confiés, non les leurs. Ils doivent même éviter le plus possible les situations de conflicts d'intérêts, car on pourrait les soupçonner de ne pas se donner entièrement aux intérêts sociaux..[1]
These fiduciary duties are the hallmark of the role to be played by any administrator or manager of other people's assets. Whenever one party places its trust in another, the latter is obliged to adopt the highest management standards, under penalty of being personally liable for the damages arising from its actions, as observed in Roy Goode's classic lesson:
Only where the relationship between the parties or the nature of the agreed arrangements involves one party having to repose trust and power in the other does the higher standard of behavior set by equity come into play.[2]
The partners of a company, as well as the shareholders of an investment fund, when entrusting their capital to the management of third parties, whether these are corporate bodies or contracted administrators, are doing so. law a high standard of dedication to the sound management of the funds or businesses entrusted to them.[3] Norma Parente, with her characteristic precision, summarizes the duties of professionals who manage the assets of third parties:
The administrator is responsible for managing investment funds, and may manage the portfolio themselves or hire a manager. Both the administrator and the manager must perform their duties with the diligence expected of an honest (loyal) and proactive (diligent) administrator, it being understood that the principles of due diligence applicable to the fund administrator and manager, due to their fiduciary characteristics, are the same as those inherent to company administrators […] These standards are applicable to the conduct of administrators in general, whether of publicly traded companies or market entities that maintain a fiduciary relationship with investors. They represent a series of desirable behaviors inherent to the proper conduct of administrators. [4]
Administrators and managers of investment funds are, therefore, unequivocally subject to fiduciary duties, which is precisely why the CVM's regulation on investment funds clearly stipulates that they must observe the duties of diligence and loyalty, as well as the sub-duties of informing and being informed, observing the rules on conflicts of interest, disclosing relevant information, among others.
Investment funds are, in fact, a relatively recent phenomenon, so that, until recently, the applicable rules were almost exclusively contained in the regulations of the CVM (Brazilian Securities and Exchange Commission), issued based on Article 8, I, of Law No. 6,385/76. Even with the enactment of the Economic Freedom Law (Law No. 13,874/2019), which came into effect in 2019, the legislative technique of adopting legal norms with low normative density, with quite broad delegation to the CVM for regulation, still prevailed.,[5] that, being a regulatory agency with a technical profile, it would be better equipped to issue, with the necessary agility, efficient rules that take into account all the peculiarities of the capital market.
In this context, the CVM (Brazilian Securities and Exchange Commission) has been issuing extensive regulations on the matter for the past few decades, especially regarding the standards of conduct that must be observed by administrators and managers of investment funds. Since it would be impossible to define specific conduct to be observed, given the wealth of situations and the rapid evolution of practices that naturally occur in this environment, capital market regulators, both in Brazil and in other countries, have opted to create... standards These are guidelines that must be observed by those being regulated, allowing for the constant updating and evolution of the subject matter, generating regulatory efficiency and enabling the proper alignment of practices in this dynamic environment.[6].
Among these standards Among the core duties governing conduct are the so-called fiduciary duties, especially those of diligence and loyalty. Regarding these two core duties, which often interrelate in specific cases, it can be said that, in general, the duty of diligence has a more procedural character, thus involving the procedures adopted by the regulated agent to perform its functions adequately and efficiently. The duty of loyalty, on the other hand, is mainly linked to ethical behavior that prioritizes the interests of the fund's investors, so that regulated agents do not prioritize their own interests to the detriment of those of the investment fund.[7]–[8]
The general rules regarding investment funds, especially article 92, I, of ICVM 555/14, place considerable weight on the observance of these duties by the administrators and managers of investment funds, obligating them to act "with care and diligence," "performing all necessary acts to [ensure] the defense of the unitholder's rights," as well as with "loyalty to the interests of the unitholders and the fund, avoiding practices that may harm the fiduciary relationship maintained with them.".
Regarding this topic, Nelson Eizirik emphasizes that the standard of diligence required of administrators and managers should be understood according to the current parameters of professional management science, so that the regulated agent must have up-to-date knowledge and act proactively in protecting the assets entrusted to them.
The duty of diligence, according to modern corporate law, can no longer be understood simply as the care of a good family man. Currently, to verify whether a manager has observed the duty of diligence, it is necessary to hypothetically compare their actions with those of a good business manager. That is, to evaluate, on a case-by-case basis, what would be the advisable course of action in those specific circumstances, in that type of business, according to the norms of business administration.[9]
Furthermore, given the complexity of the current securities market landscape, fulfilling the duty of due diligence, especially from a supervisory perspective, is taking on an increasingly procedural character, requiring regulated entities to create adequate control mechanisms capable of detecting irregularities committed by those they are supposed to supervise.
In this sense, Article 19 of ICVM 558/15 explicitly states that the administrator "must guarantee, through adequate internal controls, the permanent compliance with the rules, policies and regulations in force, relating to the various types of investment, to the activity of managing securities portfolios itself and to ethical and professional standards" and that such "internal controls must be effective and consistent with the nature, complexity and risk of the operations carried out".
Therefore, since it is the administrator's responsibility to oversee the professionals they have hired, especially the outsourced manager,[10], Therefore, it is imperative that the administrator adopt adequate and effective control mechanisms to detect any "irregularities" committed by professionals hired to provide services to the investment fund.[11]. Regarding the duty of oversight, it is worth transcribing the irrefutable opinion of Director Alexsandro Broedel, delivered in the judgment of CVM Administrative Proceeding No. 18/2008, whose conclusions, although analyzing the duties of board members of publicly traded companies, apply, for identical reasons, to investment fund managers:
This professional must ensure that appropriate systems are in operation within a company, particularly when that company, in its routine activities, engages in transactions with financial instruments capable of significantly altering its results. Therefore, I understand that inoperative or ineffective risk monitoring and control systems constitute a breach of the duty of diligence, more specifically the component of the duty of vigilance.[12]
It can be concluded, therefore, that it is the Administrator's responsibility to create procedures and mechanisms that are adequate, at least in theory, to detect possible irregularities that may occur in the management of the investment fund, as was even explicitly stated in Circular Letter/CVM/SIN/6/2014, issued by the Superintendence of Relations with Institutional Investors (SIN) with the "objective of guiding fiduciary administrators and investment fund managers":
It is important to emphasize that, in the understanding of this Superintendency, the aforementioned duty of diligence implies, at a minimum, the adoption of consistent, objective, and verifiable practices that are sufficient not only to understand and measure the risks associated with the invested assets, but also to guarantee an acceptable standard of internal controls and management of operational, market, liquidity, and credit risks associated with the management of third-party resources. These practices must be consistent with the risks assumed in each of the markets in which one is operating.[13][DF1]
2. On the Possibility of Delegating Fund Management and the Contractual Rule of Joint and Several Liability between the Administrator and the Manager (among Other Contracted Professionals).
The administrator initially holds all powers of representation for the fund.[14], allowing the regulation (“option”) that it may contract third parties, duly qualified or authorized by the CVM, to provide certain services to the fund, but the selection must be made in a “careful” manner, as determined by § 1 of art. 79 of ICVM 555/14.
The central position to which the administrator was elevated in design The CVM's regulation on investment funds is very clear.[15]–[16], since it holds the exclusive authority to draft and prepare the "regulations" (which are the foundational document for the fund's operations), to carry out all actions necessary for the fund's registration with the CVM, and to manage the investment fund during its operation.[17] and to carefully select the professionals who will provide regulated services to the fund, who are subject to the supervision of the administrator itself (art. 90, X, of ICVM 555/14).
Regarding the regulatory model adopted by the CVM (Brazilian Securities and Exchange Commission), the power to exercise the fund's rights vis-à-vis the invested companies is originally held by the administrator, who only has the "option" to delegate, in whole or in part, these powers.
Article 79. The contracting of duly qualified or authorized third parties for the provision of administrative services, as mentioned in Article 78, is optional for the fund, while the contracting of independent auditing services referred to in Article 65 is mandatory, and, when the administrator is not duly authorized or accredited to provide such services, the services provided for in items III, IV, V and VI of § 2 of Article 78.
1. It is the responsibility of the administrator, as the fund's representative, to contract service providers, through prior and thorough analysis and selection of the contractor, and the administrator must also be named as a consenting party in the contract.
§ 2. Contracts entered into in accordance with § 1, relating to the services provided in items I, III and V of § 2 of article 78, must contain a clause stipulating joint and several liability between the fund administrator and third parties contracted by the fund for any losses caused to unit holders due to conduct contrary to the law, regulations or normative acts issued by the CVM.
Thus, the administrator, as the central figure in the investment fund, institutionally exercises the role of gatekeeper, In order to preserve the environment of this specific segment of the securities market, investors can have the peace of mind of knowing that there is a regulated participant overseeing procedures and selecting qualified professionals to perform relevant functions within the fund, especially management (if this is not performed by the administrator himself). On this point, it is worth mentioning the considerations of Director Ana Novaes in the judgment of CVM Administrative Sanctioning Process No. RJ 2012/6987:
The administrator is the overseer of the fund's unit holders regarding the actions of the fund manager, without prejudice to their other responsibilities. After all, it is the administrator who contracts, on behalf of the fund, the services of third parties, including management. In this sense, Article 65, item XV, of CVM Instruction No. 409/04 stipulates that it is the administrator's duty to supervise the services provided by third parties to the fund, including management services. Furthermore, item XIII of the same article states that it is the administrator's obligation to "observe the provisions contained in the regulations and prospectus." Therefore, there is no doubt that the administrator is also responsible for ensuring compliance with the fund's regulations.[18]
The administrator, therefore, has the option.[19] The fund administrator has the option to directly manage the fund or delegate this function to a third party. If such delegation is made, the administrator must, however, in accordance with its fiduciary duties and regulatory rules, carefully select the manager through informed analysis. Furthermore, according to general regulatory rules, when choosing to delegate the management function, the fund administrator is obligated to include a contractual clause of joint and several civil liability for irregular management acts, thus preventing unit holders from suffering the consequences of the administrator's poor choice of manager.gatekeeper from the bottom.
The CVM, in fact, clarifies this point very precisely in the Analysis Report of the Public Hearing of ICVM 555, as follows:
The CVM (Brazilian Securities and Exchange Commission) considers it appropriate to reinforce that, while the administrator has the prerogative to delegate the provision of fund management services, on the other hand, they cannot evade the responsibilities that may arise from the poor provision of these services, and it is their duty to supervise the services provided by third parties to the fund.[20]
This regulatory rule does not create joint liability between the administrator and the manager, but only requires that the administrator, if he or she chooses to delegate management, stipulate a contractual rule of joint liability in the manager's hiring instrument.[21]
In this regulatory model, investors naturally remain subject to the risks of investment (intrinsic to the securities market).[22]), but would have minimized the risks of damages due to irregularities and fraud committed by the manager hired by the administrator, so that investors would only need to assess and trust the integrity of the administrator, who would fulfill the role of supervising and being held civilly liable for damages resulting from irregular acts committed by other service providers contracted by the fund.
This regulatory model seeks to generate business efficiency by minimizing the total cost of evaluation in the process of acquiring shares in investment funds, since the investor would not need to analyze the credibility and risk of fraud or other irregularities in relation to each of the investment fund's service providers, but only in relation to the administrator, who would thus perform the function of... gatekeeper, overseeing and assuming civil liability for damages arising from irregular acts that may be caused by regulated agents chosen and contracted by it to operate within the investment vehicle.[23].
There is therefore no doubt that the institutional design of the CVM's regulation chose the administrator.[24] as the central figure from which the bundles of legal relationships pertinent to the investment fund radiate, adding, from these relationships, an additional guarantee to the shareholder, who will have the contractual requirement of a rule of joint and several liability of the administrator for losses suffered due to irregular acts carried out by the professionals/institutions to whom the administrator delegated the management of the investment fund.
Regarding the rule of joint and several liability, it should be noted that this arises from the law or the will of the parties (article 265 of the Brazilian Civil Code of 2002). In the case under analysis, joint and several liability is based on the will of the parties, who included it in the management contract, because, even if the joint and several liability clause is imposed by CVM (Brazilian Securities and Exchange Commission) regulations, the expression of will would not be disregarded, since it was contractually adopted. Every contract is subject to the typical normative complex applicable to it. It is up to the parties to submit to the applicable normative complex or simply refrain from entering into the contract.
Thus, the requirement to include a joint and several liability clause would be merely a regulatory norm to be observed by all those subject to it. If this were not the case, the entire regulatory system conferred upon the various government bodies, autonomous agencies, and regulatory bodies, such as the CMN, the BACEN, and the CVM itself, would be irreparably compromised.
Given the complex set of rules stemming from the law and the CVM (Brazilian Securities and Exchange Commission) regulations, it will be up to the agents legally subject to regulatory power to decide whether to contract according to these precepts, or simply not to contract, making a choice similar to that made by any person when faced with legislation that, through mandatory rules, imposes typical forms of contract.[25]. In this case, autonomy of will is exercised when deciding whether or not to enter into a contract.
In Brazil, someone who enters into a typical contract, or even a partially regulated contract, does not suffer any infringement on their subjective sphere of rights. They would suffer such an infringement if they were forced to enter into the contract. Those who submit to the legal norm do not incur a defect of consent, because, in deciding to enter into the contract, they consented to accept the inherent normative complex of the transaction.
It is also important to clarify that Law No. 13.874/2019, the so-called Economic Freedom Law, did not prohibit joint and several liability clauses between the administrator and other service providers to investment funds; it only permitted the adoption or non-adoption of such clauses.[26]. Furthermore, the aforementioned law expressly stipulated that, should the rules pertaining to liability be altered, the prior period would be governed by the contractual or regulatory rules then in force.[27].
3. Regarding the Possible Misconduct of the Shareholder's Directors in Collusion with the Investment Fund Manager.
Legal entities are not to be confused with their administrators. A director who deliberately acts against the company does not act as its representative, but rather against its interests, and whoever associates with the director in this fraudulent action is equally responsible. Therefore, if the fund manager acts against the corporate shareholder in collusion with its director, both will be jointly liable for the damages caused. In this scenario, permeated by fraud and irregularities, the absence of responsibility can never be considered.
The administrators of private pension companies, foundations, and associations retain, by virtue of their statutes, the power to represent the entity, but they must act in the interest of the legal entity they represent. Therefore, when these administrators willfully deviate from their institutional duties and begin to act against the interests of the entity, they no longer represent it, and, for this reason, become civilly liable for all damages they cause.
Civil liability, and therefore the duty to indemnify, arises whenever an administrator, through intentional misconduct, causes harm to the company (Article 158 of Law No. 6.404/76). This illegal practice removes the administrator from their position as a corporate body, placing them in the role of antagonist, that is, an opposing party to the company itself. Whoever becomes an accomplice to this administrator in this criminal practice is not, evidently, an accomplice to the company, but rather to the administrator themselves, against the company.
The logic of the system would already lead to this conclusion, since it would not be legally acceptable to transform the victim, which is a legal entity, into a co-author of a crime perpetrated against itself, with the effect of freeing the third party, who associated with the administrator to harm the institution, from the civil effects of the criminal act attributable to both.
The legislator, however, addressed this dysfunctional situation by regulating the "liability of directors" of publicly traded companies who acted against them, providing the following in § 5 of article 158 of Law No. 6,404/76:
Art. 158 […]
§ 5. Anyone who, with the aim of obtaining an advantage for themselves or for another, contributes to the commission of an act in violation of the law or the contract, shall be jointly liable with the administrator.
The prevailing doctrine on this subject is that an administrator who acts against the company of which he is an administrator is jointly liable with the other co-perpetrators of the wrongdoing for the damages suffered by the legal entity. See, on this topic, the teachings of Fran Martins, Sampaio de Lacerda, Egberto Lacerda Teixeira, José Alexandre Tavares Guerreiro, and Sergio Campinho:
The new law not only addresses cases of liability of administrators for acts committed or omissions that result in losses for the company; it also stipulates that 'whoever, with the aim of obtaining an advantage for themselves or for another, contributes to the commission of an act in violation of the law or the bylaws, shall be jointly liable with the administrator (§ 5).[28]
Anyone who, with the aim of obtaining an advantage for themselves or another, contributes to the commission of an act in violation of the law or the bylaws, will be jointly liable with the administrator. This is stated in paragraph 5 of article 158. Since the text uses the expression "anyone" in a general sense, it is impossible to enumerate which persons should be covered by the legal norm. However, examples can be given. Thus, any intermediary in the operation, whether or not an employee of the company or, privately, of any administrator, whatever their position, such as lawyers, economists, accountants, etc., would be included. Often, it is third parties who lead administrators to commit these acts, under various pretexts.[29].
Section 5 of Article 158 finally stipulates that whoever, with the aim of obtaining an advantage for themselves or for another, contributes to the commission of an act in violation of the law or the bylaws, will be jointly liable with the administrator.[30].
Finally, it should be noted that anyone who, with the aim of obtaining personal gain or for the benefit of a third party, contributes to the commission of an act that violates the law or the bylaws, will be jointly liable with the administrator (Article 158, § 5). [31]
These rules, as well as the doctrine transcribed, although directed at public limited companies, apply, by analogy, to all companies, as well as to all legal entities and institutionalized collective organizations, consequently encompassing pension funds and investment funds. Thus, the application of this rule to all legal entities falls within the scope of analogy. legis, since the existing rule, directed at public limited companies, presents the same essence as that which would be applicable to all other collective entities, equally subject to professional administration.[32]
However, even disregarding this rule that makes a third party, an accomplice of the administrator, as responsible as the administrator for damages caused to the collective entity, it can be understood that this responsibility results from the nature of things, because if this were not the case, any adventurer could, free from any risk, advance upon the assets of collective entities, especially pension funds, simply by colluding with the entity's administrators.
Conclusion.
Based on the foregoing, it can be concluded that the clause of joint and several civil liability between the administrator and the manager for the purpose of reimbursing a shareholder of an investment fund due to irregular management acts is contractual in nature, even though it may be related to a CVM (Brazilian Securities and Exchange Commission) regulatory norm that mandates the inclusion of this rule in the management contract. The fact that the CVM imposes a contractual clause in the regulation for the case of outsourcing services does not mean that the regulatory body is creating joint and several liability, but rather that the administrator, if they choose to hire a manager, will have to define this obligation contractually to comply with the regulation, which is quite different from creating joint and several liability.
The contractual joint and several civil liability of a fund administrator should not be confused with their personal responsibility for supervising contracted professionals. Therefore, they can be held civilly liable for irregular acts by the manager regardless of fault in supervision, since the joint and several liability clause, defined in the contract, only requires proof of fault or intent on the part of the manager, with liability extending to the administrator by virtue of the joint and several liability clause.
Finally, it is important to emphasize that any collusion between the fund manager and a director of the corporate shareholder does not exempt either the manager or the fund administrator (jointly liable) from liability, since a director who acts willfully against the interests of the legal entity to which he is linked will not be representing it, but rather acting against the legal entity. Therefore, Article 158 of Law No. 6,404/76 would apply to the case, according to which the company director and third parties who act willfully against the company's interests are jointly liable for the damages caused.
[1] Free translation: “They must prove themselves worthy of this trust. They inherit fiduciary duties (fiduciary duties) that normally weigh on the trustee, those to whom, in the traditional framework of trust, In this context, goods are entrusted to another in their interest. Certainly, they are not exactly a trusteeTheir essential mission is not only to manage, but to make things fruitful. […] In their decisions, directors should consider only the interests entrusted to them, not their own interests. They should even avoid, as much as possible, situations of conflict of interest, because these could lead them to not fully dedicate themselves to the company's interests.” (TUNC, André. Les droit americain de sociétés anonymous, Paris: Economica, 1985, p. 130).
[2] Free translation: "Only where the relationship between the parties or the nature of the relationship involves one party having to place trust and decision-making power in the other party, should the highest standard of conduct established by..." equity to be adopted.” (GOODE, Roy. Commercial law in the next millennium, London: Sweet & Maxwell, 1998. p. 12).
[3] In this line of reasoning, Lamartine Corrêa de Oliveira, referring to an opinion by Miguel Reale, stated: “However, the eminent jurist and philosopher points out, not only in relation to this phase, but in general, the existence among condominium owners of 'bonds comparable to those that link the partners, participants or members of an association, which explains the increasing approximation that the law and doctrine are making between condominium and society' is undeniable‘ (CORRÊA DE OLIVEIRA, Lamartine). The double crisis of the legal entity., São Paulo: Saraiva, 1979, p. 228).
[4] PARENTE, Norma Jonssen. Capital Markets. InCARVALHOSA, Modesto (Coord.). Business Law Treatise Collection – v. 6. 2nd ed. São Paulo: Thomson Reuters Brasil, 2018, p. 310 and 578.
[5] According to the new article 1368-C, § 2, of the Civil Code ("The Securities and Exchange Commission shall be responsible for regulating the provisions of the heading of this article").
When analyzing this issue from a doctrinal perspective, Daniel Maeda (Superintendent of the CVM's Institutional Investor Relations area) and Alexandre Pinheiro dos Santos (General Superintendent of the CVM) argue that "the new legislation in question did not establish a broad and complete general framework for the fund industry, and to the detriment of the CVM's broad regulatory power and everything the Authority has already done regarding the matter," so that the law preserved the regulatory power of the authority, only adding "minimum elements for legal certainty on certain especially sensitive topics" (MAEDA, Daniel; PINHEIRO DOS SANTOS, Alexandre. Notes on Investment Funds in Light of the Economic Freedom Law)., In: HANSZMAN, Felipe; HERMETO, Lucas (Coord.). Current Issues in Corporate Law and Capital Markets – Volume V. Rio de Janeiro: Lumen Juris, 2021, p. 37).
[6] Norma Parente analyzed this reality in the following terms: “The legislative option for a generic provision of the expected conduct of the administrator thus consists of a response to the innumerable and unpredictable range of activities and circumstances that may permeate their performance, which would clearly escape express legal provision. The standard is intentionally broad, precisely to accommodate diverse circumstances and peculiarities, and does not depend on any regulation. It derives from concepts that the average citizen considers valid at a given time. An exhaustive enumeration of the rules of conduct that must be followed by the administrator is practically impossible. Therefore, the law chooses to establish a standard that will be assessed in light of the judge's experience” (PARENTE, Norma Jonssen. Treatise on Business Law. Capital Markets). InCARVALHOSA, Modesto (Coord.). Business Law Treatise Collection. Vol. 6., 2nd ed. São Paulo: Thomson Reuters Brasil, 2018).
[7] Regarding the concept of the duty of loyalty, the CVM (Brazilian Securities and Exchange Commission) defined it as follows when judging Administrative Sanctioning Process No. RJ 2015/12087: “72. The duty of loyalty, in turn, derives from the obligation to perform duties in good faith, considering the interests of the fund and the real holders of the assets, that is, the unit holders. Therefore, for there to be a breach of the duty of loyalty, it is necessary that the manager or administrator has committed acts aimed at their own interests or those of third parties to the detriment of the interests of the Fund itself.” (BRAZIL. Securities and Exchange Commission. Administrative Sanctioning Process CVM No. RJ 2015/12087. Rapporteur: Director Pablo Renteria. Rio de Janeiro, July 24, 2018.).
[8] Furthermore, the requirement that regulated agents (operating in investment funds) be registered with the CVM aims to allow the regulator to oversee their activities and verify whether they are acting in accordance with the law and the agency's regulations. If any non-compliance is detected, the CVM must act to rectify the situation, and may even initiate sanctioning processes and apply penalties to discourage behaviors that are inconsistent with the established rules.
[9] EIZIRIK, Nelson. Corporate Law Topics. São Paulo: Editora Renovar, 2005. p. 68.
[10] Article 90, X, of ICVM 555/14 – The administrator's obligations include, in addition to those provided for in this Instruction: […] XV – to supervise the services provided by third parties contracted by the fund.
[11] On this subject, it seems pertinent to cite the technical observations of Otávio Yazbek, in the judgment of CVM Administrative Proceeding No. 18/2008, regarding the evolution of the duty of diligence from the perspective of the obligation of supervision:
“"In any case, this type of problem leads me to the second point, which is the transformation that the standard of due diligence itself, especially within the Board of Directors, has undergone in recent decades. In the past, faced with simpler demands, much of the content of the duty of due diligence was related to the duty of direct oversight by the directors. Recognizing that this direct oversight was not possible, even because of the nature of the board's activities, it became recognized that the director should only take action, should actively seek information, if there is some "warning sign," a red flag, as they say. When the activities of companies become more complex, when, alongside operational activities, a financial dimension gains space—not as secondary as it was before, but important and full of new risks—it tends to be recognized that even this may be insufficient. A progressive and natural evolution of that standard of care and diligence begins there: if directors cannot directly oversee, if they often lack technical skills, then mechanisms should be created that allow them, in a mediated way, to understand..." "This reality and, ultimately, to deliberate in an informed manner.".
[12] BRAZIL. Securities and Exchange Commission. Administrative Sanctioning Process CVM No. 18/2008. Rapporteur: Director Alexsandro Broedel. Rio de Janeiro, December 4, 2010.
[13] BRAZIL. Securities and Exchange Commission. Superintendency of Relations with Institutional Investors. Circular Letter No. 06/2014. Available at: http://www.cvm.gov.br/export/sites/cvm/legislacao/oficios-circulares/sin/anexos/oc-sin-0614.pdf. Accessed on: March 7, 2022.
[14] David Casz Schechtman and Caio Brandão summarize the central role of the investment fund manager: “In general terms, the manager is the legal entity authorized and accredited before the CVM (Brazilian Securities and Exchange Commission) to perform its functions, possessing fiduciary ownership of the available resources, and is therefore responsible for the organization and maintenance of the fund, and must perform the necessary acts for the administration of the fund” (SCHEHTMAN, David Casz; BRANDÃO, Caio. Freedom or contractual abuse: limitation of liability for violation of fiduciary duties of managers and administrators of investment funds and the experience of the United States). In: HANSZMAN, Felipe; HERMETO, Lucas (Coord.). Current Issues in Corporate Law and Capital Markets – Vol. V. Rio de Janeiro: Lumen Juris, 2021, p. 303).
[15] Carlos Martins Neto, in his work "The Responsibility of the Shareholder of a Private Equity Investment Fund", accurately describes the administrator's position by stating that he is responsible for carrying out "all the activities necessary for its regular operation and maintenance", with the possibility of "directly providing such services or contracting third parties for this purpose" (MARTINS NETO, Carlos). The Liability of a Private Equity Investment Fund Investor. São Paulo: Almedina, 2017. p. 54-55).
[16] Articles 6 and 79, caput and paragraphs, of ICVM 555/14 stipulate that the fund's constitution is carried out by the Administrator, who has the option of contracting, with prior and careful selection, the fund manager, and in this case, the contractual provision of their joint and several liability with the manager will be mandatory.
[17] Article 80 of ICVM 555/14 gives the exact dimension of the central role played by the Administrator in the constitution and operation of the investment fund: “The administrator, observing the legal limitations and those provided for in this Instruction, has the power to perform all acts necessary for the operation of the investment fund, being responsible for the constitution of the fund and for providing information to the CVM in the manner of this Instruction and when requested”.
[18] BRAZIL. Securities and Exchange Commission. Administrative Sanctioning Process CVM No. RJ 2012/6987. Rapporteur: Director Ana Novaes. Rio de Janeiro, August 13, 2013.
[19] ICVM 409 – Art. 57. The contracting of duly qualified or authorized third parties for the provision of administration services, as mentioned in art. 56, is at the discretion of the fund […]”
[20] BRAZIL. Securities and Exchange Commission. Market Development Superintendency. Public Hearing Report SDM No. 04/14.
[21] Regarding this matter, the CVM has already had the opportunity to clarify "that it is not establishing the joint liability regime through the Instruction, but rather requiring that the contract between the parties contain such a provision" (BRAZIL. Securities and Exchange Commission. Market Development Superintendency. Public Hearing Report SDM No. 05/2015).
[22] There is, of course, no guarantee of profitability from investing in funds, since winning or losing is part of the "game" of any variable income investment, as is the case with the acquisition of shares in an investment fund. What we are dealing with here, therefore, is a rule that seeks to protect shareholders in cases of irregular management practices, a situation in which shareholders would be protected by the contractual rule of joint liability between the manager and the administrator. This increases the level of investor protection against the risk of irregularities (which, it should be reiterated, has nothing to do with the risk of investment profitability).
[23] The only exceptions are auditing functions, in relation to which there would be no need for a contractual provision establishing the administrator's joint liability (Article 79 of ICVM 555).
[24] In practice, one could even consider that, in certain investment funds, the figure of the manager would be more important or emblematic than that of the administrator, but, legally, this would not be relevant, since, as already explained, the administrator has been elevated, by CVM regulation, to the central position in the investment fund, from where the relationships with the shareholders and service providers radiate.
[25] If an administrator, in breach of regulations, fails to include a joint and several liability clause, they will naturally be subject to administrative penalties by the CVM (Brazilian Securities and Exchange Commission). However, from a civil law perspective, joint and several liability only exists when it is explicitly stipulated in a contract signed by the administrator; otherwise, such liability cannot be presumed. Contractual civil liability should not be confused with administrative or criminal liability. The former seeks to protect the assets of the unit holders against irregular acts committed by professionals hired by the administrator on behalf of the investment fund, while administrative and criminal liability aims to punish offenders for irregular acts committed by them. Only administrative and criminal liability requires personal fault, unlike contractual joint and several liability, whose objective is precisely to protect the assets of the unit holders against irregular acts committed by the manager. If this were not the case, a contractual provision for joint and several liability would be entirely unnecessary, since the administrator would not even need a contractual clause to hold them liable for their own actions, as the existing legislation/regulation would already be sufficient.
[26] The new Article 1,368-D of the Civil Code does not prohibit joint liability, but only stipulates that those involved will define the rules of responsibility for the agents acting in the investment fund, which is in line with other recent new rules of the Civil Code, also inserted by the Economic Freedom Law, which favor the freedom of the parties and the exceptional nature of contractual revision. Therefore, there is only one civil law norm, pertaining to contractual matters, and with only permissive content.
[27] According to the wording of paragraph 1 of the new article 1,368-D, added to the Civil Code by Law 13,2847/19.
[28] MARTINS, Fran. Comments on the law of corporations, Vol. 2, Tome I, Rio de Janeiro: Forense, 1978. p. 409.
[29] SAMPAIO DE LACERDA, JC. Comments on the law of corporations, Vol. 3, São Paulo: Saraiva, 1978. p. 209.
[30] LACERDA TEIXEIRA, Egberto; TAVARES GUERREIRO, José Alexandre. Public limited companies in Brazilian law, Vol. 2. São Paulo: J. Bushatsky, 1979, Vol. 2. p. 479.
[31] CAMPINHOS, Sérgio. Public limited company course, Rio de Janeiro: Renovar, 2015. p. 384.
[32] Carlos Maximiliano, In his classic work "Hermeneutics and Application of Law," he succinctly defines analogy in the following terms: "Analogy legis It relies on an existing rule, applicable to a similar hypothesis in essence; analogy. jurisdiction "It makes use of the set of rules governing an institution that has fundamental points of contact with that which the positive texts failed to contemplate; the first finds reserves of solution in the repositories of legal precepts themselves; the second, in the general principles of Law" (MAXIMILIANO, Carlos. Hermeneutics and Application of Law Rio de Janeiro: Forense, 2001, 19th ed., p. 172). The lessons of José de Oliveira Ascensão also greatly clarify the issue of analogical application: “Analogy rests on the requirement, to which current thought is extremely sensitive, of the equal treatment of similar cases. If a rule establishes a certain way for a case, it is natural that, despite the silence, an analogous case should be resolved in the same way. A rule that governs the administration of limited liability companies can be applied to public limited companies, there being the same reason for deciding. The interpreter will then proceed from similar to similar, in the happy expression of our Ordinances.” (ASCENSÃO, José de Oliveira. Law – Introduction and general theory, Lisbon: Almedina, 1980. p. 402).