Commodities brokerage houses (Corretoras de Mercadorias) are subject to the control and monitoring of the Brazilian Securities and Exchange Commission (CVM) and of the futures and commodities exchanges where they are listed as members, in addition to being members of the Brazilian securities distribution system1. Rules and procedures to organize and operate a commodities brokerage house have been recently established by Instruction CVM nº 402, of January 27, 20042.
According to Instruction CVM nº 402/2004, "commodities brokerage house" is a corporation accredited to trade in or list transactions with securities and stock on a futures and commodities exchange3. In order to operate, a commodities brokerage house will need a prior registration with the CVM 4 and must meet the following requirements: (i) be a corporation (sociedade por ações) or a limited liability company (sociedade limitada); (ii) be admitted as member of futures and commodities exchange5; (iii) inform CVM the name of a technically qualified officer appointed in the by-laws/articles of incorporation or of a managing partner, with experience in the securities, commodities and futures exchange6; and (iv) add to its corporate name the expression "commodities brokerage house". A commodities brokerage house must additionally show equity and financial adequacy, as determined by the futures and commodities exchange in question.
Commodities brokers may also be organized as securities broker or dealer, investment or multi-service bank with an investment portfolio, and, in any of case, will be governed by the rules applicable to financial institutions.
Upon admittance in a given futures and commodities exchange, a commodities brokerage house must pledge real guarantee7 of seat (título patrimonial) or stock issued by the exchange it holds, to guarantee, on a priority basis, the debts to the exchange of which it is a member, pursuant to the exchange’s regulations and conditions.
In transactions made in futures and commodities exchange, the commodities brokerage house will be liable to customers, also known as principal (comitente)8, or other intermediaries on behalf of which it may have operated or has been operating, and to the exchange itself: (a) for their proper and effective settlement; (b) for the legitimacy of securities delivered for any purpose and for their adequate acceptance and delivery, endorsement or transfer; (c) arrangements with respect to registration, in the names of principals (comitentes) connected thereto and as per instructions thereof; (d) for the legitimacy of the power-of-attorney and other documentation required to transfer the securities; and (e) for the compliance with and adherence to the high standards of creditworthiness and ethics.
It is incumbent on commodities brokerage houses to keep transactions and services in secrecy, including the names of the principals (comitentes). This information may only be disclosed upon authorization given by such principals (comitentes) or under the terms of the laws and regulations in force9. However, if a principal (comitente) fails to adhere to or violates applicable legal rules or regulations, irrespective of any actions in court or out of court, the commodities brokerage house shall report it to the futures and commodities exchange, asking, if applicable, that the arrangements be taken to enforce the guarantees pledged by the principal (comitente) in default, as well as the publication of these facts to the market10. In the case of default by a principal (comitente), the commodities brokerage house will report to the futures and commodities exchange which transactions gave rise to the default, showing evidence of good-standing and actions taken to collect the principal (comitente).
In the discharge of its duties, commodities brokerage houses are expressly forbidden to perform the following transactions: (i) grant financing, loans or advances to their principals (comitentes)11; (ii) acquire property not intended for their own use. Exceptionally, however, a commodities brokerage house may accept assets in payment of doubtful or bad debts and, in this case, the brokerage house must sell the assets within one year of acceptance, which time cannot be extended more than twice, at the option of CVM; (iii) take loans or financing from financial institutions. Laws and regulations in force allow brokerage houses to take loans or financings in connection with the acquisition of property for their own use and in the attainment of their corporate purposes, nevertheless; and (iv) carry out transactions involving ultimate principal (comitente) with no information on the records of the futures and commodities exchange, on the terms of applicable laws and regulations.
As with the other financial institutions, commodities brokerage houses must prepare monthly balance sheets and, on the last day of July and December of each year, financial statements attaching the corresponding audit report and opinion by an independent auditing firm accredited by CVM12.
In addition to the registration to operate, there are several other actions of commodities brokerage houses conditioned on prior approval of CVM: (a) conversion, consolidation, merger and spin-off; (b) vesting of administrators; (c) vesting of tax advisors and members of other corporate bodies; (d) disposal of controlling equity; and (e) liquidation of company by deliberation of the partners13. Although not subject to CVM approval, the following actions must also be informed within five business days of the date of deliberation, both to CVM and the futures and commodities exchange: (i) move of head office; (ii) establishment and closing of offices and branches; (iii) change in the capital stock; (iv) disposal of seat (título patrimonial) in the futures and commodities exchange; and (v) any change in the by-laws or articles of incorporation.
Registration to operate may be cancelled by CVM if: (a) operation does not start within 180 days of the date of registration; (b) requested cancellation; (c) misrepresentation or false information on documents delivered for registration14; (d) a commodities brokerage house no longer meets requirements or conditions for the approval of registration on the terms of CVM Instructions nº 402/2004; (e) the commodities brokerage house, in the performance of its activities, fails to satisfy the obligations provided in CVM Instruction nº 402/2004; or (f) in case of disposal of seat (título patrimonial) in or stocks issued de futures and commodities exchange15.
Decisions made by the Head of the Relations with the Market and Intermediaries Department of CVM may be appealed to the Full Board, as provided by current laws and regulations16.
* Walter Douglas Stuber is a partner of Stuber - Advogados Associados and expert in Banking, Capitals Market and Corporate Negotiations.
Footnotes
1 Article 4 of Law nº 10,303, of October 31, 2001 creates a sub-item VI to article 15 of Law nº 6385, of December 7, 1976, which includes commodities brokerage houses, special operators and the commodities and futures exchanges in the securities distribution system. Law nº 6385/1976 contains provisions on the securities market and created CVM.
2 CVM Instruction nº 402/2004 will be effective 30 days after January 29, 2004, date of its publication on the Federal Official Gazette. Commodities brokerage houses presently in operation will have an additional 90 days, from the effective date of the Instruction, to adjust to its requirements.
3 This definition was already described in article 2, item III, of CVM Instruction nº 387, of April 28, 2003, which gives the standards and procedures to be followed in the securities and exchange transactions on the floor and in electronic trading and registration systems in the stock exchange and in the future and commodities exchange and other provisions.
4 Approval to operate will be granted by the CVM’s Superintendent’s Office of Relations with the Market and Intermediaries within 30 days of the date of application. In the absence of any manifestation on the part of CVM, and provided that all the formalities set out in CVM Instruction nº 402/2004 have been met, the approval will be assumed to be granted. This 30-day period may be stopped once, if CVM should ask the stakeholder for additional information, in which case an addition 30-day period is triggered off as of the date requirements have been met. The requirements will have to be met within no later than 60 days of the date of such requirements, subject to rejection of application. Rejection of application will be communicated by CVM in writing to the part in interest and the futures and commodities exchange, and all the documentation supporting the application will be available to the applicant for retrieval for 90 days.
5 If the operation approval is not applied for within 180 days of the admittance to of the futures and commodities exchange of the commodities brokerage house as member, the exchange will auction its seat or shares, as the case may be.
6 Only a natural person, resident in Brazil, of unquestionable creditworthiness and college education and proven experience in the securities, commodities and futures markets can manage a commodities brokerage house. The person to be appointed as manager must give CVM certain representations and statements of the following: (a) he/she is not forbidden to discharge the duties of the office in financial institutions and other entities whose operation is conditioned on accreditation from CVM or the Brazilian Central Bank (Bacen), Superintendence of Private Insurance (Susep) and the Office of Complementary Social Security (SPC); (b) he/she has not been convicted of any crime, except in the case of rehabilitation; (c) his/her name is not listed in the Bacen’s Roster of Bouncing Checks; (d) he/she has not been in the preceding five years manager of any entity subject to CVM, Bacen, Susep or SPC control and monitoring, which has, within that time, had its authorization cancelled or filed for bankruptcy, concordata, intervention, extrajudicial liquidation or subject to temporary special management; and (e) has had an unfavorable decision, within the preceding five years, in proceedings for violation of CVM, Bacen, Susep and SPC specific regulations, with an explanation of the respective nature of the violation. CVM may, at its own option, ask for additional documentation and information as it may deem necessary when considering the request for approval of the name ti manage the commodities brokerage house concern and proof of his/her creditworthiness and technical expertise.
7 Article 3 of CVM Instruction nº402/2004 states that said guarantee is enforceable against third parties, under the terms of the Brazilian Civil Code.
8 Definition found in Article 2, item VII, of CVM Instruction nº 387/2003, principal or client is a natural or legal person, and an entity on behalf of which the securities transactions are carried out. Principal is, therefore, the name given to a broker’s client and in transactions performed in exchanges. Clients are not allowed directly in the futures and commodities exchange and must invariably be represented by a commodities brokerage house listed as member of the exchange concerned. Brokers will act on account of and as instructed by their clients. Instruction is the act by means of which a client determines that a particular broker should purchase or sell securities, or have a transaction listed, on their behalf and on the specified conditions (as per article 2, item X of CVM Instruction nº 387/2003).
9 In view of the kind of transactions performed, commodities brokerage houses are put on the same foot as financial institutions and, therefore, are also subject to Complementary Law nº 105, of January 10, 2001, which makes provisions on secrecy of transactions performed by financial institutions. Article 1, paragraph 3, item V provides that disclosure of confidential information made with the express consent of the party involved does not constitute breach of secrecy .
10 Should the guarantees to be enforced be property of or have been protested by third parties, under any pretense, the futures and commodities exchange concerned must publish that information to the market.
11 Such prohibition applies to transactions which characterize the granting of financing, loans or advances to clients.
12 Commodities brokerage houses are subject to the rules governing the preparation and publication of financial statements applicable to securities brokers. The following documentation about the commodities brokerage house’s activities must be made available to CVM and be forwarded to the futures and commodities exchange: (a) monthly interim balance sheets, within 15 days of month end; and (b) financial statements, as well as reports and opinions of independent auditors, within 90 days of each end. The same time limits apply to publication of interim balance sheets, as financial statements and respective audit opinions on the website, if any, and on the website of the futures and commodities exchange of which it is a member.
13 CVM may publish its opinion on these actions within 30 days of the date of application and will consult with the futures and commodities exchange, which will have no later than 15 days to publish its opinion. Thereafter, in the absence of manifestation by CVM, the request for the action in question will be assumed to be approved. Simultaneously with the filing of request application with CVM, the commodities brokerage house must inform the futures and commodities exchange of the request.
14 In this case, CVM will officially inform the Public Prosecution Service with respect to the relevant criminal action, without prejudice of the other applicable administrative sanctions.
15 In any event, canceling the authorization to operate will occur without prejudice of the enforceability of the other obligations of the brokerage house and compliance with penalties that might be imposed thereon.
16 This issue is presently regulated by CVM Deliberation nº 463, of July 25, 2003, which sets out the procedures to be followed in appeals to the Full Board from CVM decisions. These decisions may be appealed to the Full Board within 15 days of the date the party gains knowledge of it. Appeals will be in the form of a properly supported petition accompanied by any and all corroborating documentation to the Official handing out the appealed decision. Within 10 business days of the receipt of the appeal petition, the Superintendent will revert or uphold the decision in writing. If the decision is upheld, the Superintendent will forward the matter to the Full Board, through the Superintendent General, even if to the best of his/her knowledge it is an untimely or inapplicable appeal. The appeal will have a remanding effect, being incumbent on the Superintendent, immediately after receiving it and irrespective of request from the party, decide whether the staying effect of the appeal will be partially or totally approved. In the presence of request for staying effect and upon decision of the Superintendent, the applicant must be immediately informed, with a copy of the appeal and decision forwarded to CVM’s President, who will review the denial of staying effect. A Full Board session will decide the appeal and the Superintendent making the decision will notify the appellant within 5 business days. In the allegation of error, omission, obscurity or inaccuracy of the decision, contradiction of decision and rationale, or unclear conclusion, a Full Board session will review the allegations, upon request of a member, of the Superintendent handing out the decision or the appellant. If applicable, a full Board will correct the decision, and the application forwarded to the Director giving the prevailing opinion in the appeal within 15 days of the date the stakeholder is informed of the deliberation and submitted by said Director to deliberation of the Full Board.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
