CVM Explanatory Note 29

CVM EXPLANATORY NOTE NO. 29, OF MARCH 26, 1984.
Ref.: CVM Instruction No. 33, of March 26, 1984, which defines the types of purchase or sale orders for securities in Stock Exchanges, and establishes norms and procedures to be observed by brokerage firms and their clients.

INTRODUCTION
The constant evolution of the securities market induces the need for the CVM to continuously evaluate the practices and methods used in this market, with a view to elaborating norms that, on one hand, preserve the reliability necessary for the orderly functioning of the market and, on the other, seek to rationalize the procedures adopted by the agents interacting in this segment.

Following this line of action, the CVM, while monitoring and evaluating the application of the provisions set forth in the document that, until now, defined the types of purchase or sale orders for securities in Stock Exchanges - CVM Instruction No. 12, of 04.09.80 -, found that a series of improvements could be introduced into this Instruction, aiming to adapt it to the current stage of our market.

Thus, based on studies conducted by this Commission, and accepting suggestions from Stock Exchanges and brokerage firms, INSTRUCTION NO. 33/84 is issued, which presents the following basic characteristics:

1. Client Registration
   By recognizing that the perfect knowledge of the client must compete, above all, to the intermediary who will operate with him in the stock market, the Instruction provides as mandatory only the minimum registration data considered necessary for investor identification.

Regarding natural persons, the full name, address, CPF (individual taxpayer registry), and marital status are information that, along with others, allow the brokerage to identify the client (art. 1, item I).

Regarding the investor, a legal entity, the provisions contained in Instruction No. 12/80 are reduced, requiring only that the identification of this type of client be made through the company's trade name or corporate name, address, CGC (corporate taxpayer registry) number, name of its controllers, and the name and qualification of the persons who operate on behalf of the company (art. 1, item II).

Obviously, it is optional for brokerages and Stock Exchanges to require any additional information from clients, including regarding their financial or asset status, data that will undoubtedly be important mainly when the investor operates in high-risk markets, such as futures and options (art. 1, § 2).

2. Order Types
   Instruction No. 12/80 created four basic types of orders, the main ones being the free order and the immediate order. The first conferred upon the brokerage discretionary power to execute the order at the time and price that seemed most convenient to it. The immediate order, on the other hand, gave the intermediary no discretion, as it had to be executed as quickly as possible from the moment of its receipt in the trading floor.

Although such a classification is valid, practice has shown that the vast majority of intermediaries did not use the discretion offered by the free order, executing orders, except for limit price orders, at the moment of their receipt, obviously observing the chronology of entry into the brokerage.

Thus, considering the practice already established by the market, this Instruction eliminates the "free" and "immediate" orders existing in Instruction No. 12/80, replacing them with the so-called "market" order, which specifies only the quantity and characteristics of the securities to be bought or sold, and must be executed from the instant it is received in the trading floor (art. 5, item I).

Maintaining the other orders provided for in Instruction No. 12/80, namely the "limit" and "paired" orders, INSTRUCTION NO. 33/84 introduces a specific order for operations known in the market as "financing" and involving the purchase or sale of shares or rights through an operational modality, and another concomitant transaction of opposite sense in the same or another modality, observing that such operations must be contracted with distinct maturity dates (art. 5, item IV).

3. Procedures for Registration, Receipt, and Execution of Orders
   Under this Instruction, the information required to fill out orders is practically identical to that previously provided by Instruction No. 12/80.

What is being changed is the moment at which such information must be filled out, because while under the previously in force Instruction, the brokerage was obliged to immediately record all operation data upon receipt of the order, CVM INSTRUCTION NO. 33/84 allows some information to be added to the order after the execution of financing operations and operations carried out in the futures and options markets.

Thus, in financing operations, the brokerage firm is permitted to fill out, at the moment of receipt, only its identification: the client's name or code, and the date, time, and sequential number of the order (art. 7, § 1). This is because, in a large part of these operations, upon receiving the client's order, the brokerage does not know which share it will acquire, nor which markets it will use to finance the operation. In this way, the complete filling out of the order at the moment of its receipt becomes an obligation not always possible to fulfill.

Also, in the case of futures and options markets, the reasons that hinder the complete filling out of the order upon receipt are more related to the dynamism of the operations carried out in these markets, since the brokerage may receive, in a short space of time, orders from several clients for instant execution. Thus, considering the practical difficulty resulting from the immediate filling out of all order data, INSTRUCTION NO. 33/84 allows these intermediaries to fill out some information after the execution of the operation (art. 7, § 2).

It is worth remembering, however, that in the case of financing, as well as for futures and options operations, this system is only permitted if the brokerage maintains provisional control that allows the inspection sectors of the Stock Exchange and the CVM to identify all characteristics of the operations carried out.

4. Market Professionals
   Instruction No. 12/80 classifies, for purposes of priority in order execution and business distribution, clients into two categories: market professionals and non-professionals.

Market professionals would be those investors who engage in activities related, directly or indirectly, to the intermediation or even the regulation of the securities market, and non-professionals would be investors not linked to any market activity.

The breadth of the concept inserted in Instruction No. 12/80 needed revision, as only those persons who, by virtue of dealing directly with market orders, hold comparative advantages over other investors should merit special regulation.

Therefore, and considering that according to current legislation, the intermediation activity in the Stock Exchange is exercised exclusively by brokerages, INSTRUCTION NO. 33/84 substantially reduces the universe of persons considered market professionals, classifying in this category only partners, directors, employees, or agents of brokerages, accredited autonomous investment agents by these firms, as well as their spouses or partners and minor children (art. 10).

Still on this topic, it is worth remembering the change in the concept of collective accounts, including investment clubs, as market professionals. In fact, while under the terms of Instruction No. 12/80, collective accounts, except investment companies or funds, were considered market professionals when any person classified in this condition participated in them, INSTRUCTION NO. 33/84 provides that said accounts be considered market professionals only when the majority of their quotas belong to investors who are also professionals (art. 10, § 1).

5. Execution and Distribution of the Order
   The new definition of order types introduced in INSTRUCTION NO. 33/84 simplifies the subsequent distribution of business carried out by the brokerage. This is because, under Instruction No. 12/80, the immediate order always had priority over the others. Also, that legal document allowed the brokerage to adopt its own criteria for the distribution of other types of orders.

This Instruction, on the contrary, in its art. 11, item II, letters a and b, provides only two basic criteria to distribute orders in the market: orders on behalf of non-professional market clients will be attended before those issued by clients of the same category (non-professionals and market professionals).

This system aims not only to rationalize the procedures adopted by intermediaries but also to facilitate investors' understanding of the operational mechanics used in stock transactions.

We also recall that, as an example of the provision in the previously in force Instruction, INSTRUCTION NO. 33/84 establishes that only orders capable of execution at the moment of the effective conclusion of a business will compete in its distribution.

It is further determined that the financing order will only compete with another order of the same category, since in this operational modality any modification in the prices fixed at the time of the operation would distort the conditions established by the principals for its realization (art. 11, Sole Paragraph).

6. Responsible Administrator
   As an example of other legal documents already issued by the CVM, it is also determined the indication by the brokerage of one of its administrators (director, managing partner, or holder of an individual firm), who will be responsible before the market, regulatory and self-regulatory bodies, for compliance with the provisions set forth in this Instruction (art. 12).

RIO DE JANEIRO, MARCH 26, 1984.
Original signed by
HERCULANO BORGES DA FONSECA
President