Jayme Petra de Mello Neto
Lawyer at Marcos Martins Advogados
In a move to better protect non-institutional investors, safeguarding its primary role as guarantor of Popular Savings, the Brazilian Securities and Exchange Commission (CVM – SDM 09/2019) held a public hearing on a proposal to change the mechanisms for better execution of orders from non-institutional clients, referred to in the Capital Markets as Best Execution.
The regulatory provision for best execution is nothing new in the Brazilian regulatory and legal context. It has already been clearly established as an obligatory conduct for intermediary institutions since September 2011, with the original wording of CVM Instruction 505[1]. Just to put it in context, this Instruction comes at a very peculiar time for the Brazilian Capital Market, still under the influence of the demutualization of the Stock and Commodities and Futures Exchanges, seeking to broaden the spectrum of investors, attracting more non-institutional investors, increasing the scope of this type of investment. The discipline adopted by Instruction 505 is quite different from the traditional mechanism for regulating the fulfillment of orders, which was previously governed by Instruction 122.
The current model has abandoned the strictly formal character, whose regulatory verification was limited to the verification of faithful execution and migrated to the concept of greater ethicality ofbest execution.
There is no a priori definition of what best execution is. The CVM Instruction, as well as the proposal to amend the public hearing, rightly do not take the path of trying to legally define what best execution is. They point out a series of indications and objectives that must be observed by the intermediary institution in order for its procedure to be understood as best executed.
The Instruction states that the intermediary, when executing the order under the best conditions, must always take into account the following objectives and indicators: (i) price; (ii) cost; (iii) speed; (iv) probability of execution and settlement; (v) volume; (vi) nature; and (vii ) any other relevant considerations.
There are therefore no numerical benchmarks or precise boundaries for defining best execution from the outset.
It could therefore be argued that the current regulations could lead to legal insecurity, which would be contrary to the very spirit of CVM’s protection. However, this is not true.
Since at least 2002, Brazilian law, under the influence of the current Civil Code, has lived under the aegis of maximum Ethicality, which favors the existence of open clauses and abstract concepts, endowed with high axiological content, even though they are expressed in undefined forms.
It can be categorically affirmed that CVM Instruction 505 is fully in line with this legislative technique when it sets out objectives, indicators, i.e. axiological vectors, in order to impose best execution regulation execution. Not least because, in its text, it states the full adoption of good faith as an essential value in the execution of orders by intermediaries. See article 30 of CVM Instruction 505:
Art. 30: Intermediaries must carry out their activities with good faith, diligence and loyalty towards their clients.
In this sense of Ethicality, in which objective good faith, transcending the Civil Code and permeating all other legal relationships of an obligatory nature – as is the case with orders from investors to intermediaries – is the mater rule, the maximum extension of this ethical-legal primacy must be observed.
This means that the latere concepts of objective good faith must be applied with interpretative and normative characteristics, especially those that refer to ancillary duties. Common legal opinion dictates that only conduct that carries with it full information and full collaboration, both reciprocally and adversely to the parties, is considered to be objectively in good faith. Fair play taken to the legal extreme. And, in addition to information and collaboration, objective good faith also requires that conduct does not present contradictory behavior, electing the prohibition of venire contra factum proprium as a meta-legal norm of overlapping observance.
Looking at the normative form proposed by the Public Hearing that aims to amend CVM Instruction 505, as well as the rules that will not be derogated by the new wording, it is clear that the regulatory agent is concerned with the duty of information, creating a series of direct and personal information obligations, as well as keeping information material available (e.g. art. 20, III, and art. 20, § 1).
The duty to cooperate is also emphasized, when, for example, the Instruction requires that in the case of competing orders between clients who are not linked to the intermediary and clients linked to the intermediary, the orders of the latter must be carried out first.
And finally, as an example of the prohibition of contradictory behavior, the mandatory creation of internal control mechanisms should be highlighted, especially with a view to resolving conflicts of interest between clients and the intermediary itself or people linked to it.
As well as these ethical provisions and the mandatory operation of internal control mechanisms, poorly executed orders are still subject to heterogeneous control through the Loss Redress Mechanisms, which exist within the scope of the Stock Exchanges and OTC Markets.
The adoption of this more ethical system will undoubtedly enable more people to try investing in the capital markets without fear, secure in the knowledge that there is a legal framework to support them if they are victimized by a poorly executed order.
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[1] SECURITIES COMMISSION. Instruction No. 505, OF SEPTEMBER 27, 2011. Establishes rules and procedures to be observed in transactions carried out with securities on regulated securities markets. Federal Official Gazette, [S. l.], September 28, 2011. Available at: http://www.cvm.gov.br/legislacao/instrucoes/inst505.html. Accessed on: 09 Mar. 2020.
