The Superintendence of Market and Intermediary Relations ("SMI") of the Securities and Exchange Commission ("CVM") published, on 11.10.2019, CVM/SMI Circular Letter 05/2019 ("Letter"), regarding the performance of intermediaries in relation to transactions with excessive costs for investors.
With the objective of guiding intermediaries about the monitoring of excessively costly and inadequate operations to the investor's profile, the document provides recommendations for the implementation of the duties of good faith, diligence and loyalty, inherent to the intermediation activities. The proposed alternatives are also intended to give effectiveness to the suitability standards set out in CVM Instruction No. 539, of November 13, 2013.
The provisions on churning, a type of fraud in which excessive trading is carried out in securities, generating benefits for intermediaries to the detriment of investors, are worthy of note. The Official Letter identifies the elements that characterize churning (excessive portfolio turnover, control over transactions and intention to generate brokerage revenues and commissions) and the need to implement clear routines and internal controls to prevent this practice, so that clients' interests are not harmed as a result of conflicts of interest. Accordingly, the following are recommended:
(i) the implementation of systems for monitoring portfolio turnover indicators, with alerts in the event of violations;
(ii) contacting and offering didactic information to the client, allowing a conscious evaluation of costs and service;
(iii) monitoring linked autonomous investment agents; and
(iv) the communication of irregularities committed by agents and employees to CVM, as soon as they are identified.
Finally, the Official Letter concludes by indicating that intermediaries are expected to act effectively to prevent advisors, agents and employees from violating the fiduciary relationship with clients for their own benefit.
To access the Official Letter, click here.
The team at Barcellos Tucunduva Advogados is available to clarify any doubts related to the matter.
