One of the key responsibilities of Brazilian fund managers in the face of default situations and asset depreciation within their portfolios is the duty to “act” diligently.
The current Brazilian economic scenario has once again placed funds such as FIDC (receivables), FIAGRO (agribusiness), FII (real estate), and FIP (equity) managers on high compliance alert, particularly concerning their fiduciary duty to act diligently in protecting the fund’s assets, in accordance with Brazilian Securities and Exchange Commission (CVM) Resolution 175.
Below is a breakdown of each investment fund class and the specific provisions of CVM Resolution 175 that mandate managers’ proactive stance in safeguarding portfolio assets:
1. Duty of Diligence of Receivables Investment Fund (FIDC) Managers: CVM Resolution 175, in Annex II, which specifically governs FIDCs, establishes that the manager is responsible for monitoring “the credit rights portfolio’s payment compliance and, concerning overdue and unpaid credit rights, ensuring that collection procedures are undertaken, provided that this last obligation does not apply in cases where exemptions are stipulated in the regulations.”
As an investment vehicle that acquires credit rights, FIDC managers must closely adhere to CVM Resolution 175 and the terms of the fund’s regulations to avoid liability for inaction or failure to exercise due diligence in protecting investors’ interests concerning portfolio assets.
2. Duty of Diligence of Real Estate Investment Fund (FII) Managers: FII managers must comply with the general provisions of CVM Resolution 175, which require managers to adopt conduct standards, including: (i) “exercising, or ensuring that all rights arising from the fund’s assets are exercised“; and (ii) “employing, in defense of unitholders’ rights, the diligence required by the circumstances, carrying out all necessary acts to ensure such rights, and undertaking applicable judicial, extrajudicial, and arbitral measures.”
3. Duty of Diligence of Agribusiness Investment Fund (FIAGRO) Managers: In addition to the general obligations imposed on fund managers under CVM Resolution 175, Annex VI, which specifically regulates FIAGROs, mandates that managers must “ensure the preservation of the rural property’s land and environmental integrity.”
4. Duty of Diligence of Equity Investment Fund (FIP) Managers: In addition to the obligations outlined in the general section of CVM Resolution 175, Annex IV, which specifically regulates FIPs, stipulates that FIP managers must ensure the proper safeguarding of assets, including: (i) “receiving, verifying, and keeping custody of documentation that evidences and confirms the existence of asset backing“; (ii) “ensuring that supporting asset documentation is maintained (…) updated and in perfect order“; and (iii) “collecting and receiving, on behalf of the share class, revenues and any other payments related to the custodied assets.”
The analysis of CVM rulings and caselaw developments highlights the regulator’s increasing scrutiny over managers’ duty of diligence in overseeing portfolio assets, including the imposition of significant penalties on both legal entities and individuals.
Managers must remain vigilant regarding their fiduciary duties to act and document their actions in exercising fund rights, thereby mitigating compliance risks and potential liability before investors and regulators.