Circular Letter CVM/SMI 03/2021

16/07/2021 SEI/CVM - 1304690 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1373335&infra_sistema=… 1/5 SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br Circular Letter No. 3/2021-CVM/SMI Rio de Janeiro, July 15, 2021. To Responsible Directors, at Intermediaries, for observance of:
CVM Resolution No. 35/2021 (former CVM Instruction No. 505/11) CVM Resolution No. 30/2021 (former CVM Instruction No. 539/13) CVM Resolution No. 16/2021 (former CVM Instruction No. 497/11) Subject: Offer to retail clients of operations that include securities registered in an organized over-the-counter market. Dear Directors,

1. This Circular Letter aims to emphasize the duties of intermediaries, in compliance with current regulations, when offering to retail clients securities registered in an organized over-the-counter market (especially derivative contracts, offered individually or together with other financial assets, hereinafter referred to as “operations”), more specifically regarding (i) the minimum information that must be provided to clients and (ii) the adoption of measures aimed at mitigating potential conflicts of interest.
   I – INTRODUCTION
2. This SMI identified that intermediaries have been recommending, to their retail clients, operations registered in an organized over-the-counter market, in which, often, the clients' counterparties are investment funds administered or managed by the intermediaries themselves, other persons affiliated with them, or the institution's own portfolio.
3. Considering (i) the lack of pre-trade transparency that characterizes operations registered in an organized over-the-counter market, which makes it difficult for retail clients to evaluate the agreed prices; and (ii) the lack of standardization and fungibility of the derivative contracts involved, which make it difficult to close them early without the counterparty's consent, the SMI alerts market participants to the risk of materialization of potential conflicts of interest in carrying out these operations.

16/07/2021 SEI/CVM - 1304690 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1373335&infra_sistema=… 2/5 II – HOW INTERMEDIARIES MUST SERVE THE BEST INTEREST OF THEIR RETAIL CLIENTS
4. The pursuit of the best conditions in the execution of orders, the prevalence of the client's best interest, which must be privileged, and the transparency of information are duties of intermediaries as provided, respectively, in Art. 20, 'caput', Art. 31, sole paragraph, and Art. 33, item V, all of CVM Resolution No. 35/2021:
Art. 20. The intermediary must execute orders under the conditions indicated by the client or, in the absence of indication, under the best conditions the market allows. (emphasis added) Art. 31 The intermediary must conduct its activities with good faith, diligence, and loyalty towards its clients. Sole paragraph. The intermediary is prohibited from privileging its own interests or those of persons affiliated with it to the detriment of clients' interests. Art. 33. The intermediary must:
(...)
V – provide its clients with information about the products offered and their risks
5. In light of these provisions and the characteristics of the organized over-the-counter market, it is incumbent upon the intermediary that structures or offers these operations to its retail clients to demonstrate, in a consistent and verifiable manner, that:
I - the offer or recommendation made meets the best conditions the market allows; II - the conditions of the operation proposed by the intermediary are carried out in a way that privileges the client's interest, in view of other available alternatives; and III - the information made available to clients clearly presents the comparative advantages and disadvantages of the operations, compared to other equivalent alternatives in terms of the risk/return relationship.
6. Thus, prior to the contracting of the aforementioned operations in an organized over-the-counter market, in accordance with said regulation, it is incumbent upon the intermediary to make the following information available to the retail client:
I - investor profile suitable for the operation; II - risks of the operation, including counterparty risk, poor price formation in the organized over-the-counter market, as well as settlement and leverage risks; III - potential conflicts of interest involved, including the conflict of becoming, at the same time, intermediary and counterparty of the operation, including mitigants adopted;

16/07/2021 SEI/CVM - 1304690 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1373335&infra_sistema=… 3/5 IV - process to ensure that the conditions proposed to the client are the best that the market allows at that time; V - that it is a non-fungible contract whose early closure depends on the agreement of the parties involved, which may prevent the investor from receiving funds or harm the asset's profitability; and VI - non-application of the Loss Compensation Mechanism to operations carried out in an organized over-the-counter market.
7. Specifically regarding the possible conflict of interest, the SMI considers that a generic clause contained in the brokerage contract is not sufficient to properly alert the client to the potential conflict arising from the fact that the opening and closing of the operations (especially the derivative contracts involved) are carried out with the intermediary's own portfolio or an affiliated person acting as the client's counterparty.
8. Furthermore, the SMI highlights that the acceptance of the registration of an operation by the organized market administrator entity does not necessarily mean that the operation has been registered under the best conditions allowed by the market, as prescribed in Art. 20 of CVM Resolution No. 35/2021.
9. The mitigation of the potential conflicts of interest pointed out above must be done by providing clear and objective information to the client. Additionally, it is incumbent upon the intermediary to refrain from using “trade names” for these operations, which may induce the client to erroneous conclusions about their characteristics and associated risks.
10. In addition, it is incumbent upon the intermediary to prepare a product description material, mandatory presented to the retail client at the time of the product offer (and prior to the operation being carried out). This material must allow the client to understand the functioning and characteristics of the product, as well as its payment flows and the risks involved.
11. To this end, it is understood that the described material must contain, at minimum:
I - true, complete, consistent information that does not mislead the investor; II - simple, clear, objective, concise language, and appropriate to its nature and complexity; III - useful information for the retail client's evaluation in making the decision to invest in securities registered in an organized over-the-counter market, individually or combined with other financial assets; IV - the individual prices of each end of the operation (premiums and exercise prices); V - the components for forming this price, including the quantity and financial volume involved in the operation; VI - the possibility of requiring additional margins and the consequent compulsory closure, in case of non-compliance in a timely manner; VII - the possibility of early maturity of the offered operation, including the conditions under which this occurs and how the client can make this request; VIII - the existence of risks, including the risk of loss of invested capital; IX - the maturity or verification dates, exercise prices, applicable barriers, and any other conditions and characteristics of the contract; and X - a graph of the possible results of the operation, as a function of the price movement of the underlying asset of the derivative contract and the current value of the underlying asset, with the warning that these scenarios will only occur if the operation is carried to maturity.

16/07/2021 SEI/CVM - 1304690 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1373335&infra_sistema=… 4/5
12. It is important to highlight that the structured product has the characteristics of a complex product, which warrants the adoption of the care provided for in Art. 8, item II, of CVM Resolution No. 30/2021:
Art. 8. The persons mentioned in Art. 2 of this Resolution that organize themselves in the form of a legal entity are obliged to:
(...)
II – adopt specific internal policies related to the recommendation of complex products, which highlight:
a) the risks of the structure compared to that of traditional products; and b) the difficulty in determining its value, including due to its low liquidity III – SUPERVISION AND TRAINING
13. In compliance with regulations, the offer, recommendation, and distribution to retail clients of the aforementioned operations must be subject to specific supervision routines, under the responsibility of the Responsible Directors for CVM Resolution No. 35/2021 and CVM Resolution No. 30/2021, including the role of the Responsible Director for CVM Resolution No. 16/2021, regarding the inspection of the activities of contracted autonomous investment agents.
14. Among the specific supervision routines, the one that must prohibit the practice of unjustified changes in the profiles of retail clients, with the sole purpose of allowing the intermediary, through its representatives, to recommend securities subject to registration to clients with notoriously inadequate profiles, which conflicts with the provisions of CVM Resolution No. 30/2021, stands out.
15. In complement to supervision, it is necessary for the intermediary to promote internal training programs, both for its own staff and for contracted autonomous investment agents, in order to disseminate the issues contained in this Circular Letter.
IV – CONCLUSION
16. The brokerage activity has recognized importance for the good development of operations carried out in regulated securities markets. Operationally, the intermediary is the figure that has access to the systems for registering operations and, being responsible for its clients' operations, assumes the position of supervisor of certain acts, over which it must maintain control, in accordance with applicable regulations.
17. As the intermediary or persons affiliated with it act as counterparties to its clients, the potential conflict of interest referred to in this Circular Letter becomes evident, which is why it is considered appropriate to reiterate all the obligations contained in the applicable norms, so that the recommendation or offer of securities is carried out considering (i) the client's profile; and (ii) the necessary prevalence of the client's best interest, which must be privileged, as provided, respectively, in CVM Resolution No. 30/2021 and CVM Resolution No. 35/2021 and the norms succeeding them.
18. This Superintendence reaffirms the importance of intermediaries fulfilling informational obligations towards their clients and reinforces that they assume an even more relevant role in the recommendation and offer of securities in view of the characteristics highlighted here.

16/07/2021 SEI/CVM - 1304690 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1373335&infra_sistema=… 5/5 Sincerely, Document electronically signed by Francisco José Bastos Santos, Superintendent, on 15/07/2021, at 14:33, based on Art. 6 of Decree No. 8.539, of October 8, 2015. The authenticity of the document can be verified on the site https://sei.cvm.gov.br/conferir_autenticidade, informing the verification code 1304690 and the CRC code DB346DF2. This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Verification Code" 1304690 and the "CRC Code" DB346DF2. Reference: Process No. 19957.011397/2019-11 SEI Document No. 1304690