The Brazilian Securities and Exchange Commission (CVM) published the new regulatory framework for investment advisor activity (individuals and legal entities), which will positively impact the sector, including attraction of venture capital investments.
The regulatory framework will come into effect as of June 1, 2023 and comprises (i) CVM Regulation 178, which regulates investment advisors (replacing CVM Regulation 16) and (ii) CVM Regulation 179, which deals with remuneration practices in the intermediation of securities.
See below 8 of the main innovations that will impact the activities of individual and corporate investment advisers:
1. Possibility for investment advisors to enter into contracts with intermediaries, with or without exclusivity covenant: the new regulation will allow investment advisors to enter into service agreements with intermediaries (eg market-leading DTVMs), with or without an exclusivity clause.
In other words, investment advisors may be linked to a specific intermediary, with an exclusivity clause, or without exclusivity, being able to enter into a service contract for more than one intermediary at the same time, observing the rules of conflict of interests and suitability.
2. New framework will allow new options for the legal relationship between individual investment advisers and corporate investment advisers: the new regulation will allow corporate investment advisers to structure their human resources, hiring individual investment advisers as partners, employees or outsourced (service provider), according to its strategic planning.
There will be freedom for corporate investment advisors to decide the best way to retain talent for their businesses, as well as protect social capital, and provide greater dynamism in the entry and exit of people.
3. Legal entity investment advisors may be constituted as a simple partnership or company (Ltda. or S/A): until then, former self-employed investment agents had to mandatorily adopt the form of a simple partnership. The new framework will allow corporate investment advisors to also be constituted as Ltda. or S/A, which gives greater capital structure options, such as the creation of ordinary shares (ONs) and preferred shares (PNs) in corporations for talent retention plans.
4. Corporate investment advisors may attract equity investors: great innovation for the sector, the new regulation will allow corporate investment advisors to receive equity investments from local or foreign investors.
That is, investors in general, who are not registered investment advisors, will be able to acquire part of its capital, bringing another funding option to the sector and, possibly, a market consolidation movement in the short/medium term.
5. Investment advisor must provide greater transparency to the investor: the new regulation provides that the non-exclusive investment advisor must obtain investor consent on the policies, rules, procedures and internal controls to be observed by the investment advisor.
6. Investment advisors may make investment recommendations: in the service of providing information on the products offered and on the services provided by intermediaries on behalf of which they act, the new regulation will allow investment advisors to make investment recommendations to clients, and must ensure that the recommendations it makes are compatible with the specific policies, rules and procedures of the intermediaries regarding the duty to verify the adequacy of the investment to the client’s profile.
7. Appointment of a senior officer responsible for the corporate investment advisor: innovation of the new regulation, corporate investment advisors must have a professional registered as an investment advisor and have, among their duties, acting as a focal point before regulators, self-regulators and intermediaries.
The officer in charge must (i) provide all the information required by the regulation of the capital market, (ii) respond to requests for information made by the CVM and the accreditation entity, (iii) verify the compatibility between the policies, rules, procedures and internal controls of the different intermediaries, and (iv) act in an auxiliary, coordinated and subsidiary manner to the intermediary in relation to the supervision of the activities of all contracted investment advisors.
8. Intermediaries must supervise the activities of investment advisers: the new framework provides that the intermediary will be liable, before clients and third parties, for the acts performed by an investment adviser hired by him, within the limits of the investment adviser’s performance. The intermediary must supervise the internal structure, systems and processes of the investment adviser throughout the term of the agreement.
