Can a licensed broker-dealer execute a valid and express instruction?

August 27, 2021

The Superintendency of the Stock Market issues an opinion on whether an entity with a broker-dealer license issued by them may execute a valid and express instruction from its client.

1. Consultation matter

May an entity with the broker-dealer license issued by the Superintendency execute a valid and express instruction from its client, consisting in transferring securities without payment (“delivery free of payment”) to a third party?

2. Position of the Superintendence of the Securities Market

Normally, stock exchange transactions through which securities are acquired and transferred in a stock market are onerous, i.e., a person acquires the ownership of a security in exchange for the payment of a certain sum of money demanded by another person.

Notwithstanding the above, such stock exchange operations may also take place between the parties without payment when, on instructions given by the customer to the broker-dealer, the transfer of securities owned by the customer to the investment account of a third party is requested, provided that the documentation supporting reasonable preventive controls against money laundering and financing of terrorism in the operation is previously complied with.

It should be pointed out that broker-dealers have a fiduciary duty to manage the accounts of their customers with due diligence and care in the transfer of securities, complying with their instructions and proceeding in the same manner in the operations of their customers to enable them to legitimize reasonable supports and controls to evince the purpose and veracity of the transaction, complying with all the provisions for prevention of money laundering, financing of terrorism, and proliferation of weapons of mass destruction.

According to Article 240 of the consolidated text of the Securities Market Law, the obligations of financial intermediaries must comply with the instructions regarding the transfer given by a legitimate person of the account, either in writing or by other means agreed between the parties.

Likewise, Law 23 of April 27, 2015, established that Broker-Dealers must deploy the procedures that allow the timely examination of the nature of the operation to determine or identify an unusual or suspicious transaction.

From both national parameters and international standards indicated by the Financial Action Task Force (FACI), it may be deduced that broker-dealers must maintain faithful compliance with the regulations in force. Thus, all transactions carried out or to be carried out must be executed in compliance with their procedural and operational manuals, where such transactions are allowed to be carried out.

3. Conclusion

Therefore, it is feasible to transfer to third parties without payment, provided that internal procedures, prevention manuals, operations manuals, and/or any other manual of the broker-dealers allow this type of transaction and there is no contravention to the Securities Market Law, nor agreements or regulations in force, and the execution order given by the client is available.

In this regard, it is necessary and extremely important to comply with the rules in force concerning prevention and require in all types of transactions with or without payments, documents justifying such operations, permitted in the internal manuals of the broker-dealers in compliance with the relevant laws, and in the event, the obliged subject cannot comply with the relevant measures must not carry out any operation or transaction without this basis.

Source: La Gaceta 26/08/21