On February 22, 2024, the Brazilian Securities and Exchange Commission (“CVM”) released the letter 01/2024 to the market prohibiting the financial leverage of real estate investment funds (“Letter”).

Although Article 42 of Federal Law No. 14,754, dated as of December 12, 2023, allows real estate investment funds to encumber real estate assets as collateral to satisfy a debt, CVM has prohibited this practice until the conflict with ‘Resolução CVM No. 175’ (“CVM Resolution No. 175”) is administratively addressed – and potentially solved – by the entity.

Article 32 of Appendix III to CVM Resolution No. 175 expressly prohibits investment fund managers from encumbering real estate assets held by the investment fund or using resources to provide guarantees, endorsements, acceptances, or co-obligations in debt transactions. It is important to note that these provisions are directly conflicting; while one permits, the other prohibits.

However, considering that CVM has jurisdiction to regulate and oversee the incorporation, business activity, and administration of investment funds, the understanding of the agency is that CVM Resolution No. 175 should prevail.

Therefore, CVM should regulate the issue of the matter, and until then, investment funds cannot avail themselves of the statutory provision.

We emphasize that the prohibition imposed by CVM is valid and binding. Therefore, non-compliant parties may be penalized for violating regulations under effect.