|No to bureaucracy|
A CVM Instruction regarding investment funds may enable managers to vote in shareholders’ meetings.
A subtle change in the regulation of investment funds may increase the participation of fund managers in the shareholders’ meetings of publicly-traded companies: the permission so that they themselves, and not the fund administrators, can represent shareholders in shareholders’ meetings. The alteration would reduce the bureaucracy that hinders managers’ engagement in these forums. The good news is that it may be about to become effective, with the mini-reform of Instruction 409/04, which covers investment funds.
Discussions to promote changes to the rules are at an advanced stage in the Brazilian Securities and Exchange Commission (CVM), although there is still no precise information on when the document will be open for public consultation. It is not a reform of the Instruction, but rather small adjustments, explains Francisco José Bastos Santos, the autarchy’s superintendent of institutional investor relations.
At the request of the Brazilian Association of Financial and Capital Market Entities (Anbima), the autarchy is analyzing if it will include an additional point in the new rules regarding the participation of managers and administrators in shareholders’ meetings. “This is an agenda that benefits everyone. It reduces the bureaucracy for administrators and managers, enables managers to be more active and generate more value, as well as promoting engagement with the shareholder base and facilitating access to the company and its shareholders”, says Régis Abreu, director of Anbima and coordinator of the committee on equity funds.
The problem is the division of assignments of administrators and managers. The former are legally responsible for the investment fund, and it is their responsibility to represent shareholders at shareholders’ meetings of the companies in which they have invested. Administrators carry out bureaucratic functions, such as the calculation of shares and the execution of withdrawals and accounting, and they may outsource certain functions, such as custody and management. “The rule is that the administrator must act in the shareholders’ best interests, and that includes voting”, says the attorney Eduardo Herzkowicz, partner at the Souza Cescon law firm.
The managers, on the other hand, are the ones responsible for investment decisions. It is up to them to choose which shares will be part of the fund portfolio and to monitor the companies in which they have invested. They are, therefore, most capable of representing shareholders at company shareholders’ meetings. For some, the vote is not a fiduciary responsibility, but rather a management responsibility.
But as the regulations determine that administrators are the ones who should vote, managers need proxies to make their votes count. “The regulation does not prevent managers from voting, but it is a bureaucratic process. It is necessary to remember two weeks in advance when meetings are going to occur if they want to vote”, complains Flavio Rissato Adorno, partner at Orbe Investmentos. Although Orbe is always attentive to deadlines, he remembers at least one time in which he almost could not vote because the documentation arrived at the last minute. Orbe votes at shareholders’ meetings of companies whose shares represent more than 10% of fund assets, or on relevant subjects such as the approval of company by-laws and the establishment of stock option policies.
BNY Mellon Serviços Financeiros, one of the leading administrators in the market, is starting to issue general or single proxies, valid for one year, which do not specify a company, event or date. Through these proxies, the administrator can gives the manager the ability to delegate the right of participation in shareholders’ meetings to people that he finds suitable. “This is a great advance and it considerably reduces bureaucracy, but it would be ideal if the legislation recognized that the manager is in fact responsible for the vote”, says Luiz Motta, manager of Investidor Profissional. Part of the firm’s philosophy is to participate in all shareholders’ meetings, even those considered merely bureaucratic, in order to strengthen the ties with the companies in which it has invested.
The inclusion in the rule of the possibility for the manager to vote would make things easier, especially for independent managers, which are precisely those that are normally more active. In these firms, administration is always carried out by another institution. For funds connected to retail banks, although the procedure to obtain the proxy is the same, everything happens faster because the administrator and the manager are part of the same group.
This is an exclusive problem of funds structured along the guidelines of 409/04. This difficulty does not exist with private equity funds (FIPs). Instruction 391/03, which regulates this type of investment, covers the possibility of administrators delegating the vote to managers. “For this to happen, it only has to be written in the fund rules and regulations”, says the attorney Luiz Roberto de Assis, from the firm Levy & Salomão.
Something along the lines of Instruction 391/03 could be achieved in 409/04. Up to now, the modification of three points is certain: the management of the liquidity of investment funds; the adoption of a simplified prospectus; and the introduction of an annual report on returns. With regards to the first point, an improvement in management will be proposed to make it clear that administrators and managers must be diligent in ensuring that the liquidity of the portfolio is compatible with its liabilities. It will be up to the two of them to guarantee that they did their best to prevent any discrepancies between assets and liabilities of the fund that could lead to problems in withdrawals. This aims to avoid, for example, a fund with investments in assets that do not trade very much having daily liquidity and, therefore, having difficulty in paying shareholders when necessary.
The objective of the simplified prospectus is to simplify reading and improve retail investor understanding. And the adoption of the annual report on returns should shed light on the impact that expenses and fees charged by administrators have on the fund’s profitability.