Brazil: On-line Transactions on the Brazilian Securities Market

Last Updated: 10 December 2002

By Walter Douglas Stuber and Adriana M. Gödel Stuber*

On September 10, 2002, the Brazilian Securities and Exchange Commission (CVM) issued rules to regulate transactions and investments made on the worldwide net ("Internet"), that is, rules that electronic brokers will be required to abide by when placing purchase and sale orders and when trading securities1 on stock exchanges or organized over the counter entities over the Internet. These rules were set forth by Instruction CVM nº 376, of September 11, 20022 and are discussed ahead. Importantly, said rules do not apply to electronic brokers only but also to other members of the securities distribution system, as applicable, whenever those members intermediate securities transactions through an electronic broker.

As defined by Instruction CVM 376/02, "electronic broker" is a securities brokerage house accredited by CVM to intermediate or broker securities transactions on stock exchanges or organized over-the-counter market running systems that receive securities purchase and sale placement orders via the worldwide web. "Homepage" is a set of files exhibited or made available on the worldwide web that may be physically accessed by means of an electronic address. "Link" is a highlighted text or graphic component in a homepage that affords access to other pages or sections or components of the same homepage. And finally, "Internet Protocol", or IP as is commonly known, is the four-octet code that identifies all devices connected to the worldwide web3.

Electronic brokers must include in their homepages clear and accurate information that is easily understandable to investors. They are:

  1. detailed information on the use of the on-line securities trade system;
  2. any discounted rates offered to clients or specific category of clients and costs of trading on the Internet. The fees charged by stock exchanges or trusts in the organized over-the-counter market are also required;
  3. detailed procedures followed by the electronic broker concerned when filling purchase and sale orders received over the Internet. A note to the effect that the orders may not be automatically processed by the system must be included, as well as in relation to the priority in relation to orders incoming from other communication channels, based on the trade volume and other parameters;
  4. features of the security systems, including the use of passwords and electronic signatures;
  5. electronic means used to acknowledge receipt of order and confirm strict compliance with the instructions given by investor, including any other information investors should be furnished;
  6. information on the securities, such as best price and placement lists, by kind of security, used in the electronic trade systems of the stock exchange or trust of the organized over-the-counter market on which the broker will be filling the orders received over the Internet. Additionally, the time such information will be made available must be indicated on the broker’s homepage;
  7. if purchase and sale orders are passed on, the electronic broker in charge of the orders received over the Internet must be informed thereof;
  8. maximum time investors will have to perform transactions without being automatically disconnected; and
  9. link to the CVM homepage.

For informational purposes, electronic brokers must include in their homepages4 a section or link containing the following information:

  • a description of the structure and operation of stock exchanges, trusts of the organized over-the-counter market and securities clearance and custody entities and a description of the securities available for purchase and sale over the Internet;
  • risk of price fluctuation and possible loss of the principal amount inherently found on the securities market, specially those resulting from derivative positions; operating risks of using the Internet and electronic trade systems for purchasing or selling securities; risks resulting from the failure to deliver the assets within the established time and actions taken by the clearance and custody houses to reduce those risks;
  • special auction procedures, due respect being given to rules issued by CVM and stock exchanges or trusts of the organized over-the-counter market, to which investors’ orders are subject;
  • information about the authority of self-regulatory entities, specially the power to call off deals that have been previously completed, should such deals are later determined to have violated legal provisions; information about concurrent securities trade in open outcry and in the electronic trade system, indicating the instances one market may interfere with another; other information of relevance, as the brokerage house’s management may determine.

Annually, in the month of March, electronic brokers are required to carry out technical audits of their systems to estimate their capacity indictors5 and prepare the corresponding report. That report will be forwarded, within ten days of its completion, to the stock exchange or trust of the organized over-the-counter market of which the electronic broker is a member6. Electronic brokers must design a contingency plan for their systems aimed at protecting investors in the event of Internet service interruption or during periods of market high volatility or peak demand7. In addition to the technical audits, which will be carried out by the broker itself, self-regulatory entities (stock exchanges or trusts of the organized over-the-counter market running electronic trade systems receiving orders over the Internet) must carry out audit, semi-annually, and issue the corresponding report, of the systems used by brokers. Such audit will determine the regular provision to clients of necessary information and the compliant recording thereof at the brokerage house, as provided by existing legislation. Regulatory entities will forward copies of that report to CVM within fifteen days of its completion.

Electronic brokers must use the highest standards of net security since it is up to them to ensure security and secrecy of information on, securities purchase and sale orders from and securities portfolio of all clients, as well notify clients thereof. Each electronic broker is liable for the operability of their systems, even those systems maintained by third parties. For special auction procedures and derivative market transactions, alternative means to support clients must be in place. Clients will be informed of those alternative means at the time of registration and will also be informed of the instances they means may be used.

Electronic brokers will keep magnetic records of all securities purchase and sale orders received over the Internet for five years, whether or not such orders were filled. Additionally, brokers will provide each investor placing orders, immediately and electronically, the following information: (a) the receipt and recording of order into the electronic system of the stock exchange or the organized over-the-counter market; (b) that the order was filled; and (c) the cancellation of the securities purchase and sale, if any, with the reasons for such cancellation.

Brokers offering their clients or users of their homepages pseudonym message publication services8, must make available to CVM, also for five years, magnetic files containing: (i) full contents of messages published in their homepages; (ii) the pseudonyms used by the authors of messages; and (iii) the Internet Protocol of the PCs originating those messages. It is up to the broker to establish in-house procedures to curb manipulation of prices and misinformation or information that is deleteriously incomplete through their message publication services9.

Every relevant fact disclosed by companies listed in stock exchanges or organized over-the-counter markets, in the preceding five business days, must be inserted on the homepage10.

1 The following are securities subject to Law nº 6385, of December 7, 1996: (i) shares, debentures and subscription warrants; (ii) coupons, rights, subscription receipts and division certificates in connection with securities referred to in item (i); (iii) securities deposit certificate; (iv) debentures certificates; (v) quotas in securities investment funds or funds of investment in any kind of asset; (vi) commercial notes; (vii) forward contracts or other derivative contracts, whose underlying assets are securities; (viii) other derivative contracts, irrespective of the underlying assets; and (ix) if publicly offered, any other securities of collective investment agreements that create right of ownership, partnership or compensation, including those resulting from provision of services, which earnings result from the efforts of the entrepreneur or third parties.

2 Instruction CVM nº 376, of 9/11/2002, was published on the Federal Official Gazette issue of September 11, 2002, and shall be effective as of November 9, 2002, that is, sixty days after its publication. In addition to the rules contained in such Instruction, to the trade performed by electronic brokers apply, when applicable, the other rules issued by CVM that regulate brokerage houses trading securities and stock.

3 In the worldwide web, known as the Internet, each computer is identified by a number, called the IP (the initials for Internet Protocol) address. That IP address consists of a set of eight bits (four octets). These octets, if shown, are separated by dots. For instance: 110011000.11111111.10001110.00001010.

4 Brokers’ homepages must conspicuously (in capital letters) show the following note: "Communications made over the worldwide web are subject to interruptions, which could cause the orders or trade to be invalid."

5 Included in the capacity indicators are: (i) the number of investors authorized to trade on the Internet, divided by the maximum number of orders the electronic broker’s systems are capable of recording within one minute; (ii) the average time between recording the order in the electronic broker’s system and its input in the electronic trade system of the stock exchange or trust of the organized over-the-counter market; and (iii) the average time between recording the order in the broker’s system and electronically sending acknowledgement of recording to the client.

6 The stock exchange or trust of the organized over-the-counter market must reserve space on their homepage for publication of capacity indicators determined in the electronic broker’s technical audit report.

7 Exclusively by means of justified prior notification to CVM, stock exchanges or trusts of the organized over-the-counter market may interrupt or limit temporarily the use of an electronic broker’s homepage to trade securities.

8 Users of an electronic broker’s homepage containing analysis of corporation performances or securities must have their full names properly indicated by the broker in each analysis published. It is up to the brokerage house to check for authenticity of any personal information provided by users that is published in conjunction with their analysis. Analysis sent by users of the homepage must be published in a separate section from those published by legal entities.

9 Procedures established by a brokerage house to curb manipulation of prices and misinformation or information that is deleteriously incomplete must be communicated to CVM by November 9, 2002.

10 An electronic broker must include, in a conspicuous manner (capital letters) these relevant facts in the initial section of its homepage, followed by the following note: "Search relevant facts disclosed in the last five (5) business days". Relevant facts may be classified by title, with a link to the full text thereof, as disclosed by the company in announcement to the stock exchange or trust of the organized over-the-counter market where the company-issued securities were traded.

*Walter Douglas Stuber and Adriana M. Gödel Stuber are experts in finance law and capital market and founder partner and associate lawyer, respectively, of Amaro, Stuber e Advogados Associados.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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