Circular Letter CVM/SMI 08/2019

09/12/2019
SEI/CVM - 0896508 - Circular Letter

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, 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. 8/2019-CVM/SMI

Rio de Janeiro, December 9, 2019.

To
Directors responsible for CVM Instruction No. 542/13 at Custodians

Subject: Best practices for responding to requests for the transfer of an investor's securities to another Custodian.

Dear Directors,

1. The publication of this Circular Letter, regarding the subject in reference, aims to bring recommendations to Custodians regarding measures that, in the view of this technical area, should be adopted for full compliance with the deadline established by §2 of art. 10 of CVM Instruction No. 542/13 (“the rule”), which is up to 2 (two) business days counted from the receipt, by the Custodian, of the valid request filed by the investor.

I - INTRODUCTION
2. As established by the rule, the Custodian (“Origin Custodian”) must carry out the transfer of the securities, as well as any rights and burdens attributed to them, to the Custodian indicated by the investor (“Destination Custodian”), observing the nature of each asset, its form of holding and transfer, and the procedures established by the central depository, if applicable, in accordance with §1 of art. 10 of the rule.
3. The rule also states that the Origin Custodian must follow reasonable procedures for the transfer of securities to the Destination Custodian, considering the needs of investors and the security of the process, in accordance with § 2 of art. 10 of the rule.
4. In its art. 12, the rule requires, among others, that the Custodian must:
a) exercise its activities with good faith, diligence, and loyalty regarding the interests of investors, being prohibited from privileging its own interests or those of persons linked to it, in accordance with item I; b) adopt all necessary measures to ensure the certainty of the origin of received instructions, in accordance with item II; c) ensure the regular movement of securities held in custody, in accordance with received instructions, in accordance with item III; d) have sufficient human resources and technically capable of carrying out the processes involved in providing custody services, in accordance with item VII.

II - HOW CUSTODIANS MUST HANDLE TRANSFER REQUESTS II.1 - Reasonable procedures
5. Among the procedures required by item II of art. 15 of the rule, it is expected of the Origin Custodian that the procedures related to the request for transfer of securities include the documents and information that are those sufficiently necessary for the implementation of the transfer request, in accordance with item I of art. 12 of the rule.
6. The documents and information necessary for the implementation of the transfer request must be specified for each reason for transfer, highlighting those contained in Annex I, considering that additional requirements must be justified by the Origin Custodian in the concrete case, to validate the origin of the received request and guarantee the regular movement of securities, in accordance with items II and III of art. 12 of the rule.
7. These procedures must also include measures for timely interaction with the investor, in case the transfer request cannot be implemented within 2 (two) business days of its receipt, due to non-compliance of the documentation delivered for the purpose of effecting the transfer, in accordance with art. 10, §3, item II, of the rule.
8. Among these situations are:
a) the request was not accompanied by all the necessary documents and information for the transfer; b) registration inconsistencies; c) pending debts; d) a settlement cycle of operations is underway; e) the investor is not properly registered with the Destination Custodian; f) securities blocked by judicial orders - Bacen Jud.
9. The procedures must also provide that the investor will have access, at any time, to the current status of the transfer request and the reasons for its non-implementation up to that moment.
10. All documents and information generated from the interactions of the Origin Custodian with the investor, related to the process of the request for transfer of securities, must also be maintained for a minimum period of 5 (five) years, in accordance with art. 23 of the rule.

II.2 - Valid request
11. Once the documents and information necessary for the implementation of the transfer request, specifically for a certain reason for transfer, have been met by the investor, including additional requirements in the concrete case, the Origin Custodian has the duty to, within 2 (two) business days, carry out the transfer of the securities to the Destination Custodian previously specified by the investor, for full compliance with §2 of art. 10 of the rule.

II.3 - Best practices
12. The Custodian must make available, in a specific area on its website, in its applications, and in other interfaces offered to investors, in an easily accessible location, the step-by-step guide that the investor must follow to formalize the request for transfer of securities, as well as the necessary documents for carrying out the transfer, in accordance with art. 10, §3, item I, of the rule.
13. Likewise, it must maintain a properly trained team, in accordance with item VII of art. 12 of the rule, to answer questions about custody transfer requests, including those already underway, through service channels such as chat, phone, email.
14. The adoption, by the Custodian, of an electronic process for handling the request for transfer of securities is also appreciated, in the search for greater speed in the entire process.

III - CONCLUSION
15. Acting in this way, it is expected that the Origin Custodian acts diligently in order to mitigate the possibility of fraud in requests for transfer of securities, as well as, in the interest of the investor, that the securities are duly transferred within a period of up to 2 (two) business days from the effective validation of all documents and information and from the resolution of pending issues with the Origin Custodian.
16. Finally, we warn that additional procedures to those provided for in this Circular must be justified, as well as that the non-compliance with the deadline referred to in §2 of art. 10 of CVM Instruction No. 542/13, in a systematic manner, is considered a serious offense, in accordance with its art. 20, subject to sanctions provided for in art. 11 of Law 6.385/76.

Sincerely,

Francisco José Bastos Santos
Superintendent of Market and Intermediary Relations (SMI)

ANNEX I

1. REASON FOR TRANSFER: DONATION, PRIVATE SALE, PRIVATE LOAN BETWEEN PARTIES, OR TRANSFER BETWEEN ACCOUNTS OF THE SAME HOLDER.
   1.1. The Origin Custodian must obtain the investor's, their attorney, or legal representative's request for the transfer of assets and verify the following aspects:
   a) Availability of assets for transfer, the maturity date of positions must be checked, and in the case of positions in forward contracts and asset lending, whether they are in the process of settlement, or renewal or alteration of the position, as well as verifying if they are not being used as collateral for operations; b) Reconciliation between the asset information (quantity, paper) indicated in the transfer request with those held in custody in the client's name at the market administrators where the Custodian is authorized to operate; c) Verify if the client's registration information indicated in the transfer request corresponds to the information indicated in the registration; d) The transfer request should, preferably, be carried out electronically. Otherwise, it may be by physical means, in which the client's signature will be validated against the presentation of a valid identification document; e) For a transfer request signed by an attorney or legal representative, verify if the person who requested the transfer has powers to represent the client and if the document constituting the attorney grants powers for the transfer of assets; f) For a transfer request involving a corporate client, verify if the person(s) who signed the request has(have) power(s) to represent the company; g) Verify if the investor holding the assets subject to transfer is prevented from transferring assets from their deposit account by determination of competent regulatory, judicial, or administrative authorities or for any other reason provided for in current regulations; h) h) Balance in the graphic current account, aiming to verify if the client's current account does not have a negative balance; and i) i) Validity of registration, aiming to verify if the client's registration is up to date.

2. REASON FOR TRANSFER: INHERITANCE.
   2.1. The Origin Custodian must obtain the Formal Deed of Partition or Judicial Order and verify the following aspects:
   a) Reconciliation between the asset and quantity information contained in the Extrajudicial Inventory Deed, the Formal Deed of Partition or Judicial Warrant and the positions held in custody at B3 in the name of the Estate; b) Proportionality of the partition of assets among heirs; c) Availability of assets for transfer, the maturity date of positions must be checked, and in the case of positions in forward contracts and asset lending, whether they are in the process of settlement, or renewal or alteration of the position, as well as verifying if they are not being used as collateral for operations; and d) Balance in the graphic current account, aiming to verify if the Estate's current account does not have a negative balance.

3. REASON FOR TRANSFER: JUDICIAL ORDER.
   3.1. The Origin Custodian must obtain the Judicial Order and verify the following aspects:
   a) Availability of assets for transfer, the maturity date of positions must be checked, and in the case of positions in forward contracts and asset lending, whether they are in the process of settlement, or renewal or alteration of the position, as well as verifying if they are not being used as collateral for operations; b) Reconciliation between the asset information (quantity, paper) indicated in the Judicial Order with those held in custody at B3 in the client's name; c) Client's current account does not have a negative balance. Note: prior to complying with the Judicial Order, the Origin CUSTODIAN must inform about any need to sell assets in the client's name to regularize a negative balance, which will be subject to the judge's acceptance; and d) Validity of registration, aiming to verify if the client's registration is up to date. Note: prior to complying with the Judicial Order, the Origin CUSTODIAN must inform about any need to update the client's registration, which will be subject to the judge's acceptance.

4. REASON FOR TRANSFER: CORPORATE SUCCESSION.
   4.1. The Origin Custodian must obtain the investor's or legal representative's request for the transfer of assets, as well as the social documentation proving the corporate succession (incorporation, merger, spin-off, sale, transformation of individual firm into a company), and verify the following aspects:
   a) Availability of assets for transfer, the maturity date of positions must be checked, and in the case of positions in forward contracts and asset lending, whether they are in the process of settlement, or renewal or alteration of the position, as well as verifying if they are not being used as collateral for operations; b) Reconciliation between the asset information (quantity, paper) indicated in the transfer request with those held in custody at B3 in the client's name; c) Verify if the client's registration information indicated in the transfer request corresponds to the information indicated in the registration; d) The transfer request should, preferably, be carried out electronically. Otherwise, it may be by physical means, in which the client's signature will be validated against the presentation of a valid identification document; e) For a transfer request signed by an attorney, verify if the person who requested the transfer has powers to represent the client and if the document constituting the attorney grants powers for the transfer of assets; f) For a transfer request involving a corporate client, verify if the person(s) who signed the request has(have) power(s) to represent the company; g) Balance in the graphic current account, aiming to verify if the client's current account does not have a negative balance; h) Validity of registration, aiming to verify if the client's registration is up to date; i) Verify if the information of the transferor and transferee clients contained in the transfer request corresponds to that indicated in the social documentation proving the corporate succession; and j) Verify if the shares subject to the transfer request are contained in the social documentation regarding the corporate succession.

5. REASON FOR TRANSFER: SUBSCRIPTION OF SHARES OF CLUBS OR INVESTMENT FUNDS.
   5.1. The Origin Custodian must obtain the investor's or legal representative's request for the transfer of assets, as well as the Statute/Regulation of the Club/Investment Fund and/or Minutes of the General Assembly, and verify the following aspects:
   a) Availability of assets for transfer, the maturity date of positions must be checked, and in the case of positions in forward contracts and asset lending, whether they are in the process of settlement, or renewal or alteration of the position, as well as verifying if they are not being used as collateral for operations; b) Reconciliation between the asset information (quantity, paper) indicated in the transfer request with those held in custody at B3 in the client's name; c) Verify if the client's registration information indicated in the transfer request corresponds to the information indicated in the registration; d) The transfer request should, preferably, be carried out electronically. Otherwise, it may be by physical means, in which the client's signature will be validated against the presentation of a valid identification document; e) For a transfer request signed by an attorney, verify if the person who requested the transfer has powers to represent the client and if the document constituting the attorney grants powers for the transfer of assets; f) For a transfer request involving a corporate client, verify if the person(s) who signed the request has(have) power(s) to represent the company; g) Balance in the graphic current account, aiming to verify if the client's current account does not have a negative balance; h) Validity of registration, aiming to verify if the client's registration is up to date; i) Verify if the Statute/Regulation of the Club/Investment Fund contains a provision for the subscription of shares in shares and, if this provision is not contained in the aforementioned documents, if it was deliberated in a General Assembly; and j) Verify if the value in which the shares were subscribed in the name of the shareholder corresponds to the value of the assets subject to the transfer.

6. REASON FOR TRANSFER: ALLOCATION FAILURES OF OPERATIONS.
   6.1. The Origin Custodian must obtain the request from the client, legal representative, or foreign intermediary / Global Custodian for the transfer of assets (applicable for clients who operate on a master account, such as funds and investment clubs and non-resident investors), as well as the order of operation, brokerage notes, and graphic current account statements, and verify the following aspects:
   a) Based on the orders of operations, brokerage notes, and graphic current account statement, verify if the operations were registered and invoiced in the name of the clients who carried them out.

7. REASON FOR TRANSFER: CONVERSION OF 'ADR' - AMERICAN DEPOSITARY RECEIPT.
   7.1. The Origin Custodian must obtain the document for Deposit and Issuance of ADRs and verify the following aspects:
   a) Availability of assets for transfer, the maturity date of positions must be checked, and in the case of positions in forward contracts and asset lending, whether they are in the process of settlement, or renewal or alteration of the position, as well as verifying if they are not being used as collateral for operations; b) Carry out the reconciliation between the asset information (quantity, type of asset) indicated in the document for deposit and issuance of ADRs with those held in custody at B3 in the client's name; and c) Verify if the person(s) who signed the document for Deposit and Issuance of ADRs has(have) powers to represent the transferor client.

Document signed electronically by Francisco José Bastos Santos, Superintendent, on 12/09/2019, at 10:55, 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, informing the verifier code 0896508 and the CRC code 4FCF4F90.
This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Código Verificador" 0896508 and the "Código CRC" 4FCF4F90.

Reference: Process No. 19957.000663/2019-71 SEI Document No. 0896508