Gustavo Tavares Borba[1]
Luiza Coelho da Rocha[2]
1. Introduction
CVM Resolution No. 175/2023 introduced substantial changes to the regulation of investment funds, unifying the rules for various types of funds into a single regulatory instrument, including Investment Funds in Credit Rights (FIDCs).
Prior to Resolution 175, when the rules regarding FIDC (Investment Funds in Credit Rights) were in CVM Instruction No. 356/2001, there was an absolute prohibition against the manager, consultant, custodian, administrator, and related parties being originators or assignors of the credit to be acquired by the FIDC, as well as some uncertainty about the scope of the term "origination," especially when the manager or specialized consultant promoted the evaluation of the issuer of the "security" that would subsequently be created and assigned to the FIDC, in a system that was mistakenly...[3] included within a broader concept of "originating to distribute".
This article aims to analyze the new system established in Resolution 175 for defining issues related to the origination and assignment of credit by agents providing services to FIDC (Investment Funds in Credit Rights).
2. Credit Origination in FIDCs: A Brief Contextualization
Credit Rights Investment Funds (FIDCs) are collective investment vehicles whose main objective is the acquisition of credit rights, regardless of their nature (e.g., financial, commercial, industrial, or real estate). These credit rights are consolidated into a portfolio, providing fund investors with the possibility of investing their resources in a diversified credit portfolio.
Credit origination involves the creation of credit. A public limited company, when issuing debentures, would be originating the credit and with it the securities that embody it. In a purchase and sale transaction with future payment, both contracting parties would be originating, through the aforementioned legal transaction, the credit arising from the operation. Originating, therefore, as the name itself indicates, consists of creating the credit, so that the originator would participate centrally and formally in the act or legal transaction that generated the credit.
The repealed ICVM 356/2001 did not define what constituted the "origination" of a credit, generating, due to this omission, insecurity in the market, as in the case of the aforementioned business model, in which the specialized consultant or manager previously assesses the capacity of the future issuer of the security (usually a CCB – bank credit certificate) that would be acquired by the FIDC subsequently. In this model (recurrent in the market), the manager/consultant would participate in the origination process (performing the prior assessment) but would not actually originate the credit, as they would not be part of the legal act or transaction that created it. Resolution 175, as will be analyzed later, expressly addressed the concept of "origination," consequently reducing the insecurity that existed in this area.
Since the acquisition of receivables by a FIDC (Investment Fund in Credit Rights) involves inherent business risks, ranging from debtor default to macroeconomic variations that can impact the present value of the receivables, it is consequently necessary to manage these risks. This includes in-depth technical analyses to assess the probability of default by the debtor and the definition of clear policies and procedures to deal with different risk scenarios. The manager is responsible for analyzing various aspects of the debtor and the receivables to be acquired by the FIDC, verifying the regularity of the issuing company, the debtor's assets and debt structure, its capacity to generate resources, the collateral and guarantees of the debt, among other aspects that may impact the future receipt of the receivables.
When the transferor (assignor) or originator of the credit is one of the fund's service providers with the authority to choose/provide opinions on the credit (manager and consultant) or who has an essential function in the fund's operational structure (administrator), as well as the parties related to them, parallel interests and incentives arise that may compromise the impartial and technical analysis regarding the acquisition of credit.[4].
Prior to the changes brought about by Resolution 175, the acquisition of credit originated or assigned by the manager, consultant, administrator, or custodian of the FIDC (Investment Fund in Credit Rights), as well as by parties related to them, was objectively and totally prohibited by § 2 of Article 39 of ICVM 356.[5].
The aforementioned revoked rule sought to prevent conflicts of interest among professionals providing services to the fund, especially the manager, who would have the function of choosing the assets to be acquired by the FIDC (Investment Fund in Credit Rights) and, consequently, would have inappropriate incentives to acquire credits assigned or originated by him or by parties related to him.
When originating or assigning a credit, the manager would have theoretical and personal interests that could affect the impartial assessment and proper analysis of the convenience and opportunity of the FIDC's acquisition of the credit. This possible contamination of the credit assessment by personal interests was the basis that justified the rule in § 2 of article 39 of ICVM 356, through which it sought to prevent the possibility that the manager, consultant, administrator or custodian would prioritize personal interests to the detriment of the interests of the quota holders, which must always be primarily preserved by the agents who provide services to the fund (a fiduciary duty that is inherent in the legal and regulatory attribution of taking care of the interests of others).
In this regard, it is necessary to transcribe the excerpt from the public hearing report of ICVM 531/12 (which inserted the aforementioned § 2 into ICVM 356/01), which justifies the aforementioned prohibitive rule:
Firstly, it should be noted that the prohibition imposed by paragraph 2 of article 39 also sought to... to inhibit the occurrence of one of the main conflicts in the structuring of securitization products. – originate to distribute – in which the credits They are granted without due diligence with a view to their subsequent transfer to third parties.. Therefore, in order to make it clearer that the prohibition also applies to the origination of credit rights, the wording of article 39, §2 was changed.
3. Manager's Participation in the Credit Origination Process
The activities and responsibilities of the FIDC manager include identifying credit opportunities that are aligned with the fund's strategy, carefully analyzing potential borrowers, and assessing the risks involved in acquiring the credit.
Furthermore, it is the manager's responsibility to negotiate the terms of the transaction, always aiming to maximize the fund's return within the risk limits established in the regulations. This step requires expertise and market knowledge, necessitating an understanding of the sectors in which the debtors operate, their dynamics, and peculiarities. The ability to assess the financial health of debtors and the quality of their credits is crucial to ensuring that the fund's portfolio is composed of quality assets that comply with the regulations.
In situations where a manager or consultant was tasked with assessing the "suitability" of a potential debtor who would issue credit to be acquired by the FIDC (Investment Fund in Credit Rights) in the future, questions arose regarding the applicability of the prohibition in § 2 of Article 39 of ICVM 356/2001. This was because it could be considered that the manager might have a personal interest in the FIDC acquiring credit that would be issued by a third party already bearing their "endorsement.".
Since the repealed ICVM 356/2001 did not define what would be... origination, There was some uncertainty about the scope of the term, such as whether or not it would include the situation in which, without actually participating in the creation of the credit, the manager was still somehow involved in the origination process, through prospecting and endorsing the suitability of the future debtor.[6].
In this context, it is observed that there are professionals who have some indirect relationship with the creation of credit, such as the consultant or manager who previously assesses the future debtor, but who should not be considered originators of the credit, since it does not arise (originate) directly from acts or legal transactions in which these agents are a party. In the case of the consultant/manager who analyzes the financial soundness of the future debtor, it seems to me that this action would be carried out before the origination of the credit, which would only then be effectively created.
Although, in this context, the manager/consultant should not be considered the originator of the credit, they would participate previously and indirectly in the process. lato sensu Regarding the creation of credit, since it would only effectively arise after the prior approval of the future debtor by the manager/consultant. Thus, although it did not properly originate the credit, it was not unreasonable to consider the presence of a conflict of interest involved in the situation.
To analyze the conflict of interest in this situation, it would be necessary to examine whether the manager/consultant, by "endorsing" the future debtor of the credit to be acquired by the FIDC, would be subject to theoretical incentives to approve the acquisition of these securities, such that these incentives could theoretically affect the impartiality at the time of evaluating the acquisition of the credit.
In this context, despite the prohibition established by § 2 of article 39 regarding the manager, consultant, administrator, and custodian of the FIDC being originators Regarding credit, uncertainty persisted concerning the situation in which these agents, or parties related to them, had an indirect role in the credit origination process, largely due to the absence of a regulatory definition of the concept of... origination. Although it seems to us that, under normal conditions, these agents who pre-approve the future assignee or originator of the credit should not be considered originators of the credit nor equated to them, even due to the absence of incentives that could compromise the impartial and technical analysis of the credit (the analysis would only be anticipated), this issue was still far from being completely clarified, so the new rules of Resolution 175 came at a good time to provide greater legal certainty to these operations.
4. CVM Resolution 175: New Guidelines for Credit Origination and Assignment
The new CVM Resolution No. 175/2023, which came into effect on October 2, 2023, introduced innovation in the regulation of this issue by defining, in its Annex II (which deals specifically with FIDC), who would be the originator of the credit:
XVIII – originator: agent acting in primary granting of credit, competing directly for the formation of the credit right, which includes those acting in the capacity of representative or agent of one of the counterparties in the credit transaction, noting that the concept encompasses agents who maintain a commercial relationship with the debtor when granting credit, but is not limited to these agents; (gn)
This definition clarifies that the credit originator is the fundamental agent that participates. primary and directly In the creation of credit, the originator plays an essential role in the formation of the credit right or in accessory aspects thereof. Thus, the new resolution attempted to resolve previous doubts about who the originator of the credit would be, reducing uncertainty regarding the participation of the manager, consultant, or administrator in preliminary phases that do not directly involve the business or legal act that effectively created the credit.
Another innovation introduced by Resolution 175, for cases that do not involve the distribution of quotas to the general public (art. 13, IV, b)[7], was the definition of exceptional hypotheses (art. 42) in which it was permitted that the FIDC investment policy Provide for the possibility of acquiring credit rights originated or assigned by an administrator, manager, consultant, or related parties, provided that certain conditions are met:
Article 42. The acquisition of credit rights originated or assigned by the administrator, manager, specialized consultancy, or parties related to them is prohibited.
1. The regulation may override the prohibition set forth in the main clause, provided that:
I – the manager, the registering entity, and the custodian of the credit rights are not related parties to each other; and
II – the registering entity and the custodian are not related parties to the originator or assignor.
It is clear that the new resolution, in addition to seeking to resolve the ambiguity surrounding the concept of originator, It also explicitly allows, when foreseen in the fund's investment policy, the acquisition of credits originated or assigned by the manager, administrator, or consultant, provided that certain requirements are met: a) it is not a fund whose units are distributed to the general public; b) the manager, the registering entity, and the custodian are not related parties to each other; and c) the registering entity and the custodian are not related to the originator or assignor. Furthermore, the requirement indicated in item “b” above is waived when dealing with a class intended exclusively for professional investors (art. 42, § 2º).
Regarding the class exclusively intended for professional investors[8], The flexibility went even further, to the point that the restrictions of item I of § 2 of article 42 (hypothesis “b” of the previous paragraph) would not be applicable, so that, depending on the rule of the regulation, it would only be necessary that the registering entity and the custodian not be related to the assignor/originator of the credit.
Resolution 175 demonstrates a balance between the risks of irregular conduct, the evolutionary stage of the FIDC (Investment Fund in Credit Rights) industry, and the appropriate calibration of investor protection rules, including a rational approach to the reasons and conditions justifying the prohibitions on certain agents providing services to the FIDC from participating in the origination and/or assignment of credits to the fund. The justification for this new approach is expressed in the Public Hearing Report that preceded the issuance of Resolution 175/2022:
Recognizing the evolution of the FIDC industry, particularly regarding the control of financial flows and credit rights, and considering that regulation through restrictions is an extreme measure to be used sparingly, the CVM is willing to review the restriction. However, the restriction stemmed from specific cases whose repetition is important to avoid and whose occurrence becomes more likely if assignment operations involving service providers, their related parties, and the fund are regulated solely through [the following]. disclosure. That being said, the decision was made to maintain the logic of checks and balances, capable of keeping the regulator safe while making regulations more flexible. Thus, the operations in question are now permitted, including in the classic originate-to-distribute model; however, in order to mitigate the risks related to the existence, integrity, and ownership of credit rights, independence between the main agents of the operation remains required, with a specific and punctual flexibility for classes exclusively intended for professional investors (Article 42, § 2). Regarding suggestions for relaxing the requirement for restricted classes beyond the aforementioned exemption, it was considered more appropriate that, at this initial stage, the exemption remains possible only for classes for professional investors, capable of assessing the risks of related-party transactions on their own.
The CVM's decision to acknowledge the complexity of the issue and attempt to regulate prohibitions arising from conflicts of interest of certain agents providing services to the fund in a more calibrated manner, moving away from a mere general prohibition of operations involving the origination/assignment of credits by these agents, demonstrates an attempt at regulatory evolution. However, the risks of increased irregularities demand, in turn, careful supervision by the regulatory body.
It is beneficial for the CVM (Brazilian Securities and Exchange Commission) to recognize the dynamics of the current market for Investment Funds in Credit Rights (FIDCs) and the evolution of control systems that has occurred in this segment, in order to justifiably allow the direct participation of managers, administrators, and consultants in the "origination" or assignment of credits to the fund, with the restriction that this possibility is limited to classes intended for professional/qualified investors and that certain conditions are observed to enable the functioning of a system of "checks and balances" that reduces the risk of expropriation of investors by conflicted service providers.
As one of the authors of this article has already had the opportunity to observe[9], There are multiple strategies for "dealing with" the phenomenon of conflict of interest, and the effectiveness of each mechanism adopted will depend on the conditions that "actually" prevail in a given environment. In this case, the CVM (Brazilian Securities and Exchange Commission), attentive to the current market reality and the tendency for different agents operating within the fund to contain potential irregularities, has expanded the possibilities for credit origination and assignment by administrators, managers, and consultants, provided that they are not related parties to each other, and that the custodian and registering entity are not related to the originator/assignor.
The direct participation of the manager, administrator, or consultant in the origination/assignment of credits to the FIDC (Investment Fund in Credit Rights) may increase the risk of expropriation for investors due to the incentives created by the conflict of interest situation. However, the requirement of independence among service providers, coupled with the absence of a relationship between the originator/assignor and the registering entity and custodian, promotes an environment of mutual controls that, in theory, can be effective in inhibiting illicit acts by the conflicted party. Therefore, transactions that fall under the concept of "originating to distribute" are not precluded, which can increase the overall efficiency of the FIDC market without substantially increasing the risks of irregularities arising from the conflicts of interest that the situation structurally entails.
In theory, the system adopted by CVM Resolution 175 appears to be adequate, rational, and compatible with the stage of evolution of the FIDC market. However, close supervision by the regulatory body is necessary to verify whether the theoretical system of "checks and balances" will actually work in practice. Given the recent nature of this new regulation, it is important to emphasize that we still lack clarity on its effectiveness in preventing irregularities.
It is essential that the CVM (Brazilian Securities and Exchange Commission) continues to improve regulations in order to increase market efficiency, but always maintaining adequate rules for investor protection, without which the market will have less strength than its potential. A delicate balance is needed between innovation in business models within the FIDC (Investment Funds in Credit Rights) environment (to allow, for example, the strategy known as "originate to distribute") and the prudence that should guide capital market regulation, so as to stimulate sustainable and responsible growth through rules that seek to increase the efficiency of this sector, but without neglecting the adequate protection of investors.
Conclusion
CVM Resolution No. 175/2023 marks a significant advance for the investment fund industry, promoting substantial changes in the regulation of the respective market. The definition of the concept of origination This generates greater legal certainty, and the introduction of more customized rules on the assignment or origination of credit by the manager, administrator, or consultant of the FIDC opens the possibility that, in the case of classes intended for professional and qualified investors, these agents may originate and/or assign credit to the FIDC, provided that certain independence requirements are observed by some of the service providers to the fund, on the assumption that a system of checks and balances will operate (involving the manager, administrator, and consultant, as well as the custodian and the registering entity) that will be able to prevent irregular acts to the detriment of the investor.
These new rules appear to create a theoretically balanced "mechanism" for dealing with these situations tainted by conflicts of interest, which could generate a more efficient environment by not excluding business models involving the concept of "originating to distribute" from the market, while preserving a system capable of containing irregular conduct by conflicted parties.
Although the new model proposed by Resolution 175 seems beneficial, the effective functioning of this system must be closely monitored by the CVM (Brazilian Securities and Exchange Commission) in order to avoid situations of expropriation of investors by conflicted agents, with the consequent degradation of the FIDC (Investment Fund in Credit Rights) market.
[1] Master's and PhD from PUC/SP. Visiting Scholar in Columbia Law School. Coordinator of the Capital Markets module of the LLM in Corporate Law and Capital Markets at FGV/RJ. Former Director of the CVM (Brazilian Securities and Exchange Commission). Former Chief Prosecutor of the Commercial Registry of Rio de Janeiro. Partner at the law firm Tavares Borba Advogados.
[2] Bachelor's degree in International Relations and Law from PUC/RJ. Master of Laws for the New York University School of Law. International Lawyer from the Office Scoolidge, Peters, Russotti & Fox LLP.
[3] It is considered mistaken because whoever evaluates a future issuer of the security is not originating a credit, as will be explained in the following chapter.
[4] When the conflict involves the manager or consultant, who will decide and give their opinion, respectively, on the acquisition of the credit by the FIDC (Investment Fund in Credit Rights), the conflict of interest tends to be even more intense.
[5] Art. 39 – (…)
- 2. The administrator is prohibited from..., manager, custodian and consultant specialized or parts related to them, as defined by the accounting rules that address this subject, To assign or originate, directly or indirectly, credit rights to the funds in which they operate.
[6] Although the CVM (Brazilian Securities and Exchange Commission) did not, in its precedents regarding ICVM 356/2001, analyze the specific issue of prospecting and prior evaluation of the future debtor by the manager, the regulator has already had the opportunity to define, in Memorandum No. 27/2019-CVM/SIN/GIES, of November 11, 2019, that "coordinators and distributors" of infrastructure debentures should not be considered originators of the security, since the expression "originate" does not encompass the activity of intermediation in public offerings. This understanding is currently enshrined in Article 2, § 2, of CVM Resolution 175. (§ 2 – An institution that is exclusively involved in a public offering of securities is not considered an originator.).”).
[7] Article 13. The distribution of quotas to the general public requires the cumulative fulfillment of the following requirements: (...)
IV – the investment policy does not allow investment in:
(…)
- b) credit rights originated or assigned by the administrator, manager, specialized consultancy, custodian, entity registering the credit rights and related parties; and
[8] It should be noted that one of the innovations of CVM Resolution 175 was to allow the general public to acquire FIDC quotas, not just qualified and professional investors.
[9] Borba, Gustavo Tavares. Conflict of Interests in the Corporate Environment. São Paulo: Latin Quarter, 2023.