Circular Letter CVM/SIN No. 12/2018

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP Code: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br Circular Letter No. 12/2018/CVM/SIN Rio de Janeiro, November 30, 2018

To administrators of securities portfolios

Subject: Segregation between portfolio administration or management activities and others performed by the legal entity

Dear Sirs,

1. As is known, Article 24 of CVM Instruction No. 558 provides that the exercise of the portfolio administration activity of securities "must be segregated from the other activities performed by the legal entity."

2. By "other activities," the interpretation of this technical area is that the concept involves any other activities performed by the legal entity that may, even only potentially or occasionally, offer conflicts of interest to the exercise of the activity of administration or management of resources performed by the regulated entity.

3. In inspections carried out by this superintendency, some specific types of lack of segregation have already been observed: (1) that between the administration or management activity and, on the other hand, the intermediation in operations with financial assets, including securities; (2) the segregation between the administration or management activity and the securities consulting activity, in cases where the company maintains registration and also exercises the consulting activity, in accordance with CVM Instruction No. 592; or even, (3) the segregation itself between the administration and management activities, in cases of companies or conglomerates that exercise both activities.

4. The specific case of the improper mixing, directly or indirectly, between the administration (with the exception provided for in the sole paragraph of Article 27 of CVM Instruction No. 558) or management activities and those of intermediation, however, brings particular concern to the technical area, as it creates an environment conducive to practices such as churning and other serious irregularities on the part of the administrator or manager, to the detriment of the investors involved.

5. In this specific context, some of these irregularities already identified by inspection are (1) the atypical and unjustified concentration in the execution of operations by funds with brokers linked to the manager or administrator; (2) the maintenance of structures, at the intermediary, dedicated exclusively to the execution of operations for funds managed or administered by persons linked 1, or (3) the sharing of structures (people, systems, files, facilities, among others) between the areas dedicated to the two activities. Thus, all are practices that must be avoided, regardless of the participant's business model.

1 As can be seen, the existence of a dedicated structure at the intermediary for the manager evidences a visceral link between the management company and its linked broker that is incompatible with the independence expected of the manager in making the decision on which broker to use. On the other hand, as such a dedicated structure would be remunerated in the same way by commissions (or equivalents), even if it were totally segregated from the rest of the intermediary's structure, the conflict of interest that motivated the CVM's regulatory decision provided for in Article 24 would persist therein, rendering the purpose of the regulation for the management of this conflict ineffective.

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP Code: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

6. In this sense, we reinforce the duty imposed by regulation that, in legal entities that exercise management or administration activities, these functions have adequate segregation between them and in relation to any others, so that they do not share, even partially, temporarily, or exceptionally, any structure, team, systems, or files. This segregation, moreover, must also be reflected (1) in the management company's business model, so that no favoring of intermediaries from the group to which the management or administration company belongs is evident; and (2) in the legal entity's organizational structure, so that, including with respect to authority levels, management, decision-making processes, and reporting lines, no inappropriate level of confusion persists between the two activities.

7. Thus, we also alert that the provision in Article 24, II, of CVM Instruction No. 558 should be interpreted in the sense that the "facilities, equipment, and information common to more than one sector of the company" provided for therein refer exclusively to those in which complete segregation is unfeasible (such as, for example, for administrative areas such as human resources or accounting), ensuring, even in this case, that such shared structures are conceived and monitored in such a way that they do not serve as an improper means for the leakage of sensitive information or documents from the portfolio administration or management areas to other areas of the legal entity and vice versa.

8. At this opportunity, we highlight the interpretation of this technical area that, since this segregation is a structure required by CVM regulation, its absence or insufficiency is also interpreted as a non-compliance with the provision of Article 4, VII, of CVM Instruction No. 558, and for this reason, the legal entity in these circumstances is subject to the cancellation of its registration as an administrator of securities portfolios, in accordance with Article 9, III or IV, as the case may be, of CVM Instruction No. 558.

Sincerely,

Digitally signed by
DANIEL WALTER MAEDA BERNARDO
Superintendent of Institutional Investor Relations