Banking Board of Ecuador

RESOLUTION No. JB-2015-3452

THE BANKING BOARD

CONSIDERING:

THAT the First Transitional Provision of the Organic Code of Monetary and Financial Affairs, published in the Official Register Second Supplement No. 332, of September 12, 2014, establishes that resolutions contained in the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board, and the norms issued by control bodies, will remain in force insofar as they do not oppose the Organic Code of Monetary and Financial Affairs, until the Monetary and Financial Policy and Regulation Board resolves what corresponds, according to the case; and, with the second paragraph of the Third Transitional Provision, which states that the Banking Board will continue to act until it resolves all claims, appeals, and other administrative procedures it was hearing as of the date of entry into force of the same, within a period of one hundred and eighty days, extendable at the discretion of the Monetary and Financial Policy and Regulation Board; extension granted for an additional 180 days, through Resolution of the Monetary and Financial Policy and Regulation Board No. 054-2015-F, of March 5, 2015;

THAT through letter No. SC.IRQ-DRMV.SC.2014.089.4278, of February 13, 2014, Dr. Camilo Valdivieso Cueva, Superintendent of Companies (S), communicated to this control body that during the control process of the negotiations falling under said organism, regarding State Bonds used for the payment of pensions to former employees of the Teaching Sector, in the year 2013, carried out by Santa Fe Casa de Valores S.A., in which the Ecuadorian Teaching Pension Fund participates, it was observed that the selling principals instruct said entity that part of their payment be deposited into the account of the Ecuadorian Teaching Pension Fund, so that it in turn makes a transfer to the Preferred Single Account of each one, since the Fund guarantees them a payment of returns;

THAT on February 20, 2014, with credential No. IRG-DASS-2014-003, of February 20, 2014, a special examination was ordered for the National Teaching Pension Fund, regarding the "Preferred Single Account" product from its inception until January 31, 2014; and that it also analyzed the participation of the fund as promoter and sponsor in the Sabanilla Hydroelectric Plant project, through the Magisterio Clean Energy trust; as well as, the purchase of bonds from retirees through Santa Fe, Casa de Valores S.A.;

THAT once the special examination was concluded, the members of the National Board of Directors of the Fund were convened to read the draft report, which took place on April 28, 2014; and that through letter No. DNC-OFI-14-00294, of May 13, 2014, Engineer Juan José Castelló, Executive President of the Ecuadorian Teaching Pension Fund, presented the corresponding defenses, which were analyzed prior to the issuance of the final report; and the result of the audit was communicated to said official through letter No. IRG-DASS-2014-004-OBS of June 20, 2014, signed by Dr. Faddul Mosquera, Regional Superintendent of Guayaquil (S) from whose analysis non-compliance with what is established in articles 1, 2 and 3 of Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board; and of articles 2, 9 and 13 of the Fund's Statute, insofar as it concerns the creation of the Preferred Single Account created for retirees of the National Educational System, which establishes conditions different from those granted to fund participants such as

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captations with the possibility of periodic withdrawals, with rates higher than those granted to participants, which in addition to not having a pension purpose, contravene what is established in article 220 of the Social Security Law in concordance with article 18, Chapter I, Title I, Book III of the aforementioned Codification, which do not contemplate the possibility that persons who are not affiliated with the General Mandatory Insurance and who have concluded their labor relationship, can continue to belong to a complementary fund, without liquidating their individual accounts despite having fulfilled the contingency for which the fund was created; and that the imposed sanction also responds to other constant non-compliances in the audit report, which have to do with the maximum levels that can be contributed to the fund; cancellations and precancellations of deposit certificates that depositors maintained in Consulcrédito S.A., which were transferred to the fund's account with the authorization of the contributors; deposits and investments made as a result of the purchase of bonds from retirees; observations related to investments made from income generated by the collections of the Preferred Single Account; and, improper integration of the Fund's board of directors;

THAT through Resolution No. IRG-DASS-2014-056 of June 19, 2014, signed by Dr. Faddul Mosquera, Regional Superintendent of Guayaquil (S), a personal fine of US$ 1,500.00 (One thousand five hundred 00/100 dollars) was imposed on Licentiate Jorsi Medardo Macías Cabello, Member of the National Board of Directors of the Ecuadorian Teaching Pension Fund, on the grounds of having failed to comply with the provisions of the first paragraph of article 220 of the Social Security Law; that of articles 1, 2 and 3 of Section I, Chapter I, Title I, of Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board; that of article 18 of Section IV, ibidem; and that of articles 2, 9 and 13 of the Fund's Statute. The aforementioned sanction is imposed without prejudice to any other type of action that may apply. The referred resolution is analyzed, principally:

That the integration of the Preferred Single Account fails to meet the objective of benefit and affiliation to IESS, established in the first paragraph of article 220 of the Social Security Law, which provides: "Affiliates to IESS, regardless of their income level, may make voluntary savings to improve the amount or conditions of benefits corresponding to the General Mandatory Insurance or to protect security contingencies not covered by it"; and in articles 1 and the first paragraph of article 2 of Section I, Chapter I, Title II of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board, which prescribe: Article 1.- "Closed complementary pension funds – FCPC’s are integrated with the autonomous patrimony constituted in favor of participants from their labor relationship with public, private or mixed institutions, or with a professional or occupational guild, to improve the amount or conditions of benefits corresponding to the general mandatory insurance, through the voluntary savings of their affiliates and the voluntary contribution of their employers, if applicable, under the terms established in the prevailing legal framework." Article 2 "Participants in a closed complementary pension fund legally registered with the Superintendence of Banks and Insurance may be persons who have a dependent relationship with a public, private or mixed institution and those who belong to the professional or occupational guild under which the fund was constituted…"

THAT according to the information provided, on March 28, 2014, the administration of the Ecuadorian Teaching Pension Fund authorized

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disbursements for expenses related to the Sabanilla hydroelectric project, of US$ 568,726.45, in the capacity of promoter/sponsor of said project, which fails to comply with what is prescribed in article 3, of Section I, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and of the Banking Board; and in article 9 of the Fund's Statute, which provide: Art. 3, of Section I, Chapter (...) "Closed complementary pension funds that are registered in accordance with what is provided in this chapter, are of social benefit and non-profit, have the character of private and are administered through an autonomous patrimony independent of the patrimony of the public, private or mixed institutions from which the labor or guild relationship derives. Complementary funds will have only pension purposes and will be legally capable of acquiring rights and contracting obligations; they may carry out exclusive and non-exclusive investments, which must be framed within the internal regulations of the fund and in function of the nature of the benefit. (...)

THAT the gentlemen Licentiate Jorsi Medardo Macías Cabello, (among others, indicated there), members of the National Board of Directors of the Ecuadorian Teaching Pension Fund (FCME), created the "Preferred Single Account", through resolution of the National Board of Directors, in session of February 8, 2012, so that retired teachers, who do not wish to liquidate their individual account, continue to be affiliated with the FCME and can make additional deposits with free availability, as stated in the minutes of the National Board of Directors session, of that date, code No. DN-ACT-012; for which they updated the Operational Policy Manual of the Ecuadorian Teaching Pension Fund, on April 3, 2012, establishing as policies, among others the following: -Continue as a participant of the fund, once he has ceased in the national educational system, with conditions different from those of his participants, such as: term captations ranging from 6 months to 3 years. -Possibility of periodic withdrawals of their deposits (monthly, quarterly or annual). -Interest rates, higher than those granted to participants (6 to 8%). These policies fail to comply with articles 2, 9 and 13 of the Pension Fund Statute; article 18 of Section IV, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board; and, 220 of the Social Security Law.

THAT the gentlemen Licentiate Jorsi Medardo Macías Cabello, (among others indicated there), members of the National Board of Directors, through minutes code No. DN-ACT-13 of March 22, 2012, approved the Preferred Single Account (CUP) policy, updated on April 3, 2012, creating the possibility among others, to continue as a participant of the fund, once he has ceased in the national educational system, with conditions different from those of the participants of the same, such as: term captations ranging from 6 months to 3 years; possibility of periodic withdrawals of their deposits (monthly, quarterly or annual); interest rates higher than those granted to participants (6 to 8%), failing to comply with articles 2, 9 and 13 of the Pension Fund Statute, article 18 of Section IV, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board; and, Art. 220 of the Social Security Law, a norm that regulates the formation of complementary funds, establishing the possibility of making voluntary savings, only to affiliates to IESS, that is, for all persons who receive income from the execution of a work or the provision of a physical or intellectual service, with or without a labor relationship, that

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have met the affiliation requirements, indicated in its article 2.

THAT the so-called Preferred Single Account does not have the pension purpose of improving the amount or conditions of benefits corresponding to the general mandatory insurance, consequently the administration of the Ecuadorian Teaching Pension Fund failed to comply with article 1 of Resolution SBS-2004-740, the norm in force at the date of creation of the account in question; and fails to comply with article 1 of Resolution SBS-2013-504, in force.

THAT the provisions established in the Social Security Law and the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board, being hierarchically superior norms, prevail over articles 12, 16 and 19 of the Fund's Statute, which contain provisions incompatible, contrary to those established by norms of superior hierarchy.

THAT the Social Security Law in its article 305 provides as follows: "Art. 305.- APPLICABLE REGIME.- Entities that make up the National Social Security System and natural and legal persons that make up the Private Insurance System, for their constitution, organization, activities, functioning and extinction will be subject to the provisions of this Law, the General Law of Institutions of the Financial System and its Regulation, the Organic Law of Financial Administration and Control, the Securities Market Law, the Commercial Code, the Companies Law, in a supplementary manner, and to regulatory norms and resolutions that control bodies created by the Political Constitution of the Republic dictate for that effect."

THAT article 2 of Section I, Chapter I, Title V, of Book III, of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board, defines as INSTRUCTIONS OF THE SUPERINTENDENCE OF BANKS AND INSURANCE, the following: "It is the set of norms, mandates, provisions, requirements and guidelines imparted by the control body to the National Social Security System. These instructions may be contained in resolutions, letters or circulars and be general; or specific."

THAT article 8, Section III.- OF SANCTIONS FOR NON-COMPLIANCE WITH INSTRUCTIONS IMPARTED BY THE SUPERINTENDENCE OF BANKS AND INSURANCE, Chapter I, Title V, Book III, of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board states: The Superintendent of Banks and Insurance or his delegate will sanction pecuniarily the person responsible for the infringement in question, of an institution that is part of the National Social Security System, for non-compliance with instructions imparted by the Superintendence of Banks and Insurance to the National Social Security System, a fine of US$ 131.40 to US$ 7,886.82 will be imposed.;

THAT with a written submission presented on July 3, 2014, Licentiate Jorsi Medardo Macías Cabello, filed before the Regional Superintendent of Guayaquil an appeal for reconsideration, regarding the pecuniary sanction imposed with resolution No. IRG-DASS-2014-056, of June 19, 2014, which was denied through letter No. IRG-DJyTL-2014-0596, July 24, 2014, by which the sanction imposed on the appellant was confirmed, in view of the fact that said appeal was not based on the existence of elements of fact or law not known by the Superintendence of Banks, as required by article

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3, Chapter II, Title XVI, Book I of the Codification of Resolutions of the Superintendence of Banks and Insurance and of the Banking Board;

THAT through a written submission received at the Superintendence of Banks on August 5, 2014, Licentiate Jorsi Medardo Macías Cabello, member of the National Board of Directors of the Ecuadorian Teaching Pension Fund, filed before the Banking Board an appeal for review of the administrative act contained in letter No. IRG-DJyTL-2014-0596, of July 24, 2014, which was admitted to processing through letter No. JB-2014-2124 of August 11, 2014;

THAT Licentiate Jorsi Medardo Macías Cabello bases his appeal for review on the fact that the defenses contained in letter No. DNC-OFI-14-00294, of May 13, 2014, were not taken into account by the Superintendence of Banks; that there is a lack of motivation of letter No. IRG-DJyTL-2014-0596 because it does not carry out any examination regarding the argumentation presented in the appeal for reconsideration, which was filed because legal arguments were not taken into account, nor were the defenses analyzed, and because it was the obligation of the control body and the corresponding authority to analyze and motivate each of the arguments, for which reason, it is considered null; with respect to the Preferred Single Account he points out that it was created under the protection of what is established in article 16 of the Social Statute; that its objective is to improve the benefits of the Mandatory Social Security since it attends the pension needs of the retired participant, such as, the contingency of death, credit services, housing, among others, which are purely pension as stated in the Operational Policy Manual of April 2, 2013, approved by the National Board of Directors and which was delivered to the Audit Commission, but it did not take it into account; that the CUP is a reserve that maintains the retired affiliate of the National Educational System or the retiree of the Ecuadorian Teaching Complementary Fund, which allows him to attend risks and needs proper to his new condition, since he does not have fixed income from a teacher; that the statute in its due time was approved by the Superintendence of Banks and is in force; that the new statute is in the process of approval and that any change that occurs will govern for the future and in no case with retroactive character; that it is not accurate to affirm that it has been the board that creates the possibility of continuing as a participant of the fund once he has ceased functions in the National Educational System, since this is determined by the statute in force through its articles 12, 16 and 19; that with the CUP several benefits are obtained; among others, life insurance for the family group and coverage of funeral services, these last ones improve the amount and conditions of death and funeral benefits offered by the General Mandatory Insurance, for which reason article 1 of Resolution No. SBS-2004-740, nor article 1 of Resolution No. SBS-2013-504 in force has not been violated; that it does not explain which are the norms of the law of the Codification that contradict the statutory norms, nor why; that by virtue of the principle of non-retroactivity established in article 7 of the Civil Code, it should have been considered that if resolution No. SBS-2013-504, introduced changes, and if said resolution contained an adaptation period, said changes, to enter into force, should have been approved by the Superintendence of Banks; and, that it should have carried out the control based on the applicable norm at the time, for legal security; that article 66, numerals 13 and 15 of the Constitution recognizes and guarantees the right to associate, meet and manifest in a free and voluntary manner. Thus, based on this principle of voluntariness, people have the right to manifest their decision to join the fund, as well as to separate and the right to request the liquidation of their individual account; that articles 18 and 19 of Resolution No. SBS-2013-504, establishes that separation is voluntary, therefore the participant can withdraw from the Fund even without ceasing functions; and

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additionally articles 22 and 24 states that separation is voluntary and when the requirements of the statute are met; that therefore, if the participant can separate even without ceasing functions, he can already meeting requirements, request the liquidation of his individual account;

THAT likewise the appellant points out with respect to the observations relative to the Fund's participation in the Sabanilla Hydroelectric Plant Project, that it was not taken into account the fact that said project is of a private nature, that it is owned by HIDELGEN S.A., which signed a contract with CONELEC through which the State for a period of 15 years, buys all the energy it generates, with a tariff of 6.86 KWH; that the Fund has given a practical response by contributing to national objectives and at the same time achieving complementary benefits of an individual and collective nature for its affiliates as stated in its Statute; that in 10 years the debt is paid, that is, the shareholders who contribute as capital 18 million, in that period will own 100% of the Central, since the business pays the debt; that its shares revalue and that an annual profit of 14% is projected on an ITR of 14.6% and the corresponding revaluation of the share year by year; that 6230 people, of them 5,800 affiliates to the fund, 150 retirees, 160 family or friends have perfected their investment and the resources have been transferred to the Magisterio Renewable Energy Trust FMER for USD 12,510,000 and with that they own 70% of the share package of HDG; that to put the project into operation USD 62,400,000 are required, structured in 18 million of capital and 44,400,000 by securitization; that the management of the FUND as promoter and sponsor has allowed the project to pass from the condition of project to being a hydroelectric plant under construction; that the securitization trust has presented the documentation of the securitization to be approved by the Superintendence of Companies; that once the USD 12,000,000.00 of new investors was met, the refund of the pre-investment resources was requested, when the project had already entered execution; that the condition of the fund as sponsor of the project is concreted through the securities market, in titles generated in a securitization process that must be legally approved, and in shares inscribed registered in the securities market, as authorized by the Statute; that they have been protagonic managers of an unprecedented fact, national savings coming from small and medium investors, financing productive projects for the development of the country; and, that the intervention of the fund in the trust and in the Sabanilla project fulfills the objectives of article 9 of the Statute; that the appealed administrative act refers to the final report No. IRG-DASS-2014-002, of June 6, 2014, of which he never had knowledge, for which his right to defense guaranteed in article 76 of the Constitution has been violated; that the appealed act does not say which are the instructions imparted by the Superintendence of Banks that have been violated, since instruction is not the same as regulation; that the challenged resolution also does not indicate in what way article 18 of the Statute is violated; that the Social Security Law nor the current regulation has not been violated either; that both the Preferred Single Account and the Sabanilla Hydroelectric Plant were implemented in the face of the massive retirement process, since more than 20,000 employees of the National Educational System have retired and this year 16,000 additional retirements could occur, to all of them the CUP allows them to maintain a life insurance for them and their family group; and, that in the second case, it is a contribution to the development of the country; and, that he challenges letter No. IRG-DJyTL-2014-0596, of July 24, 2014, which ratifies the sanction imposed through resolution No. IRG-DASS-2014-056, of June 19, 2014, which he asks, to be left without effect;

THAT with respect to the grounds of the appeal presented by Licentiate Jorsi Medardo Macías Cabello, it must be considered that according to article 368 of the

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Constitution of the Republic, it corresponds to the State to regulate, regulate and control activities related to social security; and, that in concordance with said constitutional norm, the article