Latin Finance - May 2008 - 71

brazil cvm Enabling and Enforcing by Dan Shirai T he boom in Brazilian assets over the past four years was no mere accident. Although the country relied on a surge of global liquidity in 2003 to spark equity activity, officials in Brazil’s public and private sectors had been working years to prepare for that moment. Maria Helena Santana, the CVM’s president, has been crucial to this process. Halfway through a 12-year tenure at the Bovespa, Santana led an effort to establish the higher corporate governance standard called Novo Mercado, which went into effect in 2000. In 2006, she moved over to the CVM as commissioner, becoming president in 2007, to tackle a much broader range of issues that influence the fastest changing areas in Brazil’s market. Fund regulations, insider trading, securitization and transparency are among many such issues. From her office in Rio de Janeiro, Santana tells LatinFinance about where Brazil’s markets are headed. Brazil is drawing in an increasingly broad range of investor types, both domestically and internationally. The regulator sees itself as an enabler as well as an enforcer. We’re allowing funds to invest in other assets within the sector that are not strictly land or property. For example, debt instruments or shares in real estate companies, as well as securitization instruments issued by an FIDC. Beyond that we’d like to create different categories of REITs so investors identify what the focus of a particular fund is – whether it’s an existing asset, or a development-oriented fund – which carries more construction risk – or if it is one that focuses on real estate securities. In the past 10 years, what was the biggest development for local markets? A better REIT for liquidity: Santana be able to provide liquidity for those [investors] who lend to and invest in the real estate sector – an activity that is very positive with an important multiplier effect from the point of view of labor utilization and employment. And if you talk about the homebuilding sector, it helps with the housing deficit problem we have. The most obvious thing could be that this positive cycle we’re experiencing today has [been spurred by] global liquidity. It is no coincidence that Brazil’s primary equity market took off during a period when global liquidity was very abundant. We can also attribute this to Brazil’s more stable macroeconomic situation, with an outlook for growth that is looking better and better. And certainly this has to do with the market moment that we’re living. But if it were only up to that, then I think we’d see other large emerging economies with functioning, well structured capital markets also undergoing extraordinary improvement – both in terms of numbers and quality. I How is the CVM increasing local investors’ access to overseas assets? We just edited an instruction that permits funds to participate in certain vehicles that invest 100% of their assets abroad. These are restricted to local qualified institutional buyers and can be used for all types of assets. [Investment managers] can open new funds or modify prospectuses for existing funds to do so. Separately, all the other fund types can now invest 10% abroad, while multimercado funds can allocate 20% abroad without making modifications. This is another alternative investors now have. What changes are being considered? We’ve proposed the following, which are still subject to modifications, of course: First of all, a major simplification in the structure of the fund and how it works. We’re making it more adaptable so it can be used under different kinds of circumstances, likening it to our private equity fund, called a FIP. FIPs today are [governed by] a good regulation that has been tested and commended. The CVM is reworking its REIT law. What are the benefits? The REIT structure is being used currently in Brazil, but not to its full potential. With these changes we’ll be able to do that. The benefit would be the same as for all types of market instruments. A better REIT would UPDATE For more on Brazilian regulation see www.latinfinance.com > May 2008 LATINFINANCE 71

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Latin Finance - May 2008

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