Circular Letter No. 4/2018-CVM/SMI

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 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. 4/2018-CVM/SMI
Rio de Janeiro, December 14, 2018.

To
Independent Investment Agents - AAI
Intermediaries contracting AAIs

Subject: Interpretation by SMI regarding obligations related to the activities of independent investment agents

Dear Sirs,

1. This circular letter aims to guide independent investment agents (AAI) and the institutions that hire them on the best way to comply, in the view of this Superintendence of Market and Intermediary Relations (SMI), with the regulatory provisions applicable to the activity, particularly those set forth in CVM Instruction 497.

2. The independent investment agent, due to their close contact with the investor, plays an important role in the distribution of securities. Furthermore, sector data shows a significant increase in the number of registered and active agents. In this context, it is undeniable the importance of full compliance by these professionals and the institutions that hire them with the current legislation.

3. The SMI used as input for the preparation of this text, various consultations received by the Superintendence and situations perceived in investigative processes, investor complaints, and compensation claims filed within the framework of the Loss Compensation Mechanism (MRP). Questions raised by self-regulatory organizations and professional associations, such as BM&FBovespa Market Supervision (BSM), the Brazilian Association of Independent Investment Agents (ABAAI), and the National Association of Brokers and Distributors of Securities, Currency and Commodities (Ancord), were also taken into consideration.

4. Although this text presents a section more directly related to the independent agent and another more focused on the contracting intermediaries, the SMI recommends that recipients read the complete material, given the complementary nature of the obligations and duties of contracting intermediaries and hired independent agents.

I. Guidelines specifically directed at independent agents and societies of independent agents

Use of trade names

5. Article 8, paragraph 1, of CVM Instruction 497 prohibits trade names used by societies of independent agents from containing expressions that may mislead the investor regarding the nature of the society and requires that these names contain the expression "independent investment agent". In addition, the code of conduct set forth in Article 10 reinforces the need for the independent agent to be extremely cautious in how they present themselves to the investor, doing everything possible to ensure that their client clearly understands with whom they are dealing.

6. Thus, the use of trade names such as "XYZ Investments" is irregular, as the Instruction is explicit in requiring that the trade name include the expression "Independent Investment Agent". This is a regulatory measure justified by the need to make it clear to the public that the society in question provides services in the manner provided for in the regulation applicable to independent investment agents and that it is not, for example, an asset manager.

7. In addition, trade names that may hinder the investor's understanding of the identity of the society with which they are dealing cannot be used. For example, it is acceptable for a society with the name "Antônio, Beatriz and Carlos Independent Investment Agents Ltd." to use the trade name "ABC Independent Investment Agents", but the SMI considers it irregular that, in the example presented, the society presents itself to the public under the trade name "XYZ Independent Investment Agents".

8. Finally, it is worth alerting to the irregularity of including in the corporate name or trade name words that refer to activities different from those provided for in Instruction 497, such as "asset", "management", "bank", "broker", etc.

Simple societies

9. Article 8, item II, of CVM Instruction 497 is very clear in determining that societies of independent investment agents must be constituted as simple societies. Nevertheless, the SMI became aware of the existence of several business societies of independent agents.

10. The simple society is a corporate type whose use is justified by the nature of the service provided by independent investment agents, which, in societies, must be performed personally by the partners, not by hired employees.

11. It is also worth mentioning that, in addition to CVM Instruction 497, Resolution 2838 of the National Monetary Council provides for the operation of the independent agent as a natural person or through a single-professional legal entity.

12. Ancord, the accrediting entity authorized by CVM in the form of Instruction 497, was alerted to verify, at the time of accrediting societies, that the chosen type is compatible with legislation. Thus, the accreditation of societies of independent investment agents constituted in the form of business societies will no longer be admitted.

13. Regarding societies currently registered as business societies, the understanding of the SMI is that, as they do not meet one of the requirements for accreditation provided for in the Instruction, their registration must be cancelled, in the manner provided for in Article 9.

14. In fact, even societies constituted before the effectiveness of CVM Instruction 497 should have, from the publication of the norm, sought to adapt to its provisions. After all, the existence of a registered articles of association in a commercial registry carries the presumption of the exercise of business activity, which is incompatible with the current norm. Thus, business societies of independent agents, which operated regularly in the form of Instruction 434, should have, since the publication of Instruction 497, made the necessary changes to their articles of association and registered the new versions of these contracts at the legal entity registry office.

15. Thus, the SMI instructed Ancord to cancel the accreditation of societies of independent agents constituted in the form of companies. However, aware of the operational difficulties for these entities to adjust their articles of association, the orientation was that the cancellation only be effective from July 1, 2019, for societies that do not prove to have made the appropriate adjustments by June 30, 2019.

Individual entrepreneurs

16. Regarding the format of legal entities, it is necessary to note the situation of individual companies. It is uncontroversial the requirement of CVM Instruction 497, mentioned above, that societies of independent agents are not business societies. But it is also a fact that the norm allows the operation of the AAI through an individual firm (Article 2) and that there is no regulatory requirement regarding the limitation of liability (that is, it is acceptable to register AAI societies with or without limited liability, as long as they are simple societies). However, there is a gap in civil legislation, as there is no prescription in the civil code of a specific type for single-partner legal entities without limitation of liability. Similarly, the classification table of legal nature by Concla (National Classification Commission) lists various types of simple and business societies, but in the case of individual firms, this distinction is only made for legal entities with limited liability: the Eirelis. However, CVM Instruction 497 predates the creation of the Eireli, so the mention of "individual firm" in the Instruction could not be a reference to this corporate type. That is, the understanding of this Superintendence is that it is not appropriate to prevent the registration, as independent agents, of legal entities constituted as individual entrepreneurs (code 213-5 of the Concla classification table), since this type is the only one that allows operation in an individual firm without limitation of liability.

17. Naturally, despite this registration as "individual entrepreneur", the object of the society continues to be a non-business activity, as described in the sole paragraph of Article 966 of the Civil Code. It is worth adding that, in the case of a legal entity with only one partner and considering the limitations imposed by CVM Instruction 497 for the operation of third parties (Article 8, paragraph 2 and Article 13, VI), the concern with the format of the society is mitigated in this case.

Place of registration of the articles of association

18. It is necessary to inform, right at the beginning, that it is not within CVM's competence to determine the place of registration of the articles of association of legal entities, as this is a matter related to Civil Law and therefore outside the competence of the Autarchy.

19. Nevertheless, it is appropriate to recall that the Civil Code determines, in its Article 1.150, that the articles of association of simple societies must be registered at the Civil Registry of Legal Entities, not at the Commercial Registry. Thus, it is recommended that this procedure be observed by societies of independent agents.

20. It is worth making a reservation again regarding the situation of individual firms. Given the non-business nature of the independent agent's activity, the most appropriate place for registration seems to be the Civil Registry, in line with the aforementioned. However, considering the peculiar situation discussed previously of societies constituted as "individual entrepreneur", it is possible that some societies in this situation may be compelled to link to the Commercial Registry.

CNAE Code

21. There is no determination in CVM rules regarding the CNAE code (National Classification of Economic Activities) that should be used by AAI societies. Nevertheless, the SMI understands that the code most related to the activities permitted under Instruction 497 is "66.12-6-05 - Investment agents in financial applications", whose scope is described on the page of the National Classification Commission (Concla) as follows:
    This subclass comprises:

• the activities of distribution and intermediation of securities, securities, quotas of investment funds and derivatives under the responsibility and as agents of the institutions that are part of the securities distribution system. These are activities performed by a natural person or single-professional legal entity (independent investment agent)

Secondary activities

22. Given the requirement imposed by Article 2 of CVM Instruction 497, the SMI understands that there is no room to speak of secondary activity in the constitution of a society of independent investment agents.

Branches of societies of independent agents

23. The growth of societies of independent agents has been making the establishment of branches frequent. Article 5, paragraph 2, of CVM Instruction 497 makes it clear the need for societies of independent agents to be accredited. However, at no point does the Instruction address the possibility of constituting branches of independent agent offices. Nevertheless, the SMI understands that there is no irregularity in the constitution of branches, provided that some precautions are taken.

24. First, in order to guarantee investor safety, avoiding the possibility of false branches arising, and to allow the contracting intermediary, under whose responsibility the independent agent operates, to unequivocally know the offices used by their agents, it is necessary that the existence and location of any branch be duly stated in the articles of association of the society of independent agents.

25. In addition, naturally, any registration change, such as the inclusion or exclusion of offices or address changes, must be reported to Ancord. In addition to the dissemination to the public of information about the existence of the offices, this measure aims to allow eventual on-site inspections by CVM, self-regulatory organizations, and the contracting intermediary of the society.

26. Another indispensable condition for the use of branches is that societies ensure that all requirements applicable to the headquarters are also met by the branches. For example, the same voice recording system of the headquarters must be fully functional in the branches.

27. Regarding the duties applicable to contracting intermediaries, as described in Article 14 and following of CVM Instruction 497, it is worth alerting that the obligation to monitor the activities of independent agents applies indistinctly to all units established by the societies.

Societies of independent agents with partners residing and/or operating in locations different from the headquarters

28. This is a situation somewhat different from the one described above (establishment of branches). In this case, the hypothesis is that a society is established in a certain city, but has partners operating in other locations. As occurs with branches, it is necessary for societies to ensure that the same controls existing in the office are applicable to independent agents who operate outside it. For example, if there is an order recording system only at the headquarters, there is no talk of orders received by phone by agents who operate outside the office.

29. In addition, it is indispensable that there is the agreement of the contracting institution.

Naturally, the contractual relationship of the intermediary with the independent agents is quite different from that he has with his employees (labor relationship). Nevertheless, given the responsibility the intermediary assumes due to the activity of the agents, it is necessary that he agrees with the conditions under which their work is developed.

30. This reasoning also applies to the case of independent agents operating in coworking spaces. Although there is no definitive impediment, operating in a public location must be surrounded by precautions to ensure compliance with applicable norms, including the maintenance of confidentiality required in Article 10, sole paragraph, II, of Instruction 497.

Incompatibility of acting as independent agent and as analyst, consultant or manager

31. Initially, it is worth citing that with the recent issuance of Instructions CVM 592 and 598, in addition to the changes in Instruction 558, it is no longer permitted for an individual to hold, at the same time, registration as an independent investment agent and as a securities analyst, securities consultant, or securities portfolio manager.

32. Throughout 2018, the SMI worked with Ancord and the Superintendence of Institutional Investor Relations (SIN) to notify all individuals who hold incompatible registrations, clarifying that these professionals must choose to maintain either the registration of independent agent or the registrations of analyst, consultant, or portfolio manager. It is worth remembering that given the impossibility of accumulation, the cited norms contemplate the possibility of cancellation of registrations ex officio by CVM. In addition, in cases that may remain at the beginning of 2019, the SMI will evaluate the measures to be taken, which may include sanctioning action against independent agents who still hold, at that time, active or suspended registration as analyst, consultant, or portfolio manager.

Independent agent partner of an asset manager, consultancy or analysis house

33. In addition to the situation described above, although not provided for in Instruction 497 any explicit prohibition for an independent agent to have equity participation in an asset manager (or in a corporate consultancy or analysis house), there are serious conflicts of interest between the cited activities and the distribution of investment products. The prohibition on accumulation of registrations mentioned above illustrates well the existence of this conflict. Thus, the eventual verification of the existence of such participation will be considered as evidence of acting in prohibited activities and will be considered by the SMI in prioritizing regulated entities to inspect.

34. Moreover, given the monitoring obligations and the responsibility that intermediaries have for the activities of independent agents, the SMI considers it advisable for contractors to conduct a careful analysis before signing contracts with independent agents holding equity participation in companies of analysis, consultancy, or portfolio management of securities.

Indication of products abroad

35. The SMI receives several inquiries about the possibility of an independent agent offering investment products to their client abroad. As is known, the AAI must, in the form of Article 1 of Instruction 497, act as an agent and under the responsibility of an institution participating in the Brazilian securities distribution system, as defined by Article 15 of Law 6.385. Thus, the only hypothesis of distribution of products abroad would be of assets that were distributed by the contracting intermediary.

Use of the expression "investment advisor" to refer to independent investment agents

36. It has become quite common to refer to the independent agent as "advisor". Although the need, already mentioned, that the name of societies of independent agents include the expression "independent investment agent", not being appropriate to replace it with any other term, the SMI understands that, for other situations, there is no irregularity in identifying the AAI as "advisor".

37. In fact, the activity of the independent agent, as defined in Article 1 of Instruction 497, includes the function of assisting the investor in the investment process. In addition, the use of the expression advisor in indiscriminate reference to independent agents and employees, as some institutions do, has the positive effect of contributing to the investor perceiving that both are agents of the intermediary.

38. CVM receives several inquiries and complaints from investors who report having contracted services of independent agents believing that they were, in fact, contracting a service similar to securities consultancy. Nevertheless, the view of the SMI is that the use of the expression "advisor" should not be interpreted as an attempt to induce the investor to this error. After all, the meaning of the word "advisory" allows inferring diverse actions, which can fit both the attributes of the consultant and those of the independent agent.

39. As clarified in the Public Hearing Report SDM 11/2016, which accompanied the issuance of Instruction 592, the main characteristic that differentiates the activity of the consultant from that of the independent agent is independence. The independent agent has their action limited to the products offered by the intermediary that hires them, identifying among those that are adequate for their clients (and, mainly, those that are not adequate, by virtue of what determines, for example, Article 5 of CVM Instruction 539). Thus, although they must always observe applicable norms and act with loyalty towards the investor, there is no doubt that the independent agent acts with a limited level of independence, as they can only offer products from the portfolio of the intermediary that hires and remunerates them. The consultant, on the other hand, begins their evaluation based on the characteristics and point of view of the investor and cannot have any link to specific intermediaries. Thus, very much unlike what happens with the AAI, the consultant's activity is done entirely in a fiduciary regime towards their client, the investor, who, moreover, is the one who remunerates them.

40. CVM Instruction 497 already prescribes several precautions to prevent the independent agent from presenting themselves in a way that leads the investor to error regarding their independence. For example, the norm requires that the agent's name always be presented together with the identification of the intermediary that hires them. It is worth presenting a known analogy from the market to clarify the point: a buyer who seeks a vehicle seller from a certain manufacturer can and should demand that this seller present the vehicles most suitable for their profile (the need is for an economical car or a spacious vehicle?). However, if the seller presents themselves clearly as being linked to a certain brand, it does not make sense for the buyer to desire an independent recommendation (the Volkswagen seller will hardly recommend buying a Ford).

41. Thus, the best interpretation for the "recommendation" made by AAIs must be in the context of providing information about the products offered and about the services provided by the institution that is part of the securities distribution system for which they have been hired, in accordance with Article 1, III, of ICVM 497. That is, the independent agent, whether addressed as advisor or not, cannot, in any way, act in a way that induces their clients to believe that they are independent of the intermediary(ies) that hire(s) them.

Provision of information about products

42. As seen even from the analogy mentioned above, the independent agent, due to the characteristics of the activity they perform, is often compared to a seller, acting on behalf of the intermediary that hires them. It is crucial to understand, however, the importance of the function provided for in Article 1, III, in the activity of the AAI, which implies a much greater responsibility than the

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ordinarily imposed on sales professionals from other industries. The autonomous agent operates in the financial market and has responsibility for a portion of the public's savings. Thus, he influences decisions that can have great weight both for the investors involved and for the reputation of the market as a whole. It is no wonder that Instruction 497 explicitly imposes on the AAI, in addition to an extensive list of conduct rules, the duty to act with probity, good faith, and ethics.

43. In this context, the AAI has a huge responsibility in providing explanations to its clients about the characteristics of the products offered, including with respect to the risks involved.

Acting in other activities, such as insurance brokerage

44. CVM Instruction 497 determines that the corporate object of the autonomous agent society must provide for exclusive acting in the activities of an autonomous agent. Thus, no other type of activity is permitted to the autonomous agent society. The legislation does not, however, prohibit autonomous agents who are natural persons from being employees or partners of companies that develop other activities (an insurance broker or a foreign exchange correspondent, for example). It must be ensured, however, that these firms act in a completely segregated manner from the autonomous agent societies, since non-segregated acting would constitute a deviation of purpose of the society, resulting in a violation of art. 8, III, of the Instruction.

Acting as a financial planner

45. The SMI frequently receives questions about the regularity of the autonomous agent acting simultaneously as a financial planner.

46. Preliminarily, it is necessary to consider the scope of the financial planner's activity. In this regard, the website of the Brazilian Association of Financial Planners (Planejar) states that the planner "evaluates the objectives, expectations, and needs of each client to develop, present, and execute financial planning strategies appropriate to the client's profile." Furthermore, Planejar presents the planner's competencies, which involve collecting, analyzing, and synthesizing information about various aspects of the client's financial life, in the components of financial management, asset management, risk management, tax planning, retirement planning, and succession planning. Thus, one of the planner's activities would be to evaluate the client's investment portfolio, seeking to identify what would be the best allocation of resources.

47. From the description given, it is seen that the activity of financial planner, to have real value for those who hire it, presupposes an independent evaluation, incompatible with the restrictions applicable to the autonomous investment agent, with particular weight given to the fact that the AAI acts as an agent of an intermediary. Thus, the AAI has at the core of its activity a conflict of interest that can prevent it from making a neutral assessment of its clients' needs. Suppose, for example, that the AAI is hired only by an institution that distributes only investment funds. How would it be possible to guarantee that, in this scenario, he would inform his client that the recommended investment for this is, for example, the investment of most of his resources in another type of asset?

48. In this regard, there is no doubt that the planner's activity is very similar to securities consulting, and it is relevant to observe, moreover, that the Certified Financial Planner – CFP certification is one of those accepted by the CVM for the registration of this professional (CVM Deliberation 783). Thus, there is no way to rule out the analogy with the prohibition provided for in art. 13, IV, of Instruction 497.

49. In light of the above, although considering that the knowledge obtained by obtaining a financial planner certificate can be useful for the autonomous agent to develop his work more competently, the view of the SMI is that it is not acceptable for him to present himself to his investors as a financial planner, as this way of presenting himself would imply a violation of art. 10 of CVM Instruction 497, in that it would lead the client to suppose that the AAI would act with greater independence than is real.

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"Economic groups" or "holdings"

50. The SMI became aware of the existence of autonomous agent offices that present themselves as being part of an economic group or controlled by a holding company.

51. In this regard, it is necessary to clarify that, considering the limitations imposed by Instruction 497 on the form of constitution of AAI societies, especially those provided for in the final part of item III of art. 8 and in §2 of the same article, it is not acceptable for an autonomous agent society to present itself as being part of an economic group.

52. Even more serious are, in the eyes of the Superintendence, cases where the group includes firms of consulting, analysis, or resource management, since these are activities that the autonomous agent cannot develop.

53. The same reasoning applies to cases where there is no express mention of an economic group, but the autonomous agent society presents itself with nomenclature, visual identity, or any other element that could lead the investor to error in believing that they are firms linked in some way.

Hiring of analysis, management, or consulting services by the AAI

54. As a rule, the autonomous investment agent must limit himself to transferring to his clients the analyses made by the analysts hired by the intermediary who hired him. Given the limitation imposed by art. 11 of Instruction 497, it is not admissible for the autonomous agent to hire, on his own behalf, whether or not there is a charge for his clients, analysis, management, or consulting services, unless this hiring has prior and express approval from the hired intermediary.

Simultaneous hiring of AAI and managed portfolio service

55. The SMI became aware of cases where the autonomous agent captures investors for the intermediary and these decide to hire, with the contracting intermediary, the managed portfolio service. In this type of situation, the intermediary, by assuming the function of portfolio manager for the investor, becomes responsible for operationalizing the agreed strategy and has the duty to provide information about the securities portfolio under its administration, assuming the fiduciary function provided for in CVM Instruction 558. This implies that part of the activity that the autonomous agent would perform with respect to that investor loses its reason for being. It is no coincidence that the manager is remunerated by the investor for the services provided, so it would be strange for the autonomous agent to continue receiving rebates related to operations made by the manager in the investor's portfolio. Thus, depending on the details of each concrete case, one may be facing a situation where the intermediary is placing its interests above those of the investor, in infringement of what is provided in art. 30, sole paragraph, of CVM Instruction 505.

56. An even more serious version of this situation is the case where the hired manager is a legal entity with some type of relationship with the autonomous agent (has common partners, for example). In this case, it is clear the perverse incentive for the manager to make investment decisions considering the interests of the autonomous agent instead of prioritizing those of the investor. Thus, the view of the SMI is that this type of case points to a violation of arts. 10 and 17, II, of Instruction 497, by the autonomous agent and the contracting intermediary, respectively, in addition to the possible violation of art. 30, sole paragraph, of Instruction 505, already mentioned.

Acting of natural person AAI in a society of which he is not part of the corporate structure

57. CVM Instruction 497 clearly prohibits the autonomous agent society from delegating to third parties the activities for which it was contracted by the intermediary. Nevertheless, considering the operational procedures necessary to update the social contracts, which can be quite slow in some cases, the SMI considers it reasonable to mitigate this prohibition.

58. Thus, the Superintendence considers it acceptable for a society to allow the temporary acting of an autonomous agent who is not part of its corporate structure, provided that it is a person duly hired, as a natural person, by the same intermediary with which the society has a link. Obviously, in the case of a link with more than one intermediary, the non-partner AAI must have a link with all contractors.

59. Although it is not possible to definitively stipulate what can be considered a reasonable period in this type of situation, it only makes sense to presume regularity while the society is able to demonstrate that it is being diligent in adopting the necessary procedures for the necessary regularization of the social contract, with the inclusion of the new partner.

Distribution of other securities such as COE, CRI, CRA

60. The SMI receives frequent questions about the possibility of the autonomous agent acting in other assets. With regard to securities, CVM Instruction 497 clearly leaves the possibility of acting. Naturally, for every asset classified as a security, the exclusivity rule provided for in art. 13, I applies, with the only exception being investment fund shares, by virtue of the provision in art. 13, §2º.

61. It is also necessary to alert to the compliance with any existing requirements in specific norms, such as that contained in art. 13, sole paragraph, of CVM Instruction 600, regarding the hiring of autonomous agents by securitizing companies.

Exclusivity in the case of distribution of non-securities assets

62. The rule of art. 13, I provides that it is prohibited for the autonomous investment agent or the legal entity, constituted in the form of art. 2, to maintain a contract for the provision of services related to art. 1 with more than one institution integrated into the securities distribution system.

63. As a consequence, the rule applies solely to the activities of autonomous agents that involve intermediation and negotiation of securities. In the case of financial assets, the rule of art. 2, III, of CMN Resolution 2.838 prevails, according to which, for the exercise of its activity, the autonomous investment agent may maintain a contract for distribution and mediation with one or more of the institutions referred to in art. 1 of the same normative act.

64. In summary, it is understood that: (i) if the autonomous agent acts in activities involving securities, he may only do so through a single institution integrated into the securities distribution system, with the exception of investment fund shares, in the form of art. 13, §2º, of CVM Instruction 497; and (ii) if he acts in activities involving other financial assets (bonds) that are not securities, he may do so by linking to more than one intermediary, observing the provisions set forth below.

65. Additionally, the SMI understands that certain aspects of the activity of autonomous agents cannot be dissected into two separate parts. Thus, the controls that autonomous agents, and the intermediaries who hire them, must implement, by virtue of what is determined by CVM rules such as Instruction 497 and Instruction 505, must be extended to the entirety of the agents' acting. This is what happens, for example, with regard to the order recording system required by art. 13 of Instruction 505.

66. If it is possible that the investor orders in a specific call the negotiation of assets that may or may not be securities, there is no doubt that the controls mentioned in the previous paragraph cannot fail to be implemented and that it will be up to the CVM, to the limit, to punish intermediaries and AAIs if their lack is proven, even if the proof of this irregularity occurs in the context of acting with financial assets.

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Continuing education plan

67. CVM Instruction 497 requires, in its art. 19, V, that the accrediting institution implement a continuing education plan, with a view to ensuring that the knowledge of autonomous agents is continuously updated and improved. In this regard, it is necessary to inform that Ancord filed a proposal of a plan with the CVM, a proposal that was preceded by a public hearing held by the Association with autonomous agents and contracting intermediaries. The proposal will be brought, shortly, to the appreciation of the Autarchy's Collegiate Body, passing, subsequently, if approved, to be mandatory compliance for all AAIs.

Declaration of conformity

68. CVM Instruction 510 requires that all professionals and institutions authorized by the CVM keep their registration data updated and that once a year, always in the month of May, attest that this data is, in fact, correct. These obligations are applicable to autonomous agents, but, in accordance with CVM Instruction 510 itself, must be provided in accordance with the norms issued by the accrediting institution. With regard to the annual declaration mentioned, known as Electronic Declaration of Conformity (DEC), so far Ancord has not implemented a system for its receipt, but there is already a proposal that the declaration be required concomitantly with the compliance with the requirements of the continuing education plan. Thus, until this model is implemented, it is not required that the AAI present the DEC.

Communications to COAF

69. As informed in Circular-Office No. 1/2017/CVM/SMI/GME, the CVM does not include, in the list of participants in the securities market forwarded to COAF, the autonomous agents, since the acting of these occurs, by virtue of what is provided in Instruction 497, always through an intermediary. Thus, autonomous agents are not enabled to send communications to COAF nor do they need to send the annual declaration mentioned in art. 7º-A of CVM Instruction 301. It is opportune to alert, however, that the SMI understands that the autonomous agent has the obligation, by virtue of the provision in art. 10 of Instruction 497, to communicate to the contracting intermediary situations that he considers atypical or suspicious, in addition to complying with the rules of the intermediaries to which he is linked, including the routines related to the prevention of money laundering and the financing of terrorism.

Investments made by the AAI

70. The autonomous agent is a person linked to the intermediary who hires him, by virtue of the definition given in art. 1, VI, b, of CVM Instruction 505. Thus, he can only negotiate securities through the intermediary to which he is linked, as determined by art. 25 of Instruction 505.

71. In addition, the rules imposed by the contracting intermediaries on negotiations made by linked persons must be respected, including with respect, for example, to day-trade operations, short sales, or with derivatives, or to the minimum interval for unwinding positions.

Operation in the name of minor children

72. The SMI recently received a consultation about the regularity of the acting of an autonomous investment agent as legal representative and issuer of orders for a minor child vis-à-vis the prohibition existing in art. 13, III, of Instruction 497.

73. The understanding of the Superintendence in this regard is that, in the specific hypothesis mentioned, there is no violation of the cited device. The objective of the prohibition contained in art. 13, III, is to prevent the AAI from substituting the client's will with his own. In the scenario presented, however, since it is a minor under the parental responsibility of the AAI, there is no such substitution, as the minor does not have civil capacity.

74. It is worth observing, however, that the minor children of the autonomous agent are also considered linked persons to the contracting intermediary (art. 1, VI, f, CVM Instruction 505). Thus, the operations made in their name must observe the rules issued by the contracting intermediary, in line with what was mentioned in the previous item.

Hiring of employees

75. The uniprofessional nature of the autonomous agent society indicates that its final activities, namely those provided for in the items of art. 1 of CVM Instruction 497, cannot be developed by people who are not its partners.

76. Thus, it is not regular that the capture of clients, the reception of orders, and the provision of information about the products offered be done by professionals hired by the autonomous agents.

77. However, this does not mean that any and all hiring of employees is prohibited. Any services that are not described above can be done by hired employees.

78. In particular, there does not seem to be any obstacle, in theory, to the hiring of professionals for the activities cited below:

Marketing - Development of publicity actions of the society (provided that the materials produced are duly approved by the intermediary before their use, as required by art. 11, II, of CVM Instruction 497) and client capture strategies

Administrative/Financial - Assistance in activities such as the control of revenues and expenses of the society

Compliance - Including the development and supervision of internal control mechanisms with a view to ensuring the adherence of the conduct of partners and the society to legislative determinations

Information Technology – Maintenance of equipment and computerized systems

Cleaning, pantry service, security

79. It is worth remembering, however, the responsibility of the society and its partners with regard to the activities developed by the contractors and, in particular, the duty to maintain the confidentiality of the information received (art. 10, sole paragraph, II).

Use of prohibited expressions

80. One of the key points of CVM Instruction 497 is the adoption of various measures to make it clear to the investor that the autonomous agent is an agent of the intermediary institution. One of the points that reflects this care is the prohibition contained in art. 11, §1º, II, of the use of expressions that make this understanding difficult. The SMI has seen, however, that even the expressions expressly banned by the text of Instruction 497 ("partner", "associated" or "affiliated") continue to be used by some market participants. Thus, it is worth alerting about the possibility of sanctioning action by the CVM in these cases.

II. Guidelines directed more specifically to contracting intermediaries of autonomous agents

Duty of supervision of AAI activities

81. Instruction 497 stipulates, right in its art. 1, that the autonomous investment agent acts as an agent and under the responsibility of the intermediary who hires him. Furthermore, in art. 15 the Instruction reinforces the responsibility of the intermediary for the acts practiced by the hired AAIs. In addition, the Instruction is explicit in imposing on intermediaries, in its art. 17, II, the duty of supervision of the activities of the hired agents.

82. In light of the above, the SMI understands that contracting institutions must have systems of continuous supervision of the activities of autonomous agents, aiming to identify possible irregularities. That is, it is not sufficient evidence of compliance with art. 17, II, the proof of any diligence taken by the intermediary after the emergence of problems, such as the presentation of complaints by investors. Although a strong post-act action in the face of concrete problems is important, it is indispensable that the intermediary is able to prove that he was diligent a priori in the prevention of irregularities, especially when issues such as the absence of order records, portfolio management by the AAI, churning, etc. are involved.

Care for client passwords and monitoring of AAI and their clients' operations

83. In the view of the SMI, intermediaries have, especially considering the duties brought by CVM Instruction 505 in its articles 30 and following, the obligation to orient clients, regardless of how they were captured, about the adequate use of access means to the systems

84. The CVM becomes aware with some frequency, including through complaints presented within the Mechanism for Compensation of Damages - MRP, of cases where investors report having shared with autonomous agents the passwords to access the electronic systems maintained by the intermediary, such as the home broker. In some cases, investors who went through this situation reported that the autonomous agent who attended them informed that this was the market practice. Since it is certain that autonomous agents, when conducting business in the name of their clients, must use specific channels made available by intermediaries, which must not in any way be confused with the channel used directly by investors, it is crucial that intermediaries emphasize the orientation that the password is for personal and non-transferable use, not being shared with third parties, including autonomous agents and even the intermediary's own employees, under no circumstances.

85. It is worth remembering that contracting intermediaries of autonomous agents must respect, in addition to the provisions of CVM Instruction 505, what is determined by art. 17, §1º, III, of CVM Instruction 497. Thus, it is necessary to adopt all reasonable care to check the origin of the orders, even if they were commanded using the investor's personal password. With this objective, it is considered good practice to investigate, even by sampling, the origin IP of the orders made via home broker, comparing it with the IP used by the autonomous agent who attends the investor. Another important care consists of measuring the volume of operations of investors attended by AAI, even in the case of operations commanded via home broker, confirming with the investor the authorship of the orders when there are, for example, signs of churning (excessive portfolio turnover).

86. Additionally, in accordance with the provision of art. 17, §1º, I and II, of CVM Instruction 497, intermediaries must monitor the operations of AAIs and their clients, including seeking patterns of operation that are atypical or incompatible with the clients' profiles, as well as, in these cases, acting diligently to verify preventively if the orders were indeed commanded by the clients, as well as, if necessary, acting promptly with regard to the AAI and communicating with the CVM.

Review of the AAI website

87. As determined by art. 11, II, of Instruction 497, all material used by the agent

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autonomous agents in the exercise of their activities must be previously approved by the contracting intermediary. This command involves a bilateral obligation, as it determines that the autonomous agent must refrain from using any material without first submitting it for review and approval by the intermediary, and, on the other hand, obliges the intermediary to ensure that contracted agents are not using unapproved materials.

88. In this context, special care is necessary regarding internet pages and other electronic channels used by autonomous agents. Regarding these means, in the view of the SMI, it is not enough for the intermediary to approve the content only once before its launch; it is necessary to have an agreement between the contracting party and the contractor regarding the system for content review. This agreement must describe, among other things, which sections of the site can be freely altered by the agents and which have their alteration conditioned upon the express authorization of the intermediary.

89. It is also worth mentioning that the Instruction does not contemplate any mitigation of this responsibility in the case of non-exclusive contracts (art. 13, §2º). In this case, the website used by the autonomous agent must be approved by all contracting institutions, since the information contained therein will be accessed by clients from all of them.

90. It is also worth mentioning that art. 11 clearly establishes the obligation that the material used in courses that the autonomous agent may offer must not only expressly mention the contracting intermediary but also be previously and expressly approved by it.

Responsibilities in cases of non-presentation of order records

91. CVM Instruction 505 is quite clear in placing on the intermediary the responsibility for maintaining an order recording system (art. 13). Thus, cases where there is no presentation of proof of orders will be considered by the SMI, as a rule, as failures of the intermediaries. Naturally, given the specific characteristics of the case, the attribution may also be extended to the autonomous agent.

92. However, the possibility of exclusive liability of the autonomous agent only seems possible in very peculiar cases, in which it is possible to prove that the agent, in a fraudulent manner, acted contrary to the rules delimited by the contracting institution. Even in this situation, however, the SMI will evaluate the adequate compliance, by the contracting institution, with the duty of supervision of the agents' activities, provided for in art. 17, II, of Instruction 497.

93. It is also worth remembering that there is no provision in the legislation for a more permissive regime in cases where the autonomous agent has some type of personal relationship with the client (for example, being a relative). Thus, obviously, in these situations the duty to archive order records in a manner compatible with what is determined in art. 12 and following of CVM Instruction 505 remains.

Hiring of AAs by other types of institutions

94. In principle, credit cooperatives, commercial banks, multiple banks without an investment portfolio, and Caixa Econômica Federal are not institutions part of the securities distribution system, as these types of institutions are not mentioned in art. 15 of Law 6.385. Thus, in view of art. 1 of Instruction 497, these institutions could not hire autonomous investment agents.

95. However, commercial banks, multiple banks without an investment portfolio, and Caixa Econômica Federal can register with the CVM under the regime of CVM Instruction 424, which regulates the provision of CMN Resolution 3.261. This registration, in accordance with the provision of the Resolution, makes these institutions, for the purposes mentioned therein, part of the securities distribution system. Thus, the SMI understands that, as long as they are regularly integrated into the securities distribution system, which is achieved through registration with the CVM provided for in Instruction 424, commercial banks, multiple banks without an investment portfolio, and Caixa Econômica Federal may hire autonomous agents to carry out, as their representatives, the activities provided for in CVM Instruction 497.

96. The same does not apply to credit cooperatives, since, despite the permission given by CMN Resolution 4.434 to act in the distribution of investment fund shares, they, due to lack of legislative provision, cannot be considered part of the securities distribution system. Thus, considering the limitation provided for in art. 1 of Instruction 497, the view of this Superintendency is that the possibility of hiring autonomous agents by cooperatives would depend on a change in the Instruction.

97. Regarding the distribution of CRAs by securitizing companies, it is necessary to pay attention to the restriction existing in art. 13, sole paragraph, of CVM Instruction 600, which stipulates that the hiring of autonomous agents can only occur if the company is authorized by the Central Bank of Brazil.

Listing of contracted autonomous agents

98. The SMI became aware of the existence of situations in which, when hiring a society of autonomous agents, the intermediary contractually determines that only certain partners will provide services to it.

99. However, art. 16, §2º, determines that the intermediary must list on its internet page all the partners of the contracted societies. In the view of the SMI, this determination cannot be ignored, even in the situation described in the previous paragraph. Naturally, the intermediary can, on the other hand, highlight in some way in the list of partners of a given society those with whom it admits that its clients can contact.

Communication of irregularities

100. It is worth remembering the obligation that intermediaries have to inform the CVM of indications of irregular activity of contracted autonomous agents, as required by art. 17, III, of CVM Instruction 497 and art. 32, IV, of CVM Instruction 505.

101. This communication must, according to the procedure described in Circular Letter CVM/SMI 06/15, be sent to the email smiviolacoes@cvm.gov.br, with the address gme@cvm.gov.br, of the Market Structure and Electronic Systems Management (GME), copied.

102. Finally, it is worth remembering that, since Ancord no longer has regulatory and sanctioning activity, communications should no longer be sent to the Association. It is still pertinent, however, the communication to BSM, in cases where it is an activity subject to the supervision of that self-regulatory body.

III. Other orientations and final considerations

Training companies

103. First of all, it is worth clarifying that it is not irregular for the autonomous agent to offer courses on the securities market and recruit clients among students, as long as the rules provided for in CVM Instruction 497 are followed, such as the prior approval of the material by the contracting intermediary.

104. However, the SMI has been receiving inquiries about companies not authorized to act as AAs that present themselves as providers of training or content on the capital market and that, after attracting the public to participate in the trainings, end up recruiting investors among students, being remunerated, directly or indirectly, for this activity.

105. Since client prospecting is one of the typical activities of the autonomous investment agent, as provided for in art. 1, I, of CVM Instruction 497, the situation described points to possible irregular activity, it being worth remembering that acting as an AA without CVM authorization is not only an administrative offense, but also a crime defined in art. 27-E of Law 6.385/76.

Inquiries about regulation

106. The Market Structure and Electronic Systems Management (GME) is the best point of contact for issues related to investment autonomous agents. Thus, any doubts about the correct interpretation of CVM Instruction 497 should be sent to the management, at the address gme@cvm.gov.br, which will evaluate the inquiries, forwarding them, whenever necessary, for the response of the SMI, either directly to the inquirer, or through a circular letter to the market.

107. The formulation of the inquiry must be clear regarding its object, avoiding generic form and theoretical inquiries. The inquiry must be accompanied by all elements and arguments judged important for the conclusive manifestation of the SMI.

108. It is worth highlighting that the presentation of an inquiry does not exempt the regulated inquirer from compliance, within the due deadlines, with legal and regulatory obligations, even if these are the object of the formulated inquiry.

109. Finally, it is worth mentioning that the understandings of the SMI, including those set forth in this Circular Letter, are subject to appeal to the Collegiate Board, as provided for in item X of CVM Deliberation 463.

Inquiries about regulatory fees

110. The GME frequently receives inquiries from autonomous agents regarding pending values of regulatory fees. It is worth informing that requests of this type must be presented to the Collection Management – GAC, through the email gac@cvm.gov.br.

111. It is also worth remembering that the CVM website presents several clarifications about the regulatory fee at the address http://www.cvm.gov.br/menu/regulados/taxasmultas/faq.html.

Sending of documents

112. In case of need to send petitions, inquiries, or any other documents to the SMI, the recommended channel is the Digital Protocol of documents, available on the CVM website. There is a link to the Digital Protocol right on the home page of the site www.cvm.gov.br or access can be directly through the address http://www.cvm.gov.br/menu/atendimento/protocolodigital.html. At this address, it is also possible to consult a user manual with details about the functioning of the tool. In the case of an issue related to investment autonomous agents, the Market Structure and Electronic Systems Management – GME must be selected as the recipient area.

Anonymous complaints

113. Some autonomous agents have reported to the SMI hesitation in reporting potentially irregular conduct of the intermediaries that hire them, for fear of commercial retaliation.

114. Initially, it is worth informing that the CVM investigates, ex officio, any complaint that presents minimum elements sufficient for investigation, even if the communication is made anonymously. In addition, there is the possibility of communicating facts to the SMI by telephone or in a private hearing, without presenting a formal complaint.

115. Additionally, it is worth informing that the Autarchy is in the process of implementing a specific channel for the formalization of anonymous complaints or with a request for identity reservation.

Regulated area on the CVM website

116. Finally, the SMI reminds that there is an area on the CVM website (www.cvm.gov.br) specifically intended for communication between the Superintendency and investment autonomous agents. In this section of the site, various subjects of interest to the regulated are published, so it is recommended to visit it periodically.

Sincerely,

Francisco José Bastos Santos
Superintendent of Market Relations and Intermediaries

Document electronically signed by Francisco José Bastos Santos, Superintendent, on 12/14/2018, at 18:54, based on art. 6º, § 1º, of Decree No. 8.539, of October 8, 2015.

The authenticity of the document can be checked on the site https://sei.cvm.gov.br /conferir_autenticidade, informing the verification code 0654448 and the CRC code 3836BFFD.

This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Código Verificador" 0654448 and the "Código CRC" 3836BFFD.

Reference: Process No. 19957.011068/2018-81 SEI Document No. 0654448