Investment Funds: Brazil’s Superior Court of Justice Debates Who Pays for Mismanagement

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Brazil’s Superior Court of Justice (STJ) has returned to the question of who is liable for losses caused by mismanagement of investment funds, in a case that could redraw the balance between protecting fund unitholders and giving the capital markets legal certainty.

The Debate Now Before the STJ

The dispute turns on a question that is simple to state but complex in its consequences: who must bear the losses created by mistaken decisions, omissions, or negligent conduct by the fund’s administrator or manager? The discussion involves the combined interpretation of Law 4.728/1965, Law 6.385/1976, and, above all, the rules of the CVM (Brazil’s Securities and Exchange Commission) that regulate the fund industry.

On one side is the argument that the fund itself, as a pool of resources, should answer with its assets for acts carried out in its administration. On the other is the view that liability should fall personally on the administrator, the manager, or other service providers, so as to protect the collective assets of the investors who entrusted their money to the structure.

The practical difference is considerable. Holding the fund liable means, in effect, that the unitholders themselves absorb the loss caused by mismanagement, because the segregated assets belong to them. Holding the administrator personally liable shifts the burden to the person who actually made the decisions and acted.

The Legal Nature of the Fund and What It Means

The crux of the debate lies in the unusual legal nature of investment funds. Although a fund has its own CNPJ (corporate taxpayer registry number), its own governing rules, and segregated assets, it does not have full legal personality. It is a special type of condominium (co-ownership) governed by statute and by sub-statutory regulations.

This hybrid framework creates operational difficulties when it comes to identifying the proper defendant in a damages action. Law 13.874/2019, by amending provisions of the Civil Code and introducing a regime that limits unitholder liability, signaled a move toward stronger separation of assets. But it did not fully resolve the question of internal liability among the administrator, the manager, and the unitholders.

The STJ’s settled case law has recognized that the fund itself may be sued in certain situations, especially when the dispute involves a contractual relationship entered into in the name of the investment vehicle itself. The new ruling, however, promises to refine the criteria for situations in which mismanagement amounts to negligent or intentional conduct attributable to the service provider.

There is also a regulatory dimension. The CVM has its own power to sanction administrators and managers, and administrative and civil liability must be reconciled so as to avoid bis in idem (double punishment for the same conduct) or, at the other extreme, gaps in protection.

Mismanagement is conduct by the administrator or manager that breaches the duty of care, the duty of loyalty, or the fund’s governing rules, and causes a financial loss to the fund.

What This Means for the Market and for Unitholders

The outcome of the case will directly affect how contracts in the industry are drafted. If the broad liability of the fund prevails, administrators are expected to strengthen limitation-of-liability clauses, expand insurance coverage, and raise management fees to price in the risk. If personal liability of the manager prevails, the trend is toward stricter selection of service providers and tighter internal governance of funds.

For investors, especially retail investors, the answer matters because it defines which assets can actually be reached if a loss occurs. When the judgment is against the fund itself, compensation comes out of the collective pocket. When it is against the administrator, there is a chance of recovering from outside assets, although those are often insufficient given the size of the losses seen in high-profile cases.

Capital markets specialists point out that the predictability of the rule is as important as the rule itself. Shifting case law on the issue creates uncertainty, makes the industry’s reputational credit more expensive, and discourages new unitholders from entering more sophisticated structures, such as real estate funds, private equity funds (fundos de investimento em participações), and private credit funds.

For now, we must wait for the court’s position to settle, in the hope that it will set objective parameters for when liability falls on the vehicle, on the service provider, or, in some cases, on both jointly and severally.

Frequently Asked Questions

What counts as mismanagement of an investment fund?

Mismanagement is conduct by the administrator or manager that breaches the duty of care, the duty of loyalty, or the fund’s governing rules, and causes a financial loss to the fund. Common examples include transactions involving conflicts of interest, investing in assets the fund’s rules prohibit, failing to assess risk properly, and neglecting to monitor the portfolio.

How can a unitholder seek compensation for losses?

A unitholder has two main routes. You can file an administrative complaint with the CVM, which may lead to sanctions proceedings against those responsible. You can also bring a civil lawsuit for damages against the administrator, the manager, or the fund itself, depending on the circumstances of the case and the legal theory adopted.

How will the STJ’s decision affect funds that already exist?

When the STJ settles on a standard, it tends to unify case law and to influence the contracts, governing rules, and governance structures of funds already operating. Funds in operation may need to review their internal liability policies, their contracts with service providers, and their insurance arrangements to conform to the standard the high court sets.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.