The Securities and Exchange Commission of Brazil (CVM) recently issued two instructions amending and adding provisions to CVM Instruction 391 of July 16, 2003 on the organization, operation and management of private equity funds (FIPs): CVM Instruction 496 of May 11, 2011, and CVM Instruction 498 of June 13, 2011.

Instruction 391 obligated FIPs to allocate part of their shareholders’ deposits to stocks, debentures, subscription warrants, or other bonds and securities convertible into or exchangeable for stocks in publicly–traded or privately–held companies. The Instruction did not, however, establish minimum or maximum allocation limits for such assets. FIPs could therefore freely determine where they would invest, through their respective internal regulations. However, that freedom of investment was curtailed by Instruction 496, which added article 6–A to the prior rules, thereby determining that FIPs would need to allocate at least 90% of shareholders’ deposits to the target assets.

Instruction 496 also amended the time limitations on investment realization by FIPs. As of May 12, 2011, funds raised by private equity funds as paying–in of shares on account of a capital call should be invested in the target assets by the last working day of the second month subsequent to the pay–in period’s initial date. By creating this obligation, the CVM intends to prevent funds from increasing their capital without the respective investment in target assets.

By issuing its Instruction 496, the regulator sought to bring Brazilian equity funds closer to their original purpose, which is to make long–term investments in target companies and exert effective influence on their decision–making.

Moreover, bearing in mind the lack of uniformity between the rules formerly applicable to investment funds (including FIPs), the CVM issued its Instruction 498 on June 7, 2011, by which it standardized and established rules pertaining to the procedures and terms for trading of closed–end investment fund shares, a category which includes FIPs.

Aiming to contemplate the many specificities of FIPs, Instruction 498 establishes that these funds’ shares may only be traded on regulated markets under the following circumstances: 1) if the shares have been distributed publicly through a CVM–registered offering; 2) if the shares have been distributed in a restricted–effort offering; 3) if the shares have already been authorized for trading in regulated markets; or 4) if the shares have previously been registered for trading, including the presentation of a prospectus.

Hence, through its Instruction 498, the CVM sought to standardize the procedures and conditions for FIP share trading, in a bid to encourage the secondary market trading of private equity fund shares.