Circular Letter CVM/SMI 04/2020

30/07/2020 SEI/CVM - 1065180 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1123594&infra_siste… 1/4 SECURITIES AND EXCHANGE COMMISSION OF BRAZIL Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br Circular Letter No. 4/2020-CVM/SMI Rio de Janeiro, July 30, 2020.

To
Directors responsible for CVM Instruction No. 505/11 at Intermediaries

Subject: Best practices to provide clients with information regarding stock lending operations.

Dear Directors,

1. This Circular Letter aims to bring recommendations to intermediaries regarding the adoption of best practices to provide their clients with information regarding stock lending operations, both prior to the operation and upon its closure.

I - INTRODUCTION

2. It is certain that a large part of investors, even at the initiative of the intermediaries themselves, seek to carry out lending operations, either on the lending side or on the borrowing side, reaching even 'short selling' strategies.

3. However, in most cases, investors are not sufficiently informed about the amount that will be retained or added by the intermediary as commission or brokerage fees.

4. And this situation already occurs prior to the lending operation, when the investor is informed only of the rate that will be charged to him.

30/07/2020 SEI/CVM - 1065180 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1123594&infra_siste… 2/4

5. In other words, if the investor is the lender, they receive information on how much they will receive for the loan, and if the borrower, on how much they will pay for the loan.

6. However, in neither of the two situations does the investor know what the final amount agreed upon between the intermediaries in the lending operation actually was.

7. Transparency in the intermediation market is a requirement of CVM Instruction No. 505/11, in its art. 30:

Art. 30. 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 linked to it to the detriment of clients' interests.

8. And more specifically in art. 32, item VII, the intermediary has the duty to present, clearly to its client, the amounts retained from the operation:

Art. 32. The intermediary must:
(...)
VII – differentiate in brokerage notes, invoices, and billing notices sent to clients, the values resulting from brokerage from those related to other services provided by the intermediary and from the taxes and fees charged by market administrative entities or other third parties, if applicable.

9. In consonance, CVM Instruction No. 441/06, which deals specifically with lending operations, determines that the investor may only initiate lending operations if they have signed a prior authorization term, determining, among other things, the information that must integrate the lending orders:

Art. 3
(...)
§ 3. Investors must authorize in advance the carrying out of operations of this nature, in the form established in the authorization term referred to in art. 8.

Art. 8. The authorization term referred to in § 3 of art. 3 must mention, at minimum:
I – its term of validity;
II – the method of transmitting investor orders to carry out lending operations and the information that must integrate the orders; and III – declaration by investors that they know and adhere to the regulations of the securities lending service.

II - HOW INTERMEDIARIES MUST MEET THE BEST INTEREST OF THEIR CLIENTS IN CASE OF LENDING OPERATIONS

10. The main duty of the intermediary is the transparency of information.

30/07/2020 SEI/CVM - 1065180 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1123594&infra_siste… 3/4

11. For this purpose, the intermediary must:
    a) prior to the confirmation of the operation, inform the investor of all values and percentages involved in the stock lending operation, including those that will be retained by the intermediary itself; and b) at the time of the operation's settlement, inform the investor of all values and percentages involved in the stock lending operation, discriminating the total value, in financial resources, received or paid by the counterparty of the operation, the value charged by the intermediary, and the final value paid or received by the investor.

12. The information listed in items “a” and “b” above must be made available by the intermediary, in a clear and objective manner, on its website, on its home broker platform, and in its applications.

13. And regarding the specific lending operation, such information must be sent to the investor, preferably in written form, such as e-mail or messaging applications.

14. Once the investor is aware of the values and percentages involved in the operation, the client's order may be transmitted by the means admitted in CVM Instruction No. 505/11, art. 12, among them, by telephone, by e-mail, by other voice or electronic messaging transmission systems, and its records must be archived in accordance with art. 13.

15. Thus, prior to the carrying out and upon the closure of the operation, the investor will have full knowledge not only of the value due to them, if the lender, or of the value charged to them, if the borrower, but also of the values that will be retained by the intermediary itself with which they maintain a commercial relationship.

16. Armed with such information, the investor will tend to maintain a commercial relationship with an intermediary that meets their expectations, including lending operations.

III - CONCLUSION

17. It should be highlighted, once again, that transparency in the intermediation market is a requirement of CVM Instruction No. 505/11, reflected in its art. 30, prohibiting the intermediary from privileging its own interests:

Art. 30. 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 linked to it to the detriment of clients' interests.

18. And beyond the conflict of interest, transparency is also at the heart of a healthy market, imposing on the intermediary to safeguard the integrity of the market, in accordance with art. 32, item I, initial part, of CVM Instruction No. 505/11:

Art. 32. The intermediary must:
I – safeguard the integrity and regular functioning of the market, including regarding the selection of clients and the requirement of guarantees.

30/07/2020 SEI/CVM - 1065180 - Circular Letter https://sei.cvm.gov.br/sei/controlador.php?acao=documento_imprimir_web&acao_origem=arvore_visualizar&id_documento=1123594&infra_siste… 4/4

Sincerely,

Document electronically signed by Francisco José Bastos Santos, Superintendent, on 30/07/2020, at 11:45, based on art. 6, § 1, 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, by informing the verification code 1065180 and the CRC code 37C51452.
This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Verification Code" 1065180 and the "CRC Code" 37C51452.
Reference: Process No. 19957.006718/2018-76 SEI Document No. 1065180