BM&FBOVESPA OMBUDSMAN REPORT - 2010 Ombudsman: Izalco Sardenberg Ombudsman Manager: Valdir Pereira São Paulo, Brazil, January 2011
2 CONTENT Introduction Page 3 Proactive Role Page 4 Reactive Role 2010 consolidated data Page 5 BM&FBOVESPA Ombudsman Rules Page 17
3 INTRODUCTION In 2010, the BM&FBOVESPA Ombudsman Office issued new Rules and a new Ombudsman was appointed (see http://www.bmfbovespa.com.br/pt-br/abmfbovespa/download/regulamento-do-ombudsman.pdf or see the document attached to this report). Three new features were introduced: Provision of Ombudsman services to all stakeholders or groups with which the Exchange is related; Creation of a proactive role, whereby the Ombudsman consults the BM&FBOVESPA stakeholders directly, collecting information and data that are passed on to the Exchange s executive board and Board of Directors at the end of each quarter; and Introduction of a fixed two-year tenure for the Ombudsman, restricted to two reappointments of tenure maximum. Although open to all stakeholders, only a single audience investors remains the sole requester of the BM&FBOVESPA Ombudsman services. This is mainly due to the fact that individual investors (mostly brokerage house customers) are generally familiar and acquainted with the functions of the Ombudsman. The Ombudsman s proactive role has proved important since it brought straightforward and detached criticism to BM&FBOVESPA other than the usual comments from traditional customer relationship channels. Such incisive criticism is owed to the independence of the Ombudsman associated with two other characteristics of his function: direct access to the BM&FBOVESPA Executive Board, which facilitates the settlement of disputes or prompts response to complaints, and the assurance of confidentiality to those interviewed by the Ombudsman. This report summarizes the Ombudsman s proactive role begun in 2010, and also contains consolidated data of his reactive or traditional role, i.e. the number of recommendations made by the Ombudsman to investors and individuals throughout 2010. Enjoy the reading and a happy 2011 to everyone!
4 PROACTIVE ROLE The distribution industry has undergone significant change since the decision of stock exchanges to demutualize and go public. This was the focus of the BM&FBOVESPA Ombudsman s activities in 2010. Approximately 50 brokerage houses were visited during the year covering different types of brokers (independent brokers, those connected to banks and foreign brokerage firms), and some of them were visited more than once. The result of these visits was presented to the BM&FBOVESPA CEO and Board of Directors in the form of quarterly reports. In addition to these reports, two extra reports were published one containing the review of the Novo Mercado Rules, based on the discussions held between the Exchange and issuing companies, and another report about the difficulties encountered by BM&FBOVESPA to deliver proper customer service to some of its audiences. The Ombudsman also enjoys the freedom to choose topics of relevance. In 2010, for example, he addressed BM&FBOVESPA s communications policy, in particular the drafting of internal and external communication documents and circular letters; the transfer of custody or assets between accounts of identical ownership; and the possibility of the Exchange having an Internal Whistleblower in the future dedicated exclusively to employees and/or associates. Since it often involves strategic issues and a confidentiality agreement, as stipulated in the Rules, it is not therefore possible to hereby provide detailed information to external audiences about the Ombudsman s proactive role. But the benefits of this new function were made clear in 2010 as shown in the two examples below: Reports addressing the crisis and challenges of the distribution industry played an important role in the decision of the BM&FBOVESPA Board of Directors to create a "brokers committee in December 2010. Among other objectives, this committee will discuss topics such as the merger and acquisition of brokerage firms, competitive aspects, business model, etc thus strengthening the partnership of the Exchange with the distribution industry;
5 The report which addressed one of the biggest sources of complaints to the Ombudsman delays in custody transfers has helped the Exchange s Support and Audit areas to add a provision to the new Operational Qualification Program (PQO) drastically reducing the period for which such transfers are carried out. REACTIVE ROLE 2010 consolidated data The Ombudsman service is fully automated and access of requesters to this service is made through the communication channels managed by SAP BM&FBOVESPA. Furthermore, the Ombudsman s reactive role was ISO 9001 certified in November 2010. A1) Preliminary remarks The BM&FBOVESPA Ombudsman Rules stipulate that complaints should be responded to within 30 days of their receipt and that this period may be extended for an additional 15 days, depending on the complexity of the case under review. With the purpose of meeting deadlines and also responding to complaints in less time than that stipulated in the Rules, the Ombudsman has undertaken considerable efforts within the complained about institutions, including BM&FBOVESPA itself, so that responses to the Ombudsman be given as quickly as possible and in a conclusive and consistent manner. The data obtained from a survey conducted by the Exchange s customer service SAP BM&FBOVESPA show that the Ombudsman has managed to reduce the response time. The table below shows the evolution of customer complaint responses compared with the response timeframe in 2010:
6 1Q10 70 35 2Q10 3Q10 4Q10 200 196 216 3 13 2 Responses within the 30- day timeframe Responses outside the 30- day timeframe 0 50 100 150 200 250 A2) 2010 consolidated data During 2010, the BM&FBOVESPA Ombudsman received 735 complaints which are commented in the tables and graphs below: 1. Number of complaints per quarter Quarter Number of complaints 1Q10 105 2Q10 218 3Q10 213 4Q10 199 TOTAL IN 2010 735
7 2. Number of complaints per month Number of complaints monthly - 2010 100 95 90 80 70 60 50 40 30 20 10 0 33 52 20 58 65 56 79 78 74 70 55 No. of complaints monthly - 2010 Monthly evolution in the number of complaints in 2010 100 90 80 70 60 50 40 30 20 10 0 33 52 20 58 95 65 56 79 78 74 70 55 Number of complaints monthly - 2010 In the graphs above there are two events that deviate from the average relating to the months of March and May. In the first case, the number of complaints was very low (20), and in the other case, very high (95). There is, however, no explanation for any of these different events. This may seem strange, especially in May, when complaints reached nearly one hundred. The fact is that the complaints filed that month, and also in March, followed the usual pat-
tern in relation to their content. Investors, as usual, complained of problems with the Home Broker and difficulties related to custody transfer. With regard to the complained about institutions, the atypical two months also followed a pattern: brokerage houses were the most complained about, while the other institutions (the Exchange, banks and issuing companies) remained stable. The fact that brokerage houses come first reflects, moreover, a natural trend since complaints about the Home Broker and custody transfer involve products or services typically associated with the distribution industry. 8
9 3. Breakdown of complaints by type of complained about institution COMPLAINED INSTITUTIONS (%) 2010 Companies 2% Market participants Banks 17% Exchange 18% Market participants 63% Banks Exchange Companies The breakdown of 2010 complaints according to the complained about institution, in percentage terms, as shown above, reflects the behavior observed during each quarter of the year and follows the pattern of previous years. In short, brokerage houses continue to lead the ranking of complained about institutions, accounting for more than half of the complaints forwarded to the BM&FBOVESPA Ombudsman.
10 4. Breakdown of complaints by object/topic Topic Description Total in 2010 1 Trade orders: Unfaithful execution / non-execution /delay in execution 177 2 Evidence of fraud 13 3 Difficulties with custody transfer 105 4 Delay in transfer of revenues 11 5 Operational Criteria - BM&FBOVESPA 6 6 Home Broker 151 7 Mega Bolsa 16 8 Web Trading 27 9 BM&FBOVESPA products and services 53 10 Other (one-sided settlement of securities, complaints against issuing companies, customer service complaints delay in providing information, wrong of information or lack of courtesy, complaints about commission and/or custody fees).. 176 TOTAL in 2010 735 Also regarding the breakdown of complaints by topic, the result followed the pattern observed during the decade. Therefore, the three most complained about groups were: trading orders, difficulties with custody transfer, and problems with various electronic trading channels (Web Trading and Home Broker). The monthly evolution of complaints in 2010 by topic is detailed below in item 4.1. Something worth noting is the extinction of Web Trading BM&FBOVESPA trading platform for mini futures contract, which together with the Home Broker, was the top two categories of complaints. The Web Trading was phased out on July 1, 2010, and although it was only operating for six months in 2010, it received 27 complaints.
11 COMPLAINT BY TOPIC (%) 2010 Exchange's products and services 7% Web Trading 4% Mega Bolsa 2% Other 24% Home Broker 21% Trade Orders 24% Trade Orders Evidence of fraud Difficulties with custody transfer Delay in transfer of revenues Evidence of fraud 2% Difficulties with custody transfer 14% Delay in transfer of revenues 1% Exchange's operational criteria 1% 4.1. Evolution of the three main types of complaint in 2010 35 30 31 25 20 15 10 5 0 16 14 11 7 5 5 8 4 1 20 10 9 25 22 22 21 21 20 17 16 15 14 14 14 12 12 10 10 10 7 8 8 8 7 6 Internet channels (6 + 8) HB e WebTr Trade orders (1) Difficulties with custody transfer (3) As mentioned above, the most unusual months regarding the 2010 complaints were March and May. When compared, it is interesting to note that the complaints whose source were the Internet channels Home Broker and Web Trad-
12 ing jumped from only one complaint in March to 31 in May. The other two types also increased, but not with the same intensity. If the uniqueness of May is not taken into account, the complaint that kept the most regular average throughout the year was the difficulty with custody transfer. A3) COMPARATIVE ANALYSIS - EVOLUTION IN THE PAST 5 YEARS 1. Number of complaints addressed to the Ombudsmen 1600 1400 1200 Number of complaints 1400 1000 1058 800 600 829 735 No. of 400 200 0 236 458 2005 2006 2007 2008 2009 2010 The graph above is clear. Complaints rose consistently from 2005 to 2008 and have since then followed the reverse path. What happened? Actually, the years 2007, 2008 and 2009 were anomalous for many reasons. In 2007, about 20% of the complaints to the Ombudsman involved IPOs from the former BOVESPA and BM&F. In the following two years, the excessive number of complaints was directly linked to the financial earthquake that erupted in the United States (August 2008) and rocked the world s economy. If these exceptions are not taken into account, it appears that the number of complaints in 2010 returned roughly to the 2007 level and keeps falling. The following item shows this trend in detail.
13 2. Evolution in the number of individual investors registered at BM&FBOVESPA Number of registered investors 700.000 600.000 500.000 456.557 536.483 552.364 614.638 400.000 300.000 200.000 100.000 0 155.183 219.634 2005 2006 2007 2008 2009 2010 Individual investors under custody/registered As shown above, the leap in the number of registered investors under the Exchange s custody occurred in 2007, thanks mainly to the IPOs undertaken by both exchanges, BOVESPA and BM&F. Both were extremely successful and brought an unprecedented number of new investors to the capital markets. Indeed, from 2006 to 2007 the number of individual investors doubled. In the subsequent years, however, the growth has been fairly smooth.
14 3. Relationship between registered investors and number of complaints to the Ombudsman Complaints vs Registered Investors 1400 1058 829 735 Complaints to Ombudsman (absolute numbers) 236 458 457 536 552 615 Registered investors (in thousands) 155 220 2005 2006 2007 2008 2009 2010 The two graphs under this item go a step further and show the complaints to the Ombudsman vis-à-vis the total number of registered investors under BM&FBOVESPA s custody. The graph bars above are merely illustrative. At first, the most important event is that between 2005 and 2007 the percentage of complaints compared to the number investors remained stable an average range of 0.18% as shown in the graph below. What can be noted from the 2008 peak is that the percentage of complaints has dropped. In other words, complaints to the Ombudsman have not grown in the same proportion as the number of individual investors registered at BM&FBOVESPA. By the end of the year 2010, the percentage had fallen to 0.12% 1. 1 This is indeed a small percentage. For illustration purposes, if we project this percentage (0.12%) into a group of 5 million investors, which is the target of BM&FBOVESPA s market popularization campaign for 2014, the total number of complaints over a one-year period would be around 6 thousand.
15 Percentage of complaints compared to total registered investors Percentage of complaints from the total registered investors 0,15 0,21 0,18 0,26 0,19 0,12 2005 2006 2007 2008 2009 2010 Such event, which in practice results in a reduction in the number of complaints to the Ombudsman, can be explained by²: Improvement of investors financial education; Improved service delivery by brokerage houses; and Creation of an ombudsman channel for brokerage houses as of 2007 provided under Resolution No. 3477 of the National Monetary Council (currently Resolution CMN 3849/10). The percentage of complaints is low and, therefore, it is difficult to estimate whether they will remain so in future or whether they will grow. There are many factors involved in this process, such as the habit of accessing communication channels created especially for filing complaints. Apparently this practice is not yet entrenched among Brazilian investors. Finally, it should be underscored that for now there are no parameters to judge whether the complaints made to the BM&FBOVESPA Ombudsman follow a pattern common to other markets or clash with them, for no other Exchange in Brazil maintains an Ombudsman service. 2 BM&FBOVESPA Ombudsman s conclusions based on empirical perceptions and interviews with various capital market participants.
16 4. Evolution of the main complaints addressed to the Ombudsman Since 2005, the top three categories of complaints for BM&FBOVESPA products/ services have been (not necessarily in this order): Internet channels (Home Broker and Web Trading), difficulties with custody transfer and complaints regarding non-execution, unfaithful execution or delay in execution of trade orders. In certain periods, there were specific issues that were highlighted, but the three aforementioned types of products/services have always accounted for a significant percentage in the last five years, occupying the top three positions in the ranking of complaints. The graph below shows the top three products/ services with the largest number of complaints and shows the percentage for each one compared to the total complaints on a yearly basis: Main complaints - evolution in the yearly percentage 35 30 25 20 15 10 5 0 33 30 27 26 24 25 24 19 13 14 12 9 10 11 8 8 6 4 2005 2006 2007 2008 2009 2010 Internet channels Difficulties with custody transfer
17 BM&FBOVESPA OMBUDSMAN RULES 1 Definition 1.1 The Ombudsman provides a channel of communication between BM&FBOVESPA and its stakeholders, particularly the trading, settlement and custody system participants, media professionals, public and private institutions, listed companies and investment funds, suppliers, investors in its managed markets and the BM&FBOVESPA shareholders. 1.2 The Ombudsman shall have the following powers and duties: (i) receive, record, instruct, review and formally and properly handle complaints, suggestions, compliments and requests received from any stakeholder that maintains a relationship with BM&FBOVESPA and from any user of its products and services; (ii) provide complainants with the required clarifications and reports about the progress of their complaints and the actions taken; (iii) notify complainants of the expected timeframe for the issuance of a final answer; (iv) issue conclusive answers to complainant complaints; and (v) recommend measures for the correction or improvement of procedures and routines based on the analysis of the complaints received. 1.3 The services rendered by the Ombudsman are free of charge, confidential and identifiable by a registration number. 1.4 The activities conducted by the Ombudsman, who reports to the BM&FBOVESPA Chief Executive Officer, are based on independence, transparency, impartiality and exemption. 1.5 The Ombudsman has guaranteed access to all information and documentation required for the faithful performance of his or her activities, and receives full administrative support from BM&FBOVESPA. 1.6 In the event documentation is classified, strategic or protected by a confidentiality agreement, the Ombudsman shall be subject to the same confidentiality duties as those that apply to the relevant information holders. 1.7 BM&FBOVESPA shall widely publicize the existence and mission of the Ombudsman, and the means to access his or her services.
18 2 Mission and scope 2.1 The mission of the Ombudsman is to ensure an ethical, transparent and constructive relationship between BM&FBOVESPA and all of its stakeholders, in order to continually improve the quality and efficiency of the services and products provided by the Company. 2.2 The Ombudsman not only performs a reactive function in connection with the requests and complaints received from stakeholders, but also acts in a pro-active manner, inasmuch as he or she must make or seek constant contact with the BM&FBOVESPA stakeholders gathering their impressions and possible suggestions for change, in order to improve the operational procedures and rules that guide the Company. 2.3 The Ombudsman may intervene together with the participants of the BM&FBOVESPA trading, settlement and custody systems and with all other users of the services provided by the Company, or with any of the entities that represent these participants, in order to resolve any conflicts that may arise between investors and market participants or intermediaries. In these interventions the Ombudsman may also seek, at the express request of the relevant participants and market representative entities, a consensual resolution to these conflicts. 2.4 The services of the Ombudsman do not replace or interfere with the services provided by the BM&FBOVESPA Contact Center (SAP - Serviço de Atendimento ao Público). However, generally speaking the role of the Ombudsman is that of a higher authority regarding the services rendered by SAP.
19 3 Term of office and duties 3.1 The Ombudsman is appointed for a two (2) year term of office, and may be reappointed for two (2) more consecutive terms. 3.2 The Ombudsman is appointed by the BM&FBOVESPA Chief Executive Officer, and shall only be removed from office by way of resignation or by proven negligence in the performance of the his obligations and duties. 3.3 The Ombudsman shall review the complaints which he or she deems relevant or justified based on impartiality and exemption criteria, subject to the applicable laws and regulations. 3.4 The Ombudsman does not accept complaints that are the object of: (i) judicial proceedings; (ii) administrative proceedings before regulatory bodies; (iii) proceedings submitted to the Chamber of Market Arbitration (Câmara de Arbitragem do Mercado); (iv) proceedings submitted to the BM&FBOVESPA Market Surveillance (BSM) (BM&FBOVESPA Supervisão de Mercados); and (v) complaints against securities issuers. 3.5 Requests or complaints directed to the Ombudsman must be answered by no later than thirty (30) days after they are received. This timeframe can be extended an additional fifteen (15) day-period, depending on the complexity of the case under review. 3.6 The timeframes in 3.5 above do not apply to interventions with the purpose of resolving conflicts or disputes between investors and brokers and/or market agents. 3.7 At the end of each quarter, the Ombudsman must submit an activity report to both the Chief Executive Officer and the Chairman of the Board of Directors, containing information on the complaints/requests received and their final resolutions. The June and December reports shall be more in-depth, so as to include statistics and other relevant data concerning all of the complaints that were received. 3.8 The reports referred to in 3.7 are also published on the BM&FBOVESPA Website (www.bmfbovespa.com.br). However, any Information protected by a confidentiality agreement or deemed to be strategic in nature will not be published.
20 3.9 Reports issued by the Ombudsman shall protect the identity of both the complainant and the defendant. 3.10 In addition to the quarterly reports, the Ombudsman can also prepare separate reports addressing issues or themes of interest to BM&FBOVESPA and the market that for a variety of circumstances might require special attention.
21 4 Structure and communication tools 4.1 In addition to a highly qualified staff, the Ombudsman can also count on support from BM&FBOVESPA s full administrative structure, BSM and SAP. 4.2 The Ombudsman also has access to all of the modern communication tools with BM&FBOVESPA stakeholders.