Resolution No. 4,661/18 of the National Monetary Council (CMN) will reach one and a half years since its publication and will enter into effect on November 29. Even after the time that has elapsed, some rules established for investment in what was previously called the “Real Estate Segment” are still under discussion. Appropriate regulation on the subject in order to guarantee legal certainty for real estate transactions carried out by closed-end private pension entities (EFPC) is lacking.

Resolution 4,661/18 established restrictions on real estate investment by EFPCs, prohibiting direct acquisition of real estate and forcing these entities to dispose of their direct property within 12 years (by May 28, 2030). Much has been discussed, however, regarding what the correct interpretation would be of the prohibition on "direct acquisition of real estate."

Acquisition of real estate means acquisition of ownership of immovable property which, in Brazilian law, occurs in three ways: by adverse possession, registration of title, or accession. For the analysis conducted in this article, only direct acquisition of property by registration of the title is of interest, that is, through registration of a transfer of title over the property (deed of sale and purchase, donation, exchange, accord and satisfaction, deed of sale), among others) at with competent Real Estate Registry Office in favor of an EFPC.

By prohibiting direct acquisition of real estate by EFPCs under any circumstances, a discussion arises as to whether the provision of real estate collateral in favor of EFPCs would also be prohibited, such as collateral security (AFG). In an AFG, fiduciary ownership and indirect possession of the property are transferred to the fiduciary creditor as collateral for a debt and, in order to start the foreclosure process in the event of non-payment of the secured debt, prior consolidation of ownership of the property in the name of the creditor is required, including via payment of ITBI (Real Estate Transfer Tax) and registration with the Real Estate Registry Office.

This discussion is further divided into two lines: for new transactions entered into after the beginning of the entrance into force of Resolution No. 4,661/18, in which it may be understood that it will not be possible to create an AFG; and for the execution of real estate guarantees (AFG and mortgages) for transactions entered into before May 29, 2018, but foreclosed on after the expiration of Resolution No. 4,661/18. In the latter case, would it be possible to award or grant via accord and satisfaction properties offered as collateral to the EFPCs?

In the case of property mortgages, the possibility of creation of real estate collateral is not addressed because, unlike with AFG, the creation of a mortgage does not transfer ownership (even fiduciary ownership) to the lender, nor is the beginning of foreclosure of the guarantee addressed, since there is no consolidation of ownership of the property in the name of the creditor for subsequent sale at auction. However, there is still discussion regarding the possibility of awarding the property when there is no third party interested in the auction and regarding the possibility of emptying the equity value of the real estate as a result of this restriction, which harms the interests of EFPCs and their participants.

This discussion on the correct interpretation and scope of the prohibition on direct acquisition of real estate by EFPCs gives rise to many questions:

• How does one put into operation, in practice, the execution of an AFG set up in favor of an EFPC that requires prior consolidation of ownership of the property in the name of the creditor before subsequent sale in extrajudicial auction that may even result in the awarding of the property to the creditor itself?
• Will an EFPC be able to consolidate ownership of the property in its name, pursuant to Resolution No. 4,661/18, even though the AFG was created before May 29, 2018, for the purposes of execution?
• Will the EFPC be able to have the property given as collateral awarded and become its owner, even if temporarily, considering the obligation to dispose of all properties or pay them up in FII within 12 years?
• If it is found that it is possible to consolidate and award the property because the secured interest in the real estate was created before May 29, 2018, this property, when acquired by an EFPC, may the concept of “stock” be included so as to eliminate the concentration limit per issuer of up to 25% of shareholders' equity in the event of subsequent payment of the property by the EFPC in an FII?

Although Resolution No. 4,661/18 has been in force for a year and a half, all of these questions remain unanswered, which makes EFPCs’ activities and new investments in the real estate segment more difficult.

From a literal interpretation of the resolution (which does not provide for any exceptions), it seems obvious that EFPCs may no longer directly purchase any property after May 29, 2018, even as a result of foreclosure (mortgage or AFG) or accord and satisfaction with real estate arising from debts agreed upon or created prior to the entrance into force of Resolution No. 4,661/18. However, this does not appear to have been the intention of the CMN when it formulated the resolution, and EFPCs have been seeking alternative solutions to enable real estate collateral to be foreclosed on in order to balance both their actuarial objectives and their profitability and obligations imposed on them by the rule in question.

A literal interpretation of the letter of the law does not, in fact, seem to be the best way out, considering that, the objectives of EFPCs include precisely the guarantee of return on their investments and solvency of their assets in order to assure to their participants an adequate return and therefore, a satisfactory benefit. Seeking to preserve a minimum of legal certainty, foreclosure on real estate guarantees, including through the direct awarding of properties given as collateral, and accord and satisfaction itself for these properties in transactions entered into before May 28, 2018 (even if foreclosed on after the entry force of Resolution No. 4,661/18) should continue to be legally supported in the name of preserving the interests of the EFPCs themselves and their participants and beneficiaries.

At the present time, however, the lack of clarity on how the issue will actually be dealt with by Previc (National Supplementary Pensions Bureau), the body responsible for the interpretation and supervision of Resolution 4,661/18, and by the Judiciary creates a scenario of great legal uncertainty. Considering the vagueness surrounding Previc itself, which may possibly merge with Susep (the Private Insurance Bureau), there is no clear outlook as to when we will have a definitive solution for the issue. On a case-by-case basis, the recommendation that has been given to EFPCs is to formalize prior consultations with Previc in order to validate transactions arising from foreclosure on real estate guarantees.