New Brazilian regulation on the purchase and sale of securities through the internet

On September 11, 2002 the Brazilian Securities Commission “CVM” enacted Instruction No. 376, regulating the purchase and sale of securities through the Internet.

Instruction n. 376 defines electronic brokers as securities brokers (being intermediaries authorised by the CVM to place orders to purchase or sell securities with Stock Exchanges and over-the-counter markets) with the additional function of being able to receive orders from their clients through the Internet.

All electronic brokers must either comply with the new regulation by November 14, 2002 or be subject to the penalties set out in Law No. 6385/76, such as warning, fine, etc.

Moreover, according to Instruction No. 376, electronic brokers´ websites must contain: (1) details on how to place an order to purchase or sell securities through the Internet; (2) the prices of the securities, including the best available price, as well as the time when such prices were released; (3) the costs and fees charged for each operation; (4) the procedures to be followed by the electronic broker when placing its client´s orders received via the Internet; (5) details concerning the way in which the electronic broker issues an advice of execution to its clients; (6) details on the security of the Information Technology “IT” systems, including the use of password and electronic signature; (7) the amount of time a client may be connected to the order management system without placing orders; and (8) a direct link to the website of the CVM.

Additionally, it was established that electronic brokers´ websites must inform their clients of, including, but not limited to: (a) the structure and function of the securities markets and their operational risks; and (b) the power of self-regulators to cancel operations in view of any breach of the law and to adopt further rules in connection with Instruction No. 376.

Furthermore, electronic brokers must annually, in the month of March, audit their IT systems with the objective of certifying their capacity when processing client´s orders. Electronic brokers must also keep their clients details secure. All operations, whether executed or not, must be electronically recorded for a period of five years. In addition, those brokers must have contingency plans for peak time periods.

A final point to note is that Instruction No. 376 is in accordance with the recommendations of the International Organisation of Securities Commissions “IOSCO”. Accordingly, the new rules aim to show to foreign investors that the commitment of the Brazilian regulator is to follow international market trends.